e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission file number 0-52105
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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94-3030279 |
(State of Incorporation)
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(I.R.S. Employer |
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Identification No.) |
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27422 PORTOLA PARKWAY, SUITE 350,
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92610-2831 |
FOOTHILL RANCH, CALIFORNIA
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(Zip Code) |
(Address of principal executive offices) |
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Registrants telephone number, including area code:
(949) 614-1740
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of Exchange on Which Registered |
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Common Stock, par value $0.01 par value
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Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-accelerated Filer o (Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates of the
registrant as of the last business day of the registrants most recently completed second fiscal
quarter (June 30, 2008) was approximately $.8 billion.
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 January 30, 2009, there were 20,044,515 shares of common stock of the registrant
outstanding.
Documents Incorporated By Reference. Certain portions of the registrants definitive proxy
statement related to the registrants 2009 annual meeting of stockholders are incorporated by
reference into Part III of this Report on Form 10-K.
TABLE OF CONTENTS
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In this Report, all references to Kaiser, we, us, the Company and our refer to
Kaiser Aluminum Corporation and its subsidiaries, unless the context otherwise requires or where
otherwise indicated.
i
PART I
Item 1. Business
Forward-Looking Statements
This Annual Report on Form 10-K contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements appear throughout this Report, including this Item 1. Business Business Operations,
Item 1A. Risk Factors, and Item 7. Managements Discussion and Analysis of Financial Conditions
and Results of Operations. These forward-looking statements can be identified by the use of
forward-looking terminology such as believes, expects, may, estimates, will, should,
plans, or anticipates, or the negative of the foregoing or other variations 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 from
those in the forward-looking statements as a result of various factors. These factors include: the
effectiveness of managements strategies and decisions; general economic and business conditions,
including cyclicality and other conditions in the aerospace and other end markets we serve;
developments in technology; new or modified statutory or regulatory requirements; changing prices
and market conditions; and other factors discussed in Item 1A. Risk Factors and elsewhere in this
Report.
Readers are urged to consider these factors carefully in evaluating any forward-looking
statements and are cautioned not to place undue reliance on these forward-looking statements. The
forward-looking statements included herein are made only as of the date of this Report, and we
undertake no obligation to update any information contained in this Report or to publicly release
any revisions to any forward-looking statements that may be made to reflect events or circumstances
that occur, or that we become aware of, after the date of this Report.
Availability of Information
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a)
or 15(d) of the Securities Exchange Act of 1934, free of charge through our Internet website at
www.kaiseraluminum.com under the heading Investor Relations as soon as reasonably
practicable after we electronically file such material with or furnish it to the Securities and
Exchange Commission (SEC). The public also may read and copy any of these materials at the SECs
Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. The SEC also
maintains an Internet site that contains the Companys filings; the address of that site is
http://www.sec.gov.
Business Overview
Kaiser Aluminum Corporation is an independent fabricated aluminum products manufacturing
company with net sales of approximately $1.5 billion in 2008. We were founded in 1946 and operated
nine production facilities in the United States and one in Canada at December 31, 2008. We
manufacture rolled, extruded, drawn and forged aluminum products within three end use categories
consisting of aerospace and high strength products (which we refer to as Aero/HS products), general
engineering products (which we refer to as GE products) and custom automotive and industrial
products (which we refer to as Custom products).
We produced and shipped approximately 559 million pounds of fabricated aluminum products in
2008 which comprised 89% of our total net sales. We have long-standing relationships with our
customers, which include leading aerospace companies, automotive suppliers and metal distributors.
We strive to tightly integrate the management of the operations within our Fabricated Products
segment across multiple production facilities, product lines and target markets in order to
maximize the efficiency of product flow to our customers. In our served markets, we seek to be the
supplier of choice by pursuing Best in Class customer satisfaction and offering a broad product
portfolio.
1
In order to capitalize on the significant growth in demand for high quality heat treat
aluminum plate products in the market for Aero/HS products, in the third quarter of 2005 we began a
major expansion at our Trentwood facility in Spokane, Washington. The three phase expansion
amounted to approximately $139 million in capital investment and the final phase of the expansion
was completed in the fourth quarter of 2008. The Trentwood expansion significantly increased our
aluminum plate production capacity and enabled us to produce thicker gauge aluminum plate.
In 2007, we announced a $91 million investment program in our rod, bar and tube value stream
including a facility to be located in Kalamazoo, Michigan, as well as improvements at three
existing extrusion and drawing facilities. This investment program is expected to significantly
improve the capabilities and efficiencies of our rod and bar and seamless extruded and drawn tube
operations and enhance the market position of such products. We expect the facility in Kalamazoo,
Michigan to be equipped with two extrusion presses and a remelt operation. Completion of these
investments is expected to occur by early 2010.
In
December 2008, we announced plans to close operations at our Tulsa, Oklahoma extrusion
facility and significantly reduce operations at our Bellwood, Virginia facility. The Tulsa and
Bellwood facilities primarily produce extruded seamless tube and rod and bar products sold
principally to service centers for general engineering applications. The operations and workforce
reductions were a result of deteriorating economic and market conditions. Approximately 45 employees
at the Tulsa, Oklahoma facility and 125 employees at the Bellwood, Virginia facility were affected.
The Tulsa, Oklahoma plant was closed in late December 2008 and we expect to complete the curtailment
at the Bellwood, Virginia plant by early 2009.
In addition to our core Fabricated Products operations, we have a 49% ownership interest in
Anglesey Aluminium Limited (which we refer to as Anglesey), a company that owns an aluminum
smelter based in Holyhead, Wales. Anglesey produced in excess of 300 million pounds of primary
aluminum in each of 2006 and 2007 and approximately 260 million pounds of primary aluminum in 2008,
with 49% of such production being made available to us. During 2008, sales of our portion of
Angleseys output represented 11% of our total net sales.
Anglesey operates under a power agreement that provides sufficient power to sustain its
aluminum reduction operations at full capacity through September 2009. The nuclear plant that
supplies power to Anglesey is currently slated for decommissioning in late 2010. Anglesey has
worked intensively with government authorities and agencies to find a sustainable alternative to
the power supply needs of the smelter, but has been unable to reach a feasible solution. In January
of 2009, we announced that we expect Anglesey to fully curtail its smelting operations at the end
of September 2009, when its current power contract expires. Although Anglesey will continue to
pursue alternative sources of affordable power, as of the date of filing of this Report, no sources
have been identified that would allow the uninterrupted continuation of smelting operations.
Additionally, Anglesey is expected to evaluate alternative operating activities in line with the
needs of the local community and market opportunities, including the potential continuation of
remelt and casting operations and the production of anodes for use by other smelting facilities.
Taking into account Angleseys inability to obtain affordable power, the resulting expected
curtailment of smelting operations, the growing uncertainty with respect to the future of
Angleseys operations, and Angleseys expected cash requirements for redundancy and pension
payments, we do not expect to receive any dividends from Anglesey in the future and, as a result,
we fully impaired our 49% equity investment in Anglesey in our 2008 fourth quarter results.
Business Operations
Fabricated Products Business Unit
Overview
Our Fabricated Products business unit produces rolled, extruded, drawn, and forged aluminum
products used principally for aerospace and defense, automotive, consumer durables, electronics,
electrical, and machinery and equipment end-use applications. In general, the Fabricated Products
business unit manufactures products in one of three broad categories: Aero/HS products; GE
products; and Custom products. During 2008, 2007, the period from July 1, 2006 through December 31,
2006 and the period from January 1, 2006 to July 1, 2006, our North American fabricated products
manufacturing facilities produced and shipped approximately 559, 548, 250, and 273 million
2
pounds of fabricated aluminum products, respectively, which accounted for approximately 89%,
86%, 85% and 86% of our total net sales for 2008, 2007, the period from July 1, 2006 through
December 31, 2006 and the period from January 1, 2006 to July 1, 2006, respectively.
Types of Products Produced
The aluminum fabricated mill products market is broadly defined to include the markets for
flat-rolled, extruded, drawn, forged and cast aluminum products, used in a variety of end-use
applications. We participate in certain portions of the markets for flat-rolled, extruded/drawn and
forged products focusing on highly engineered products for Aero/HS products, GE products, and
Custom products. The portions of the markets in which we participate accounted for approximately
20% of total North American shipments of aluminum fabricated mill products in 2008.
Aerospace and High Strength Products. Our Aero/HS products include high quality heat treat
plate and sheet, as well as cold finish bar, seamless drawn tube and billet that are manufactured
to demanding specifications for the global aerospace and defense industries. These industries use
our products in applications that demand high tensile strength, superior fatigue resistance
properties and exceptional durability even in harsh environments. For instance, aerospace
manufacturers use high-strength alloys for a variety of structures that must perform consistently
under extreme variations in temperature and altitude. Our Aero/HS products are used for a wide
variety of end uses. We make aluminum plate and tube for aerospace applications, and we manufacture
a variety of specialized rod and bar products that are incorporated in diverse applications. The
aerospace and defense markets consumption of fabricated aluminum products is driven by overall
levels of industrial production, airframe build rates, which are cyclical in nature, and defense
spending, as well as the potential availability of competing materials such as composites. Demand
growth has increased for thick plate with growth in monolithic construction of commercial and
other aircraft. In monolithic construction, aluminum plate is heavily machined to form the desired
part from a single piece of metal (as opposed to creating parts using aluminum sheet, extrusions or
forgings that are affixed to one another using rivets, bolts or welds). Military applications for
heat treat plate and sheet include aircraft frames for military use and skins and armor plating to
protect ground vehicles from explosive devices. Products sold for Aero/HS applications represented
28% of our 2008 fabricated products shipments. Aero/HS products net sales in 2008 were
approximately 38% of our 2008 fabricated products net sales.
General Engineering Products. GE products consist primarily of standard catalog items sold to
large metal distributors. Our GE products consist of 6000-series alloy rod, bar, tube, sheet, plate
and standard extrusions. The 6000-series alloy is an extrudable medium-strength alloy that is heat
treatable and extremely versatile. Our GE products have a wide range of uses and applications, many
of which involve further fabrication of these products for numerous transportation and other
industrial end-use applications where machining of plate, rod and bar is intensive. For example,
our products are used in the enhancement of military vehicles, in the specialized manufacturing
process for liquid crystal display screens, and in the vacuum chambers in which semiconductors are
made. Our rod and bar products are manufactured into rivets, nails, screws, bolts and parts of
machinery and equipment. Demand growth and cyclicality for GE products tend to mirror broad
economic patterns and industrial activity in North America. Demand is also impacted by the
destocking and restocking of inventory in the full supply chain. Products sold for GE applications
represented 46% of our 2008 fabricated products shipments. GE products net sales in 2008 were
approximately 41% of our 2008 fabricated products net sales.
Custom Automotive and Industrial Products. Our Custom products consist of extruded/drawn and
forged aluminum products for many North American automotive and industrial end uses, including
consumer durables, electrical/electronic, machinery and equipment, automobile, light truck, heavy
truck and truck trailer applications. Examples of the wide variety of custom products that we
supply to the automotive industry include extruded products for bumpers and anti-lock braking
systems, drawn tube for drive shafts and forgings for suspension control arms and drive train
yokes. Other Custom product sales include extruded products for water heater anodes, truck trailers
and electrical/electronic markets. For some Custom products, we perform limited fabrication,
including sawing and cutting to length. Demand growth and cyclicality for Custom products tend to
mirror broad economic patterns and industrial activity in North America, with specific individual
market segments such as automotive, heavy truck and truck trailer applications tracking their
respective build rates. Products sold for Custom applications
represented 26% of our 2008
fabricated products shipments. Custom products net sales in 2008 were
approximately 21% of our 2008
fabricated products net sales.
3
End Markets In Which We Do Not Participate. We have elected not to participate in certain end
markets for fabricated aluminum products, including beverage and food cans, building and
construction materials, and foil used for packaging. We believe our chosen end markets present
better opportunities for sales growth and premium pricing of differentiated products. The markets
we have elected to participate in represented approximately 7% of the North American flat rolled
products market and 55% of the North American extrusion market in 2008.
Types of Manufacturing Processes Employed
We utilize the following manufacturing processes to produce our fabricated products:
Flat rolling. The traditional manufacturing process for aluminum flat-rolled products uses
ingot, a large rectangular slab of aluminum, as the starter material. The ingot is processed
through a series of rolling operations, both hot and cold. Finishing steps may include heat
treatment, annealing, coating, stretching, leveling or slitting to achieve the desired
metallurgical, dimensional and performance characteristics. Aluminum flat-rolled products are
manufactured using a variety of alloy mixtures, a range of tempers (hardness), gauges (thickness)
and widths, and various coatings and finishes. Flat-rolled aluminum semi-finished products are
generally either sheet (under 0.25 inches in thickness) or plate (up to 15 inches in thickness).
The vast majority of the North American market for aluminum flat-rolled products uses common
alloy material for construction and other applications and beverage/food can sheet. However,
these are products and markets in which we have chosen not to participate. Rather, we have
focused our efforts on heat treat products. Heat treat products are distinguished from common
alloy products by higher strength and other desired product attributes. The primary end use of
heat treat flat-rolled sheet and plate is for Aero/HS and GE products.
Extrusion. The extrusion process typically starts with a cast billet, which is an aluminum
cylinder of varying length and diameter. The first step in the process is to heat the billet to
an elevated temperature whereby the metal is malleable. The billet is put into an extrusion press
and pushed, or extruded, through a die that gives the material the desired two-dimensional cross
section. The material is either quenched as it leaves the press, or subjected to a post-extrusion
heat treatment cycle, to control the materials physical properties. The extrusion is then
straightened by stretching and cut to length before being hardened in aging ovens. The largest
end uses of extruded products are in the construction, general engineering and custom markets.
Building and construction products represent the single largest end-use market for extrusions by
a significant amount. However, we have chosen to focus our efforts on GE and Custom products
because we believe we have strong production capability, well-developed technical expertise and
high product quality with respect to these products.
Drawing. Drawing is a fabrication operation in which extruded tubes and rods are pulled
through a die, or drawn. The purpose of drawing is to reduce the diameter and wall thickness
while improving physical properties and dimensions. Material may go through multiple drawing
steps to achieve the final dimensional specifications. Aero/HS products is a primary end-use
market and is our focus.
Forging. Forging is a manufacturing process in which metal is pressed, pounded or squeezed
under great pressure into high-strength parts known as forgings. Forged parts are heat treated
before final shipment to the customer. The end-use applications are primarily in transportation,
where high strength-to-weight ratios in products are valued. We focus our production on certain
types of automotive and sports vehicle applications.
A description of the manufacturing processes and category of products at each of our
production facilities is shown below:
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Manufacturing |
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Types of Products |
Chandler, Arizona |
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Drawing |
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Aero/HS |
Greenwood, South Carolina
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Forging
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Custom |
Jackson, Tennessee
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Extrusion/Drawing
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Aero/HS, GE |
London, Ontario
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Extrusion
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Custom,GE |
Los Angeles, California
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Extrusion
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GE, Custom |
Newark, Ohio
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Extrusion/Rod Rolling
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Aero/HS, GE |
Richland, Washington
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Extrusion
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Aero/HS, GE |
Richmond, Virginia
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Extrusion/Drawing
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GE, Custom |
Sherman, Texas
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Extrusion
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Custom,GE |
Spokane, Washington
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Flat Rolling
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Aero/HS, GE |
Tulsa, Oklahoma (1)
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Extrusion
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GE |
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We closed our
Tulsa, Oklahoma facility in December 2008. |
4
As can be seen in the table above, many of our facilities employ the same basic manufacturing
process and produce the same type of end use products. Over the past several years, given the
similar economic and other characteristics at each location, we have made a significant effort to
more tightly integrate the management of our Fabricated Products business unit across multiple
manufacturing locations, product lines, and target markets to maximize the efficiency of product
flow to customers. Purchasing is centralized for a substantial portion of the Fabricated Products
business units primary aluminum requirements in order to maximize price, credit and other
benefits. Because many customers purchase a number of different products that are produced at
different plants, the sales force and its management are also significantly integrated. We believe
that integration of our operations allows us to capture efficiencies while allowing our facilities
to remain highly focused.
Raw Materials
We purchase substantially all of the primary aluminum and recycled and scrap aluminum used to
make our fabricated products from third-party suppliers. In a majority of the cases, we purchase
primary aluminum ingot and recycled and scrap aluminum in varying percentages depending on various
market factors including price and availability. The price for primary aluminum purchased for the
Fabricated Products business unit is typically based on the Average Midwest Transaction Price (or
Midwest Price), which from 2002 to 2008, has ranged between approximately $.02 to $.08 per pound
above the price traded on the London Metal Exchange (or LME) depending on primary aluminum
supply/demand dynamics in North America. Recycled and scrap aluminum are typically purchased at a
modest discount to ingot prices but can require additional processing. In addition to producing
fabricated aluminum products for sale to third parties, certain of our production facilities
provide one another with billet, log or other intermediate material in lieu of purchasing such
items from third party suppliers. For example, the Richmond, Virginia facility typically receives
some portion of its metal supply from either (or both of) the London, Ontario or Newark, Ohio
facilities; and the Newark, Ohio facility also supplies billet and log to the Jackson, Tennessee
facility and extruded forge stock to the Greenwood, South Carolina facility.
Pricing
The price we pay for primary aluminum, the principal raw material for our fabricated aluminum
products business, typically is the Midwest Price, which consists of two components: the price
quoted for primary aluminum ingot on the LME and the Midwest transaction premium, a premium to LME
reflecting domestic market dynamics as well as the cost of shipping and warehousing. Because
aluminum prices are volatile, we manage the risk of fluctuations in the price of primary aluminum
through a combination of pricing policies, internal hedging and financial derivatives. Our three
principal pricing mechanisms are as follows:
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Spot price. Some of our customers pay a product price that incorporates the spot price
of primary aluminum in effect at the time of shipment to a customer. This pricing mechanism
typically allows us to pass commodity price risk to the customer. |
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Index-based price. Some of our customers pay a product price that incorporates an
index-based price for primary aluminum such as Platts Midwest price for primary aluminum.
This pricing mechanism also typically allows us to pass commodity price risk to the
customer. |
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Firm price. Some of our customers pay a firm price. We bear commodity price risk on
firm-price contracts, which we hedge with financial derivatives. For internal reporting
purposes, whenever the Fabricated Products business unit enters into a firm price contract,
it also enters into an internal hedge with the Primary Aluminum business unit, so that all
the metal price risk resides in the Primary Aluminum business unit. Results from internal
hedging activities between the two business units are eliminated in consolidation. |
5
We introduced an energy
surcharge for new orders and new contracts placed beginning July 1,
2008. The surcharge is intended to pass through increases over the 2007 average prices for natural
gas, electricity and diesel fuel costs. While we intend to maintain the surcharge as part of our
routine pricing mechanism to pass on higher energy costs in the
future, at current energy prices,
which are below the 2007 average prices, the surcharge has no effect.
Sales, Marketing and Distribution
Industry sales margins for fabricated products fluctuate in response to competitive and market
dynamics. Sales are made directly to customers by our sales personnel located in the United States,
Canada and Europe, and by independent sales agents in Asia, Mexico and the Middle East. Our sales
and marketing efforts are focused on the markets for Aero/HS, GE, and Custom products.
Aerospace and High Strength Products. Approximately 50% of our Aero/HS product shipments are
sold to distributors with the remainder sold directly to customers. Sales are made primarily under
contracts (with terms spanning from one year to several years) as well as on an order-by-order
basis. We serve this market with a North American sales force focused on Aero/HS and GE products
and direct sales representatives in Western Europe. Key competitive dynamics for Aero/HS products
include the level of commercial aircraft construction spending (which in turn is often subject to
broader economic cycles) and defense spending.
General Engineering Products. A substantial majority of our GE products are sold to large
distributors in North America, with orders primarily consisting of standard catalog items shipped
with a relatively short lead-time. We service this market with a North American sales force focused
on GE and Aero/HS products. Key competitive dynamics for GE products include product price,
product-line breadth, product quality, delivery performance and customer service.
Custom Automotive and Industrial Products. Our Custom products are sold primarily to first
tier automotive suppliers and industrial end users. Sales contracts are typically medium to long
term in length. Almost all sales of Custom products occur through direct channels using a North
American direct sales force that works closely with our technical sales organization. Key demand
drivers for our automotive products include the level of North American light vehicle manufacturing
and increased use of aluminum in vehicles in response to increasingly strict governmental standards
for fuel efficiency. Demand for industrial products is directly linked to the strength of the
U.S. industrial economy.
Customers
In 2008, our Fabricated Products business unit had approximately 600 customers. The largest,
Reliance Steel & Aluminum, and the five largest customers for fabricated products accounted for
approximately 18% and 39%, respectively, of our net sales in 2008. The loss of Reliance, as a
customer, would have a material adverse effect on us. However, we believe that our relationship
with Reliance is good and the risk of loss of Reliance as a customer is remote.
Research and Development
We
operate three research and development centers. Our Rolling and Heat Treat Center and our
Metallurgical Analysis Center are both located at our Trentwood facility in Spokane, Washington.
The Rolling and Heat Treat Center has complete hot rolling, cold rolling and heat treat
capabilities to simulate, in small lots, processing of flat-rolled products for process and product
development on an experimental scale. The Metallurgical Analysis Center consists of a full
metallographic laboratory and a scanning electron microscope to support research development
programs as well as respond to plant technical service requests. The third center, our
Solidification and Casting Center, is located in Newark, Ohio and has a developmental casting unit
capable of casting billets and ingots for extrusion and rolling experiments. The unit is also
capable of casting full size billets and ingots for processing on the production extrusion presses
and rolling mills.
6
The combination of this R&D work and concurrent
product and process development with production operations has resulted in the creation and
delivery of value added Kaiser Select® products.
Primary Aluminum Business Unit
Our Primary Aluminum business unit contains two primary elements: (a) activities related to
our interests in and related to Anglesey and (b) primary aluminum hedging-related activities. Our
Primary Aluminum business unit accounted for approximately 11%, 14%, 15% and 14% of our total net
sales for 2008, 2007, the period from July 1, 2006 through December 31, 2006 and the period from
January 1, 2006 to July 1, 2006, respectively.
Anglesey. We own a 49% interest in Anglesey, which owns an aluminum smelter at Holyhead,
Wales. Rio Tinto Plc owns the remaining 51% ownership interest in Anglesey and has day-to-day
operating responsibilities for Anglesey. Anglesey produced in excess of 300 million pounds of
primary aluminum in each of 2006 and 2007 and approximately 260 million pounds of primary aluminum
in 2008. We supply 49% of Angleseys alumina requirements and purchase 49% of Angleseys aluminum
output, in each case based on a market-related pricing formula. Anglesey produces billet, rolling
ingot and sow for the United Kingdom and European marketplace. We sell our share of Angleseys
output to a single third party at market prices. The price received for sales of production from
Anglesey typically approximates the LME price. We also realize a premium (historically between $.05
and $.17 per pound above LME price depending on the product) for sales of value-added products such
as billet and rolling ingot.
To meet our obligation to sell alumina to Anglesey in proportion to our ownership percentage,
we purchase alumina under a contract that provides adequate alumina for operations through September
2009 at prices that are based on market prices for primary aluminum. We will need to secure a new
alumina contract for the period after September 2009 in the event Angleseys smelting operations
continue beyond September 2009, although as discussed below, such operations are not expected to
continue beyond September 2009. If, however such operations were to continue, we can give no
assurance regarding our ability to secure a source of alumina on comparable terms, and, if we are
unable to do so, the results of our Primary Aluminum operations will be affected.
Anglesey operates under a power agreement that provides sufficient power to sustain its
aluminum reduction operations at full capacity through September 2009. The nuclear plant that
supplies power to Anglesey is currently slated for decommissioning in late 2010. Anglesey has
worked intensively with government authorities and agencies to find a sustainable alternative to
the power supply needs of the smelter, but has been unable to reach a feasible solution. In January
of 2009, we announced that we expect Anglesey to fully curtail its smelting operations at the end
of September 2009, when its current power contract expires. Although Anglesey will continue to
pursue alternative sources of affordable power, as of the date of filing of this Report, no sources
have been identified that would allow the uninterrupted continuation of smelting operations.
Additionally, Anglesey is expected to evaluate alternative operating activities in line with the
needs of the local community and market opportunities, including the potential continuation of
remelt and casting operations and the production of anodes for use by other smelting facilities.
Taking into account Angleseys inability to obtain affordable power, the resulting expected
curtailment of smelting operations, the growing uncertainty with respect to the future of
Angleseys operations, and Angleseys expected cash requirements for redundancy and pension
payments, we do not expect to receive any dividends from Anglesey in the future and as a result, we
fully impaired our 49% equity investment in Anglesey in our 2008 fourth quarter results.
Hedging. Our pricing of fabricated aluminum products, as discussed above, is generally
intended to lock-in a conversion margin (representing the value added from the fabrication
process(es)) and to pass metal price risk onto our customers. However, in certain instances we do
enter into firm price arrangements. In such instances, we have price risk on our anticipated
primary aluminum purchases in respect of the customers order. Total fabricated products shipments
for which we were subject to price risk were 228, 239, 96 and 104 (in millions of pounds) during
2008, 2007, the period from July 1, 2006 through
December 31, 2006 and the period from January 1,
2006 to July 1, 2006, respectively.
Whenever our Fabricated Products business unit enters into a firm price contract, our Primary
Aluminum business unit and Fabricated Products business unit enter into an internal hedge so that
all the metal price risk
7
resides in our Primary Aluminum business unit. Results from internal hedging activities
between the two segments eliminate in consolidation. As more fully discussed in Item 7A.
Quantitative and Qualitative Disclosures About Market Risk, during the last three years, our net
exposure to primary aluminum price risk at Anglesey offset a significant amount the volume of
fabricated products shipments with underlying primary aluminum price risk. As such, we considered
our access to Anglesey production overall to be a natural hedge against Fabricated Products firm
metal-price risk. However, since the volume of fabricated products shipped under firm prices may
not have matched up on a month-to-month basis with expected Anglesey-related primary aluminum
shipments and to the extent that firm price contracts from our Fabricated Products segment exceeded
the Anglesey related primary aluminum shipments, we used third party hedging instruments to
eliminate any net remaining primary aluminum price exposure existing at any time.
As a result of the expected curtailment of Angleseys production discussed above, the natural
hedge against primary aluminum price fluctuation created by our participation in the primary
aluminum market would be eliminated. Accordingly, we deemed it appropriate to increase our
hedging activity to limit exposure to such price risks, which may have an adverse effect on our
financial position, results of operations and cash flows.
Primary aluminum-related hedging activities are managed centrally on behalf of our business
segments to minimize transaction costs, to monitor consolidated net exposures and to allow for
increased responsiveness to changes in market factors. Hedging activities are conducted in
compliance with a policy approved by our Board of Directors, and hedging transactions are only
entered into after appropriate approvals are obtained from our hedging committee (which includes
our chief executive officer and key financial officers).
Segment and Geographical Area Financial Information
The information set forth in Note 16 of Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary Data regarding our segments and geographical areas
in which we operate is incorporated herein by reference.
Competition
The fabricated aluminum industry is highly competitive. We concentrate our fabricating
operations on highly engineered products for which we believe we have production capability,
technical expertise, high product quality, and geographic and other competitive advantages. We
differentiate ourselves from our competition by pursuing Best
in Class customer satisfaction which
is driven by quality, availability, price and service, including delivery performance. Our primary
competition in the global heat treated flat-rolled products is Alcoa, Inc. and Rio Tinto Plc
(through its ownership of Alcans fabricated aluminum products business). In the extrusion market,
we compete with many regional participants as well as larger companies with national reach such as
SAPA, Norsk Hydro ASA and Indalex. Some of our competitors are substantially larger, have greater
financial resources, and may have other strategic advantages, including more efficient technologies
or lower raw material costs.
Our fabricated aluminum products facilities are located in North America. To the extent our
competitors have production facilities located outside North America, they may be able to produce
similar products at a lower cost. We may not be able to adequately reduce costs to compete with
these products. Increased competition could cause a reduction in our shipment volume and
profitability or increase our expenditures, any one of which could have a material adverse effect
on our results of operations.
In addition, our fabricated aluminum products compete with products made from other materials,
such as steel and composites, for various applications, including aircraft manufacturing. The
willingness of customers to accept substitutions for aluminum and the ability of large customers to
exert leverage in the marketplace to reduce the pricing for fabricated aluminum products could
adversely affect our results of operations.
For the heat treat plate and sheet products, new competition is limited by technological
expertise that only a few companies have developed through significant investment in research and
development. Further, use of plate and sheet in safety critical applications make quality and
product consistency critical factors. Suppliers must pass a rigorous qualification process to sell
to airframe manufacturers. Additionally, significant investment in infrastructure and specialized
equipment is required to supply heat treat plate and sheet.
8
Barriers to entry are lower for extruded and forged products, mostly due to the lower required
investment in equipment. However, the products that we produce are somewhat differentiated from the
majority of products sold by competitors. We maintain a competitive advantage by using application
engineering and advanced process engineering to distinguish our company and our products. We
believe our metallurgical expertise and controlled manufacturing processes enable superior product
consistency.
Employees
At December 31, 2008, we employed approximately 2,500 persons, of which approximately 2,440
were employed in our Fabricated Products business unit and approximately 60 were employed in our
corporate group, most of whom are located in our offices in Foothill Ranch, California
The table below shows each manufacturing location, the primary union affiliation, if any, and
the expiration date for the current union contract. As discussed below, union affiliations are with
the United Steel, Paper and Foresting, Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union, AFL CIO, CLC (USW) and International Association of Machinists
(IAM).
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Contract |
Location |
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Union |
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Expiration Date |
Chandler, AZ
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Non-union (1)
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Greenwood, SC
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Non-union
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Jackson, TN
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Non-union
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London, Ontario
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USW Canada
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Feb 2009 |
Los Angeles, CA
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Teamsters
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May 2009 |
Newark, OH
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USW
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Sept 2010 |
Richland, WA
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Non-union
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Richmond, VA
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USW/IAM
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Nov 2010 |
Sherman, TX
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IAM
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Dec 2010 |
Spokane, WA
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USW
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Sept 2010 |
Tulsa, OK
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USW (2)
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Nov 2010 |
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(1) |
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In November 2008, certain employees at our
Chandler, Arizona plant voted for affiliation
with the USW. We had not completed negotiation
with the union as of December 31, 2008. In
January 2009, the employees of Chandler
exercised their rights to contest the vote to
affiliate with the USW. The issue is under
review with the National Labor Relations Board. |
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(2) |
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In December 2008, we closed our Tulsa,
Oklahoma plant and entered into a closure
agreement with the USW. Pursuant to the closure
agreement with the USW, in the event that we
recall the employees at the Tulsa, Oklahoma
plant prior to November 15, 2010, we will be
subject to the union contract that was in place
prior to the closure of our Tulsa, Oklahoma
plant. |
As part of our chapter 11 reorganization, in 2006 we entered into a settlement with the USW
regarding, among other things, pension and retiree medical obligations. Under the terms of the
settlement, we agreed to adopt a position of neutrality regarding the unionization of any of our
employees.
Environmental Matters
We are subject to numerous environmental laws and regulations with respect to, among other
things: air and water emissions and discharges; the generation, storage, treatment, transportation
and disposal of solid and hazardous waste; and the release of hazardous or toxic substances,
pollutants and contaminants into the environment. Compliance with these environmental laws is and
will continue to be costly.
Our operations, including our operations conducted prior to our emergence from chapter 11
bankruptcy in July 2006, have subjected, and may in the future subject, us to fines or penalties
for alleged breaches of environmental laws and to obligations to perform investigations or clean up
of the environment. We may also be subject to claims from governmental authorities or third parties
related to alleged injuries to the environment, human health or natural
9
resources, including claims with respect to waste disposal sites, the clean up of sites
currently or formerly used by us or exposure of individuals to hazardous materials. Any
investigation, clean-up or other remediation costs, fines or penalties, or costs to resolve
third-party claims, may be significant and could have a material adverse effect on our financial
position, results of operations and cash flows.
We have accrued, and will accrue as necessary, for costs relating to the above matters that
are reasonably expected to be incurred based on available information. However, it is possible that
actual costs may differ, perhaps significantly, from the amounts expected or accrued, and such
differences could have a material adverse effect on our financial position, results of operations
and cash flows. In addition, new laws or regulations, or changes to existing laws and regulations
may occur, and we cannot assure you as to the amount that we would have to spend to comply with
such new or amended laws and regulations or the effects that they would have on our financial
position, results of operations and cash flows.
Emergence From Reorganization Proceedings
From the first quarter of 2002 to June 30, 2006, Kaiser and 25 of its subsidiaries operated
under chapter 11 of the United States Bankruptcy Code under the supervision of the United States
Bankruptcy Court for the district of Delaware(the Bankruptcy Court). Pursuant to a plan of
reorganization (the Plan), Kaiser and its subsidiaries, which included all of our then-existing
fabricated products facilities and operations and a 49% interest in Anglesey, emerged from
chapter 11 on July 6, 2006. Pursuant to the Plan, all material pre-petition debt, pension and
post-retirement medical obligations and asbestos and other tort liabilities, along with other
pre-petition claims (which in total aggregated at June 30, 2006 approximately $4.4 billion) were
addressed and resolved. Pursuant to the Plan, all of the equity interests of Kaisers pre-emergence
stockholders were cancelled without consideration. Equity of the newly emerged Kaiser was issued
and delivered to a third-party disbursing agent for distribution to claimholders pursuant to the
Plan.
All financial statement information before July 1, 2006 relates to Kaiser before emergence
from chapter 11 (sometimes referred to herein as the Predecessor). Kaiser after emergence is
sometimes referred to herein as the Successor. As more fully discussed below, there will be a
number of differences between the financial statements before and after emergence that will make
comparisons of future and past financial information difficult and may make it more difficult to
assess our future prospects based on historical performance.
We also made some changes to our accounting policies and procedures as part of the application
of fresh start accounting as required by the American Institute of Certified Professional
Accountants Statement of Position 90-7 (SOP 90-7), Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code and the emergence process. In general, our accounting
policies are the same as or similar to those historically used to prepare our financial statements.
In certain cases, however, we adopted different accounting principles for, or applied methodologies
differently to, our post emergence financial statement information. For instance, we changed our
accounting methodologies with respect to inventory accounting. While we still account for
inventories on a last-in, first-out (LIFO) basis after emergence, we are applying LIFO
differently than we did in the past. Specifically, we now view each quarter on a standalone basis
for computing LIFO; in the past, we recorded LIFO amounts with a view to the entire fiscal year,
which, with certain exceptions, tended to result in LIFO charges being recorded in the fourth
quarter or second half of the year.
Legal Structure
In connection with our Plan, we restructured and simplified our corporate structure. Our
current corporate structure is summarized as follows:
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We directly own 100% of the issued and outstanding shares of capital stock of Kaiser
Aluminum Investments Company, a Delaware corporation (KAIC), which functions as an
intermediate holding company. |
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KAIC owns 49% of the ownership interests of Anglesey and 100% of the ownership interests
of each of: |
10
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Kaiser Aluminum Fabricated Products, LLC, a Delaware limited liability company
(KAFP), which holds the assets and liabilities associated with our Fabricated Products
business unit (excluding those assets and liabilities associated with our London, Ontario
facility); |
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Kaiser Aluminum Canada Limited, an Ontario corporation, which holds the assets and
liabilities associated with our London, Ontario facility and certain former Canadian
subsidiaries that were largely inactive; |
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Kaiser Aluminum & Chemical Corporation, LLC, a Delaware limited liability company,
which, as a successor by merger to Kaiser Aluminum & Chemical Corporation, holds our
remaining non-operating assets and liabilities not assumed by KAFP; |
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Kaiser Aluminium International, Inc., a Delaware corporation, which functions
primarily as the seller of our products delivered outside the United States; |
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Trochus Insurance Co., Ltd., a corporation formed in Bermuda, which has
historically functioned as a captive insurance company; and |
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Kaiser Aluminum France, SAS, a corporation formed in France for the primary purpose
of engaging in market development and commercialization and distribution of our products
in Western Europe. |
Item 1A. Risk Factors
This Item may contain statements which constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. See Item 1. Business
Forward-Looking Statements for cautionary information with respect to such forward-looking
statements. Such cautionary information should be read as applying to all forward-looking
statements wherever they appear in this Report. Forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties. Actual results may vary from
those in forward-looking statements as a result of a number of factors including those we discuss
in this Item and elsewhere in this Report.
In addition to the factors discussed elsewhere in this Report, the risks described below are
those which we believe are the material risks we face. The occurrence of any of the events
discussed below could significantly and adversely affect our business, prospects, financial
condition, results of operations and cash flows as well as the trading price of our common stock.
Recent economic factors.
The United States and global
economies are currently experiencing a period of substantial economic uncertainty with wide-ranging effects, including:
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disruption in global financial markets that has reduced the liquidity available to us, our customers,
our suppliers and the purchasers of products that materially affect demand for our materials, including commercial
airlines; |
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a substantially weakened banking and financial system with increasing risk and exposure to the impact of
non-performance by banks committed to provide financing, hedging counterparties, insurers, customers and suppliers; |
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extreme volatility in commodity prices reflected most recently by broad and unprecedented declines that
materially impact the results of our hedging strategies, increase near term cash margin requirements, reduce the value
of our inventories and borrowing base under our revolving credit facility and result in substantial non-cash charges as
we adjust inventory values and mark-to-market our hedge positions; |
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substantial reductions in consumer spending that reduce the demand for applications that use our products,
including commercial aircraft, automobiles, trucks and trailers; |
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the rapid destocking of inventory levels throughout the supply chain in response to reduced demand and increasing
uncertainty; |
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reduced customer demand under existing contracts resulting in customers limiting purchases to contractual
minimum volumes or seeking relief from contractual obligations; |
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increasing risk that customers and suppliers may liquidate or seek protection under federal bankruptcy laws
and reject existing contractual commitments; |
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difficulty successfully executing our strategy of growth through acquisitions; |
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the possibility of additional plant closures or reductions in response to a prolonged or increased reduction
in demand for our products; |
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pressure to reduce defense spending and demand for our
products used in defense applications as the new United States
government administration is faced with competing national priorities; and |
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the inability to predict with any certainty the effectiveness and long term impact of economic stimulus plans. |
We are unable to
predict the impact, severity and duration of these events, any of which could have a material adverse impact on our
financial position, results of operations and cash flows.
A reader may not be able to compare our historical financial information to our financial
information relating to periods after our emergence from chapter 11 bankruptcy.
As a result of the effectiveness of our chapter 11 plan of reorganization, our Plan, on
July 6, 2006, we began operating our business under a new capital structure. In addition, we
adopted fresh start reporting in accordance with American Institute of Certified Public Accountants
Statement of Position 90-7, or SOP 90-7, Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code as of July 1, 2006. Because SOP 90-7 requires us to account for our assets and
liabilities at their fair values as of the effective date of our Plan, our financial condition and
results of operations from and after July 1, 2006 are not comparable in some material respects to
the financial condition or results of operations reflected in our historical financial statements
at dates or for periods prior to July 1, 2006.
We operate in a highly competitive industry which could adversely affect our profitability.
The fabricated products segment
of the aluminum industry is highly competitive. Competition in the sale of fabricated aluminum products is based upon
quality, availability, price and service, including delivery performance. Many of our competitors are substantially
larger than we are and have greater financial resources than we do, and may have other strategic advantages, including
aluminum reduction capacity providing a long term natural hedge that facilitates the offering of fixed price contracts
without margin exposure, more efficient technologies or lower raw material costs. Our facilities are primarily located in
North America. To the extent that our competitors have production facilities located outside North America, they may be
able to produce similar products at a lower cost or sell those
products at a lower price during periods when the currency exchange
rates favor foreign competition. We may not be able to adequately reduce our costs or prices to compete with these
products. Increased competition could cause a reduction in our shipment volumes and profitability or increase our
expenditures, any one of which could have a material adverse effect on our financial position, results of operations
and cash flows.
11
We depend on a core group of significant customers.
In 2008, our largest fabricated products customer, Reliance, accounted for approximately 18%
of our fabricated products net sales, and our five largest customers accounted for approximately
39% of our fabricated products net sales. If our existing relationships with significant customers
materially deteriorate or are terminated and we are not successful in replacing lost business, our
financial position, results of operations and cash flows could be materially and adversely
affected. In addition, a prolonged or increasing downturn in the business or financial condition of any of our
significant customers could materially and adversely affect our financial position, results of
operations and cash flows.
Our industry is very sensitive to foreign economic, regulatory and political factors that may
adversely affect our business.
We import primary aluminum from, and manufacture fabricated products used in, foreign
countries. We also own 49% of Anglesey, and, at least through September 2009, we will purchase
alumina to supply to Anglesey, and we purchase aluminum from Anglesey for sale to a third party in
the United Kingdom. Factors in the politically and economically diverse countries in which we
operate or have customers or suppliers, including inflation, fluctuations in currency and interest
rates, competitive factors, civil unrest and labor problems, could affect our financial position,
results of operations and cash flows. Our financial position, results of operations and cash flows
could also be adversely affected by:
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acts of war or terrorism or the threat of war or terrorism; |
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government regulation in the countries in which we operate, service customers or purchase
raw materials; |
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the implementation of controls on imports, exports or prices; |
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the adoption of new forms of taxation and duties; |
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the imposition of currency restrictions; |
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the nationalization or appropriation of rights or other assets; and |
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trade disputes involving countries in which we operate, service customers or purchase raw
materials. |
12
The aerospace industry is cyclical and downturns in the aerospace industry, including downturns
resulting from acts of terrorism, could adversely affect our revenues and profitability.
We derive a significant portion of our revenue from products sold to the aerospace industry,
which is highly cyclical and tends to decline in response to overall declines in industrial
production. The commercial aerospace industry is historically driven by
the demand from commercial airlines for new aircraft. Demand for commercial aircraft is influenced
by airline industry profitability, trends in airline passenger traffic, by the state of the
U.S. and world economies and numerous other factors, including the effects of terrorism. In recent years, a number of
major airlines have also undergone chapter 11 bankruptcy and experienced financial strain from volatile fuel prices. The
aerospace industry also suffered significantly in the wake of the
events of September 11, 2001, resulting in a sharp decrease globally in new commercial aircraft deliveries and order
cancellations or deferrals by the major airlines. Continued financial instability in the industry, terrorist acts or
the increased threat of terrorism may lead to reduced demand for new aircraft that utilize our products, which could
adversely affect our financial position, results of operations and
cash flows. The military aerospace industry is highly
dependent on U.S. and foreign government funding; however, it is also driven by the effects of terrorism, a changing
global political environment, U.S. foreign
policy, regulatory changes, the retirement of older aircraft and technological improvements to new
aircraft engines that increase reliability. The timing, duration and severity of upturns
and downturns cannot be predicted with certainty. A future downturn
or reduction in defense spending could
have a material adverse effect on our financial position, results of operations and cash flows.
Reductions in defense spending for
aerospace and non-aerospace military applications could substantially
reduce demand for our products.
Our products are used in a wide
variety of military applications, including military jets, armored vehicles and ordinance. The funding of U.S. government
programs is subject to congressional appropriations. Many of the programs in which we participate may extend several
years; however these programs are normally funded annually. Changes in military strategy and priorities may affect
current and future programs. Similarly there may be significant pressure to reduce defense spending as the new
administration and governments around the world are faced with competing national priorities. Reductions in defense
spending will reduce the demand for our products and could adversely affect our financial position, results of operations
and cash flows.
13
Our customers may reduce their demand for aluminum products in favor of alternative materials.
Our fabricated aluminum products compete with products made from other materials, such as
steel and composites, for various applications. For instance, the commercial aerospace industry has
used and continues to evaluate the further use of alternative materials to aluminum, such as
composites, in order to reduce the weight and increase the fuel efficiency of aircraft. The
willingness of customers to accept substitutions for aluminum or the ability of large customers to
exert leverage in the marketplace to reduce the pricing for fabricated aluminum products could
adversely affect the demand for our products, particularly our aerospace and high strength
products, and thus adversely affect our financial position, results of operations and cash flows.
Further
downturns in the automotive and heavy duty truck and trailer industries could adversely affect our net sales and
profitability.
The demand for many of our general engineering and custom products is dependent on the
production of automobiles, light trucks, SUVs, and heavy duty vehicles and
trailers in North America. The automotive
industry is highly cyclical, as new vehicle demand is dependent on consumer spending and is tied
closely to the overall strength of the North American economy. The North American automotive
and heavy truck and trailer industries have experienced severe
downturns in sales. Multiple production cuts
by United States manufacturers may continue
to adversely affect the demand for our products. The North American automotive manufacturers are
also burdened with substantial structural costs, including pension and healthcare costs that impact
their profitability and labor relations and may ultimately result in severe financial difficulty,
including bankruptcy. More recently, the three major automobile manufacturers in the United States
have encountered serious financial difficulties as automotive sales and production have
substantially declined, and two of them have received financial assistance from the federal
government. A worsening of these companies financial condition or their bankruptcy could have
further serious effects on the Unites States and global economies which, in turn, could worsen the
conditions of the markets which directly affect the demand of our
products. Similarly, a prolonged decline in the demand for new
automobiles and heavy duty trucks and trailers, particularly
in the United States, could have a material adverse effect on our financial position, results of
operations and cash flows.
Changes in consumer demand may adversely affect our operations which supply automotive end users.
Increases in energy costs have resulted in shifts in consumer demand away from motor vehicles
that typically have a higher content of the products we currently supply, such as light trucks and
SUVs. The loss of business with respect to, or a lack of commercial success of, one or more
particular vehicle models for which we are a significant supplier could have an adverse impact on
our financial position, results of operations and cash flows.
We face tremendous pressure from our automotive customers on pricing.
Cost cutting initiatives that our automotive customers have adopted generally result in
increased downward pressure on pricing and our automotive customers typically seek agreements
requiring reductions in pricing over the period of production. Pricing pressure may further
intensify, particularly in North America, as North American automobile manufacturers pursue cost
cutting initiatives. If we are unable to generate sufficient production cost savings in the future
to offset any required price reductions, our financial position, results of operations and cash
flows could be adversely impacted.
Because our products are often components of our customers products, reductions in demand for our
products may be more severe than, and may occur prior to reductions in demand for, our customers
products.
Our products are often components of the end-products of our customers. Customers purchasing
our fabricated aluminum products, such as those in the cyclical automotive and aerospace
industries, generally require significant lead time in the production of their own products.
Therefore, demand for our products may increase prior to demand for our customers products.
Conversely, demand for our products may decrease as our customers anticipate a downturn in their
respective businesses. As demand for our customers products begins to soften, our customers
typically reduce or eliminate their demand for our products and meet the reduced demand for their
products using
14
their own inventory without replenishing that inventory, which results in a reduction in
demand for our products that is greater than the reduction in demand for their products. This
amplified reduction in demand for our products in the event of a downswing in our customers
respective businesses (de-stocking) may adversely affect our financial position, results of
operations and cash flows.
Our business is subject to unplanned business interruptions which may adversely affect our
performance.
The production of aluminum and fabricated aluminum products is subject to unplanned events
such as explosions, fires, inclement weather, natural disasters, accidents, transportation
interruptions and supply interruptions. Operational interruptions at one or more of our production
facilities, particularly interruptions at our Trentwood facility in Spokane, Washington where our
production of plate and sheet is concentrated, could cause substantial losses in our production
capacity. Furthermore, because customers may be dependent on planned deliveries from us, customers
that have to reschedule their own production due to our delivery delays may be able to pursue
financial claims against us, and we may incur costs to correct such problems in addition to any
liability resulting from such claims. Interruptions may also harm our reputation among actual
and potential customers, potentially resulting in a loss of business. To the extent these losses
are not covered by insurance, our financial position, results of operations and cash flows may be
adversely affected by such events.
Covenants and events of default in our
debt instruments could limit our ability to undertake certain types of transactions and adversely affect our liquidity.
Our revolving credit facility
contains negative and financial covenants and events of default that may limit our financial flexibility and ability to
undertake certain types of transactions. For instance, we are subject to negative covenants that restrict our activities,
including restrictions on our ability to grant liens, engage in
mergers, sell assets, incur debt, engage in different
businesses, make investments, pay dividends, and repurchase shares. If we fail to satisfy the covenants set forth in our
revolving credit facility or another event of default occurs under the revolving credit facility, we could be prohibited
from borrowing. If we cannot borrow under the revolving credit facility, we could be required to seek additional financing,
if available, or curtail our operations. Additional financing may not be available on commercially acceptable terms, or
at all. If the revolving credit facility is terminated and we do not have sufficient cash on hand to pay any amounts
outstanding under the facility, we could be required to sell assets or to obtain additional financing.
We depend on our subsidiaries for cash to meet our obligations and pay any dividends.
We are a holding company. Our subsidiaries conduct all of our operations and own substantially
all of our assets. Consequently, our cash flow and our ability to meet our obligations or pay
dividends to our stockholders depend upon the cash flow of our subsidiaries and the payment of
funds by our subsidiaries to us in the form of dividends, tax sharing payments or otherwise. Our
subsidiaries ability to provide funding will depend on their earnings, the terms of their
indebtedness (including the revolving credit facility), tax considerations and legal restrictions.
We may not be able to successfully implement our productivity and cost reduction initiatives.
As the economy and markets for
our products move through economic downturns or supply otherwise begins to exceed demand through increases in capacity or
reduced demand, it is increasingly important for us to be a low cost producer. Although we have undertaken and expect to
continue to undertake productivity and cost reduction
initiatives to improve performance, including deployment of company-wide business improvement
methodologies, such as our production system, the Kaiser Production System, which involves the
integrated utilization of application and advanced process engineering and business improvement
methodologies such as Lean Enterprise, Total Productive Maintenance
and Six Sigma, we cannot assure
you that all of these initiatives will be completed or beneficial to us or that any estimated cost
saving from such activities will be fully realized. Even when we are able to generate new
efficiencies successfully in the short to medium term, we may not be able to continue to reduce
cost and increase productivity over the long term.
15
Our profitability could be adversely affected by increases in the cost of raw materials and
freight.
The price of primary aluminum has historically been subject to significant cyclical price
fluctuations, and the timing of changes in the market price of aluminum is largely unpredictable.
Although our pricing of fabricated aluminum products is generally intended to pass the risk of
price fluctuations on to our customers, we may not be able to pass on
the entire cost of increases to our customers or offset fully the
effects of higher costs for other raw materials through the use of
surcharges and other measures,
which may cause our profitability to decline. There will also be a potential time lag between
increases in prices for raw materials under our purchase contracts and the point when we can
implement a corresponding increase in price under our sales contracts with our customers. As a
result, we may be exposed to fluctuations in raw material prices, including aluminum, since, during
the time lag, we may have to bear the additional cost of the price increase under our purchase
contracts. If these events were to occur, they could have a material adverse effect on our
financial position, results of operations and cash flows. In addition, an increase in raw material prices may cause some of our
customers to substitute other materials for our products, adversely affecting our financial
position, results of operations and cash flows due to both a decrease in the sales of fabricated
aluminum products and a decrease in demand for the primary aluminum produced at Anglesey.
The price volatility of energy costs may adversely affect our profitability.
Our income and cash flows depend on the margin above fixed and variable expenses (including
energy costs) at which we are able to sell our fabricated aluminum products. The volatility in
costs of fuel, principally natural gas, and other utility services, principally electricity, used
by our production facilities affect operating costs. Fuel and utility prices have been, and will
continue to be, affected by factors outside our control, such as supply and demand for fuel and
utility services in both local and regional markets. Future increases
in fuel and utility prices may have a material adverse
effect on our financial position, results of operations and cash flows.
Our hedging programs may limit the income
and cash flows we would otherwise expect to receive if
our hedging program were not in place.
From time to time in the
ordinary course of business, we enter into hedging transactions
to limit our exposure to price risks relating to primary aluminum prices, energy prices and foreign
currency. To the extent that these hedging transactions fix prices or exchange rates and primary
aluminum prices, energy costs or foreign exchange rates are below the fixed prices or rates
established by these hedging transactions, our income and cash flows will be lower than they
otherwise would have been. Additionally, to the extent that primary aluminum prices, energy prices
and/or foreign currency exchange rates deviate materially and adversely from fixed, floor or
ceiling prices or rates established by outstanding hedging transactions, we could incur margin
calls that could adversely impact our liquidity and result in a
material adverse effect on our financial position, results of
operations and cash flows. Conversely, we are exposed to risks associated with the credit worthiness of our hedging
counterparties. Non-performance by a counterparty could have a
material adverse effect on our financial position, results of
operations and cash flows.
16
Uncertainty of Anglesey is expected to preclude recognition of future operating results and distribution of dividends.
The agreement under which
Anglesey receives power expires in September 2009, and the nuclear facility which supplies such power is scheduled to
cease operations in 2010. We fully impaired our 49% equity investment in Anglesey in its 2008 fourth quarter
results after considering Angleseys inability to obtain affordable power, the resulting expected curtailment of smelting
operations and the growing uncertainty with respect to the future of Angleseys operations. While we expect Anglesey to
continue to pursue alternative sources of affordable power, no sources have been identified that would enable the
uninterrupted continuation of smelting operations. Similarly, although we expect Anglesey to continue to evaluate
alternative operating activities, including the potential continuation of remelt and casting operations and the
production of anodes for use by other smelting facilities, the economic feasibility of alternative operating activities
at Anglesey is highly uncertain in the context of current economic conditions, Angleseys increasing exposure to higher
pension contributions following recent declines in the value of the assets held by the Rio Tinto pension plan in which
Anglesey participates and uncertainty with respect to future costs and expenses Anglesey may incur in connection with
the curtailment of smelting operations. Unless we can determine that current or future operating results from
Anglesey will be recoverable, we will not recognize future operating results from Anglesey. The expected inability to
recognize future operating results from Anglesey and the anticipated loss of future dividend income, will adversely
affect our financial position, results of operations and cash flows.
We are exposed to fluctuations in foreign currency exchange rates and interest rates, as well as
inflation and other economic factors in the countries in which we operate.
Economic factors, including inflation and fluctuations in foreign currency exchange rates and
interest rates in the countries in which we operate, could affect our revenues, expenses and
results of operations. In particular, lower valuation of the U.S. dollar against other currencies,
particularly the Canadian dollar, Euro and British Pound Sterling, may affect our profitability as
some important raw materials are purchased in other currencies, while products generally are sold
in U.S. dollars.
Our ability to keep key management and other personnel in place and our ability to attract
management and other personnel may affect our performance.
We depend on our senior executive officers and other key personnel to run our business. The
loss of any of these officers or other key personnel could materially and adversely affect our
operations. Competition for qualified employees among companies that rely heavily on engineering
and technology is intense, and the loss of qualified employees or an inability to attract, retain
and motivate additional highly skilled employees required for the operation and expansion of our
business could hinder our ability to improve manufacturing operations, conduct research activities
successfully or develop marketable products.
Our production costs may increase and we may not sustain our sales and earnings if we fail to
maintain satisfactory labor relations.
A significant number of our employees are represented by labor unions under labor contracts
with varying durations and expiration dates. All of these contracts currently expire in 2009 and
2010, including labor contracts with the USW, covering three of our
manufacturing locations or
approximately 36% of our employees, scheduled to expire in the fall of
2010. In addition, efforts by the USW are currently underway to
organize our Chandler, Arizona facility. We may not be
able to renegotiate or negotiate these or our other labor contracts on satisfactory terms. As
part of any negotiation, we may reach agreements with respect to future wages and benefits
that could materially and adversely affect our future financial position, results of operations and
cash flows. In addition, negotiations could divert management attention or result in
union-initiated work actions, including strikes or work stoppages, that could have a material
adverse effect on our financial position, results of operations and cash flows. Moreover, the
existence of labor agreements may not prevent such union-initiated work actions.
Our business is regulated by a wide variety of health and safety laws and regulations and
compliance may be costly and may adversely affect our results of operations.
Our operations are regulated by a wide variety of health and safety laws and regulations.
Compliance with these laws and regulations may be costly and could have a material adverse effect
on our results of operations. In addition, these laws and regulations are subject to change at any
time, and we can give you no assurance as to the effect that any such changes would have on our
operations or the amount that we would have to spend to comply with such laws and regulations as so
changed.
17
Environmental compliance, clean up and damage claims may decrease our cash flow and adversely
affect our results of operations.
We are subject to numerous environmental laws and regulations with respect to, among other
things: air and water emissions and discharges; the generation, storage, treatment, transportation
and disposal of solid and hazardous waste; and the release of hazardous or toxic substances,
pollutants and contaminants into the environment. Compliance with these environmental laws is and
will continue to be costly.
Our operations, including operations conducted prior to our emergence from chapter 11
bankruptcy, have subjected, and may in the future subject, us to
fines, penalties and expenses for alleged
breaches of environmental laws and to obligations to perform investigations or clean up of the
environment. We may also be subject to claims from governmental authorities or third parties
related to alleged injuries to the environment, human health or natural resources, including claims
with respect to waste disposal sites, the clean up of sites currently or formerly used by us or
exposure of individuals to hazardous materials. Any investigation, clean-up or other remediation
costs, fines or penalties, or costs to resolve third-party claims may be significant and could have
a material adverse effect on our financial position, results of operations and cash flows.
We have accrued, and will
accrue, for costs relating to the above matters that are reasonably expected to be incurred based on available
information. However, it is possible that actual costs may differ, perhaps significantly, from the amounts expected
or accrued. Similarly, the timing of those expenditures may occur faster than anticipated. These differences could
have a material adverse effect on our financial position, results of operations and cash flows. In addition, new laws
or regulations or changes to existing laws and regulations may occur, including government mandated green initiatives
and limitations on carbon emissions, that increase the cost or complexity of compliance, including the increased
regulation of carbon emissions. Difference in actual costs, the timing of payments for previously accrued costs
and the impact of new laws and regulations may have a material adverse effect on our financial position, results
of operations and cash flows.
Other legal proceedings or investigations or changes in the laws and regulations to which we are
subject may adversely affect our results of operations.
In addition to the matters described above, we may from time to time be involved in, or be the
subject of, disputes, proceedings and investigations with respect to a variety of matters,
including matters related to personal injury, employees, taxes and contracts, as well as other
disputes and proceedings that arise in the ordinary course of business. It could be costly to
address these claims or any investigations involving them, whether meritorious or not, and
legal proceedings and investigations could divert managements attention as well as operational
resources, negatively affecting our financial position, results of
operations and cash flows.
Additionally, as with the
environmental laws and regulations, the other laws and regulations which govern our business are subject to change
at any time. Compliance with changes to existing laws and regulations could have a material adverse effect on our
financial position, results of operations and cash flows.
Product liability claims against us could result in significant costs and could adversely affect
our financial position, results of operations and cash flow.
We are sometimes exposed to
warranty and product liability claims. While we generally maintain insurance against many product liability risks, a
successful claim that exceeds our available insurance coverage or that is no longer fully insured as a result of the
insolvency of one or more of the underlying carriers could have a material adverse effect on our financial position,
results of operations and cash flows.
Our rod, bar, and tube investment projects and other expansion projects may not be completed as
scheduled.
We are currently engaged in
various investment projects, including investment in
our rod, bar, and tube value stream to, among other things, develop a production facility in
Kalamazoo, Michigan and various other expansion projects. Our ability to complete these
projects, and the timing and costs of doing so, are subject to various risks associated with all
major construction projects, many of which are beyond our control, including
18
technical
or mechanical problems, economic conditions and permitting. If we are unable to fully complete
these projects or if the actual costs for these projects exceed our current expectations, our
financial position, results of operations and cash flows could be adversely affected.
We may not be able to successfully execute our strategy of growth through acquisitions.
A component of our growth strategy is to acquire fabricated products assets in order to
complement our product portfolio. Our ability to do so will be dependent upon a number of factors,
including our ability to identify acceptable acquisition candidates, consummate acquisitions on
favorable terms, successfully integrate acquired assets, obtain financing to fund acquisitions and
support our growth and many other factors beyond our control. Risks associated with acquisitions
include those relating to:
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diversion of managements time and attention from our existing business; |
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challenges in managing the increased scope, geographic diversity and complexity of
operations; |
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difficulties integrating the financial, technological and management standards,
processes, procedures and controls of the acquired business with those of our existing
operations; |
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liability for known or unknown environmental conditions or other contingent liabilities
not covered by indemnification or insurance; |
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greater than anticipated expenditures required for compliance with environmental or other
regulatory standards or for investments to improve operating results; |
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difficulties achieving anticipated operational improvements; |
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incurrence of indebtedness to finance acquisitions or capital expenditures relating to
acquired assets; and |
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issuance of additional equity, which could result in further dilution of the ownership
interests of existing stockholders. |
We
may not be successful in acquiring additional assets, and any acquisitions that we do
consummate may not produce the anticipated benefits or may have adverse effects on our financial
position, results of operations and cash flows.
Our effective income tax rate could
increase and materially adversely affect our business.
We operate
in multiple tax
jurisdictions and pay tax on our income according to the
tax laws of these jurisdictions. Various factors, some of which are beyond our control, determine our effective tax
rate and/or the amount we are required to pay, including changes in or interpretations of tax laws in any given
jurisdiction, our ability to use net operating losses and tax credit carry forwards and other tax attributes,
changes in geographical allocation of income and expense, and our judgment about the realizability of deferred
tax assets. Such changes to our effective tax rate could materially adversely affect our financial position,
liquidity, results of operations and cash flows.
Exposure to additional income tax liabilities due
to audits could materially adversely affect our business.
Due
to our size and the
nature of our business, we are subject to ongoing reviews by taxing jurisdictions on various tax matters, including
challenges to various positions we assert on our income tax and withholding tax returns. We accrue income tax liabilities
and tax contingencies based upon our best estimate of the taxes ultimately
expected to be paid after considering our knowledge of all relevant facts and circumstances, existing tax laws,
our experience with previous audits and settlements, the status of current tax examinations and how the tax authorities
view certain issues. Such amounts are included in taxes payable or other non-current liabilities, as appropriate,
and updated over time as more information becomes available. We record additional tax expense in the period in which
we determine that the recorded tax liability is less than the ultimate assessment we expect. We are currently subject
to audit and review in a number of jurisdictions in which we operate and have been advised that further audits may
commence in the next 12 months. For example, the Canadian Revenue Agency (which we refer to as the CRA) is currently
conducting an audit to determine whether we are in compliance with certain transfer pricing and intercompany loan
provisions. If it is determined that we are not in compliance, we will not be entitled to certain tax rates on
payments from our U.S. subsidiaries to and from our Canadian company. It is reasonably possible that the amount
of our unrecognized tax benefits could significantly increase or decrease within the next 12 months.
We are exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act of 2002.
We are
required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. While we have
concluded that at December 31, 2008, we have no material weaknesses in our internal controls over
financial reporting we cannot assure you that we will not have a material weakness in the future. A
material weakness is a control deficiency, or combination of significant deficiencies that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. If we fail to maintain a system of internal
controls over financial reporting that meets the requirements of Section 404, we might be subject
to sanctions or investigation by regulatory authorities such as the SEC or by the NASDAQ Stock
Market LLC. Additionally, failure to comply with Section 404 or the report by us of a material
weakness may cause investors to lose confidence in our financial statements and our stock price may
be adversely affected. If we fail to remedy any material weakness, our financial statements may be
inaccurate, we may be subject to increase in insurance costs, we may not have access to the capital
markets, and our stock price may be adversely affected.
We may not be able to adequately protect proprietary rights to our technology.
Our success will depend in part upon our proprietary technology and processes. Although we
attempt to protect our intellectual property through patents, trademarks, trade secrets,
copyrights, confidentiality and nondisclosure agreements and other measures, these measures may not
be adequate
19
particularly in foreign countries where the laws may offer significantly less intellectual
property protection than is offered by the laws of the United States. In addition, any attempts to
enforce our intellectual property rights, even if successful, could result in costly and prolonged
litigation, divert managements attention and adversely affect our results of operations and cash
flows. The unauthorized use of our intellectual property may adversely affect our results of
operations as our competitors would be able to utilize such property without having had to incur
the costs of developing it, thus potentially reducing our relative profitability. Furthermore, we
may be subject to claims that our technology infringes the intellectual property rights of another.
Even if without merit, those claims could result in costly and prolonged litigation, divert
managements attention and adversely affect our results of operations and cash flows. In addition,
we may be required to enter into licensing agreements in order to continue using technology that is
important to our business. However, we may be unable to obtain license agreements on acceptable
terms, which could negatively affect our financial position, results of operations and cash flows.
We may not be able to utilize all of our net operating loss carry-forwards.
We have net operating loss carry-forwards and other significant U.S. tax attributes that we
believe could offset otherwise taxable income in the United States. The net
operating loss carry-forwards available in any year to offset our net taxable income will be
reduced following a more than 50% change in ownership during any period of 36 consecutive months (an "ownership change")
as determined under the Internal Revenue Code of 1986 (the Code). Upon our emergence from chapter 11 bankruptcy, we entered into a stock transfer
restriction agreement with our largest stockholder, a voluntary employees beneficiary association,
or, VEBA, that provides benefits for certain eligible retirees represented by certain unions and
their spouses and eligible dependents (which we refer to as the Union VEBA), and our certificate of
incorporation was amended to prohibit and void certain transfers of our common stock. Both reduce
the risk that an ownership change will jeopardize our net operating loss carry-forwards. Because
U.S. tax law limits the time during which carry-forwards may be applied against future taxes, we
may not be able to take full advantage of the carry-forwards for federal income tax purposes. In
addition, the tax laws pertaining to net operating loss carry-forwards may be changed from time to
time such that the net operating loss carry-forwards may be reduced or eliminated. If the net
operating loss carry-forwards become unavailable to us or are fully utilized, our future income
will not be shielded from federal income taxation, and the funds otherwise available for
general corporate purposes would be reduced.
Transfer restrictions and other factors could hinder the market for our common stock.
In
order to reduce the risk that an ownership change would jeopardize the preservation
of our U.S. federal income tax attributes, including net operating loss carry-forwards, for
purposes of Sections 382 and 383 of the Code, upon emergence from chapter 11 bankruptcy, we entered
into a stock transfer restriction agreement with our largest stockholder, the Union VEBA, and
amended and restated our certificate of incorporation to include restrictions on transfers
involving 5% ownership. These transfer restrictions may make our stock less attractive to large
institutional holders discourage potential acquirers from attempting to take over our
company, limit the price that investors might be willing to pay for shares of our common stock
and otherwise hinder the market for our common stock.
We could engage in or approve transactions involving our common shares that inadvertently impair
the use of our federal income tax attributes.
Section 382 of the Code affects our ability to use our federal income tax attributes,
including our net operating loss carry-forwards, following a more than 50% change in ownership
during any period of 36 consecutive months, all as determined under the Code, an ownership
change. Certain transactions may be included in the calculation of an ownership change, including
transactions involving our repurchase or issuance of our common shares. When we engage in or
20
approve any transaction involving our common shares that may
be included in the calculation of
an ownership change, our practice is to first perform the
calculations necessary to confirm that our ability to use our federal
income tax attributes will not be affected. These calculations are
complex and reflect certain necessary assumptions.
Accordingly, it is possible that we could approve or
engage in a transaction involving our common shares that causes an
ownership change and inadvertently impair the use of our federal income tax
attributes.
We could engage in or approve transactions involving our common shares that adversely affect
significant stockholders.
Under the transfer restrictions in our certificate of incorporation, our 5% stockholders are,
in effect, required to seek the approval of, or a determination by, our Board of Directors before
they engage in transactions involving our common stock. We could engage in or approve transactions
involving our common stock that limit our ability to approve future transactions involving our
common stock by our 5% stockholders in accordance with the transfer restrictions in our certificate
of incorporation without impairing the use of our federal income tax attributes. In addition, we
could engage in or approve transactions involving our common stock that cause stockholders owning
less than 5% to become 5% stockholders, resulting in those stockholders having to seek the approval
of, or a determination by, our Board of Directors under our certificate of incorporation before
they could engage in future transactions involving our common stock.
For example, share repurchases reduce the number of our common shares outstanding
and could cause a stockholder holding less than 5% to become a 5% stockholder even though it has
not acquired any additional shares.
Our net sales, operating results and profitability may vary from period to period, which may lead
to volatility in the trading price of our stock.
Our financial and operating results may be significantly below the expectations of public
market analysts and investors and the price of our common stock may decline due to the following
factors:
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volatility in the spot market for primary aluminum and energy costs; |
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changes in the volume, price and mix of the products we sell; |
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our annual accruals for variable payment obligations to the Union VEBA and another VEBA
that provides benefits for certain other eligible retirees and their surviving spouses and
eligible dependents (which we refer to as the Salaried VEBA); |
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non-cash charges including last-in, first-out, or LIFO, inventory charges and
impairments, lower of cost or market valuation adjustments to inventory, mark-to-market
gains and losses related to our derivative transactions and impairments of fixed assets and
investments; |
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global economic conditions; |
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unanticipated interruptions of our operations for any reason; |
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variations in the maintenance needs for our facilities; |
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unanticipated changes in our labor relations; |
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cyclical aspects impacting demand for our products; and |
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reductions in defense spending. |
21
Our annual variable payment obligations to the Union VEBA and Salaried VEBA are linked with our
profitability, which means that not all of our earnings will be available to our stockholders.
We are obligated to make annual payments to the Union VEBA and Salaried VEBA calculated based
on our profitability and therefore not all of our earnings will be available to our stockholders.
The aggregate amount of our annual payments to these VEBAs is capped however at $20 million and is
subject to other limitations. As a result of these payment obligations, our earnings and cash flows
may be reduced. Although our obligation to make annual payments to the Union VEBA terminates for
periods beginning after December 31, 2012, the Union VEBA or other groups representing our current
and future retired hourly employees may seek to extend our obligation beyond the termination date.
Any such extension could have a material adverse effect on our financial position, results of
operations and cash flows.
A significant percentage of our stock is held by the Union VEBA which may exert significant
influence over us.
The Union VEBA owns 24.2% of our outstanding common stock as of December 31, 2008. As a
result, the Union VEBA has significant influence over matters requiring stockholder approval,
including the composition of our Board of Directors. Further, to the extent that the Union VEBA and
other substantial stockholders were to act in concert, they could potentially control any action
taken by our stockholders. This concentration of ownership could also facilitate or hinder proxy
contests, tender offers, open market purchase programs, mergers or other purchases of our common
stock that might otherwise give stockholders the opportunity to realize a premium over the then
prevailing market price of our common stock or cause the market price of our common stock to
decline. We cannot assure you that the interests of our major stockholders will not conflict with
our interests or the interests of our other investors.
The USW has director nomination rights through which it may influence us, and USW interests may
not align with our interests or the interests of our other investors.
Pursuant to an agreement, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy,
Allied Industrial and Service Workers International Union, AFL-CIO,
CLC, or USW, has the right to nominate candidates which, if elected, would constitute 40% of our Board of Directors
through December 31, 2012 at which time the USW is required to cause any director nominated by the
USW to submit his or her resignation to our Board of Directors, which submission our Board of
Directors may accept or reject in its discretion. As a result, the
directors nominated by the USW have a significant voice in the decisions of our Board of Directors. It is possible that the
USW may seek to extend the term of the agreement and its right to nominate board members beyond
2012.
Payment of dividends may not continue in the future and our payment of dividends and stock
repurchases are subject to restriction.
In June 2007, our Board of
Directors initiated the payment of a regular quarterly cash
dividend. A quarterly cash dividend has been paid in each subsequent quarter and in June 2008, our
Board of Directors increased the payment of the regular quarterly cash dividend. The future declaration and payment of
dividends, if any, will be at the discretion of the Board of Directors and will depend on a number of factors, including
our results, financial condition, anticipated cash requirements, and ability to satisfy conditions reflected in our
revolver. We can give no assurance that dividends will be declared and paid in the future. Our revolving credit
facility, as amended on January 9, 2009, restricts our ability to pay any dividends and prohibits us from repurchasing
our common shares. Under our revolving credit facility, we may pay cash dividends only if we maintain $100 million in
borrowing availability and are not in default. In addition, our revolving credit facility, as amended, limits dividends
during any fiscal year to an aggregate amount not to exceed $25 million.
22
Our certificate of incorporation includes transfer restrictions that may void transactions in our
common stock effected by 5% stockholders.
Our
certificate of incorporation restricts the transfer of our equity securities if
either (1) the transferor holds 5% or more of the fair market value of all of our issued and
outstanding equity securities or (2) as a result of the transfer, either any person would become
such a 5% stockholder or the percentage stock ownership of any such 5% stockholder would be
increased. These restrictions are subject to exceptions set forth in our certificate of
incorporation. Any transfer that violates these restrictions is void
and will be unwound as provided in our
certificate of incorporation.
Delaware law, our governing documents and the stock transfer restriction agreement we entered into
as part of our Plan may impede or discourage a takeover, which could adversely affect the value of
our common stock.
Provisions of Delaware law, our certificate of incorporation and the stock transfer
restriction agreement with the Union VEBA may discourage a change of control
of our company or deter tender offers for our common stock. We are currently subject to
anti-takeover provisions under Delaware law. These anti-takeover provisions impose various
impediments to the ability of a third party to acquire control of us, even if a change of control
would be beneficial to our existing stockholders. Additionally, provisions of our certificate of
incorporation and bylaws impose various procedural and other requirements, which could make it more
difficult for stockholders to effect certain corporate actions. For example, our certificate of
incorporation authorizes our Board of Directors to determine the rights, preferences and privileges
and restrictions of unissued shares of preferred stock without any vote or action by our
stockholders. As a result, our Board of Directors can authorize and issue shares of preferred stock with
voting or conversion rights that could adversely affect the voting or other rights of holders of
common stock. Our certificate of incorporation also divides our Board of Directors into three
classes of directors who serve for staggered terms. A significant effect of a classified Board of
Directors may be to deter hostile takeover attempts because an acquirer could experience delays in
replacing a majority of directors. Moreover, stockholders are not permitted to call a special
meeting. Our certificate of incorporation prohibits certain transactions in our common stock
involving 5% stockholders or parties who would become 5% stockholders as a result of the
transaction. In addition, we are party to a stock transfer restriction agreement with the Union
VEBA which limits its ability to transfer our common stock. The general effect of the transfer
restrictions in the stock transfer restriction agreement and our certificate of incorporation is to
ensure that a change in ownership of more than 45% of our outstanding common stock cannot occur in
any three-year period. These rights and provisions may have the effect of delaying or deterring a
change of control of our company and may limit the price that investors might be willing to pay in
the future for shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
23
Item 2. Properties
The locations of the principal plants and other materially important physical properties
relating to our Fabricated Products business unit are below:
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Location |
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Square footage |
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Owned or Leased |
Chandler, Arizona |
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93,000 |
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Leased |
(1) |
Greenwood, South Carolina |
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185,000 |
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Owned |
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Jackson, Tennessee |
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310,000 |
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Owned |
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Kalamazoo, Michigan |
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465,000 |
|
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Leased |
(2) |
London, Ontario (Canada) |
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265,000 |
|
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Owned |
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Los Angeles, California |
|
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183,000 |
|
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Owned |
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Newark, Ohio |
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1,293,000 |
|
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Owned |
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Richland, Washington |
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45,000 |
|
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Leased |
(3) |
Richmond, Virginia |
|
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443,000 |
|
|
Owned |
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Plainfield, Illinois |
|
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80,000 |
|
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Leased |
(4) |
Sherman, Texas |
|
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313,000 |
|
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Owned |
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Spokane, Washington |
|
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2,854,000 |
|
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Owned/Leased |
(5) |
Tulsa, Oklahoma |
|
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28,000 |
|
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Owned |
|
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|
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Total |
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6,557,000 |
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|
|
|
(1) |
|
The Chandler, Arizona facility is subject to a lease with a primary lease
term that expires in 2033. We have certain extension rights in respect of the
Chandler lease. |
|
(2) |
|
The Kalamazoo, Michigan facility is subject to a lease with a 2033 expiration date. |
|
(3) |
|
The Richland, Washington facility is subject to a lease with a 2011 expiration
date, subject to certain extension rights held by us. |
|
(4) |
|
The Plainfield, Illinois facility is subject to a lease with a 2010 expiration
date and a renewal option subject to certain terms and conditions. |
|
(5) |
|
2,733,000 square feet is owned and 121,000 square feet is subject to a lease with
a 2010 expiration date and a renewal option subject to certain terms and
conditions. |
Plants and equipment and other facilities are generally in good condition and suitable for
their intended uses.
Our corporate headquarters located in Foothill Ranch, California, is a leased facility
consisting of 21,500 square feet.
Our obligations under the revolving credit facility are secured by, among other things, liens
on our U.S. production facilities. See Note 8 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and Supplementary Data for further discussion.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the fourth quarter of 2008.
24
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases
of Equity Securities |
Market Information
Our outstanding common stock is traded on the Nasdaq Global Select Market under the ticker
symbol KALU.
The following table sets forth the high and low sale prices of our common stock for each
quarterly period for fiscal years 2007 and 2008:
|
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|
|
|
High |
|
Low |
Fiscal 2007 |
|
|
|
|
|
|
|
|
First quarter. |
|
$ |
78.00 |
|
|
$ |
57.00 |
|
Second quarter |
|
$ |
89.24 |
|
|
$ |
70.09 |
|
Third quarter. |
|
$ |
79.99 |
|
|
$ |
52.75 |
|
Fourth quarter |
|
$ |
80.75 |
|
|
$ |
65.89 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 |
|
|
|
|
|
|
|
|
First quarter. |
|
$ |
79.84 |
|
|
$ |
56.67 |
|
Second quarter |
|
$ |
76.46 |
|
|
$ |
53.23 |
|
Third quarter. |
|
$ |
55.49 |
|
|
$ |
41.89 |
|
Fourth quarter |
|
$ |
43.00 |
|
|
$ |
15.01 |
|
Holders
As of January 30, 2009, there were approximately 651 holders of record of our common stock.
Dividends
In June 2007, our Board of Directors initiated the payment of a regular quarterly cash
dividend of $0.18 per common share per quarter. In June 2008, our Board of Directors increased the
quarterly cash dividend to $0.24 per common share per quarter. Each quarterly cash dividend
declared in 2007 and 2008 has been paid in the subsequent quarter. Total cash dividends paid were
$0.36 per common share, or $7.4 million, in 2007 and $0.84 per common share, or $17.2 million, in
2008.
In January 2009, our Board of Director declared another quarterly cash dividend of $0.24 per
common share, or $4.8 million to shareholders of record at the close of business on January 26, 2009, which was
paid on February 13, 2009.
Future declaration and payment of dividends, if any, will be at the discretion of the Board of
Directors and will be dependent upon our results of operations, financial condition, cash
requirements, future prospects and other factors. We can give no assurance that any dividends will
be declared or paid in the future. On January 9, 2009, we entered into an amendment to our
revolving credit facility. Our revolving credit facility, as amended restricts our ability to pay
dividends and prohibits us from repurchasing our common shares. Under our revolving credit
facility, as amended, we may pay cash dividends only if we maintain $100 million in borrowing
availability thereunder, and are not in default or would not be in default as a result of the
dividend payment, and such dividends can not
exceed $25 million during any fiscal year.
25
Stock Performance Graph
The following graph compares the cumulative total shareholder return on the Companys common
stock with: (i) the Russell 2000 of which we are a component, and (ii) the S&P SmallCap 600. The
graph assumes (i) an initial investment of $100 as of July 7, 2006, the first day on which the
Companys common stock began trading on the Nasdaq Stock Market, and (ii) reinvestment of all
dividends. The performance graph is not necessarily indicative of future performance of our stock
price.
|
|
|
* $100 invested on 7/7/06 in stock or
on 6/30/06 in index-including reinvestment of dividends. |
Our performance graph reflects the cumulative return of (i) the Russell 2000, a broad equity
market index of which we are a component and (ii) the S&P SmallCap 600. We elected to use the S&P
SmallCap 600 index after determining that no published industry or line-of-business indexes were
closely enough related to our industry or business to provide a reasonable basis for comparison.
Similarly, we determined that we could not identify comparables to include in a peer group that
would provide a reasonable basis for comparison and that, as a result, an index consisting of
companies with similar market capitalizations was appropriate.
Issuer Repurchases of Equity Securities
We made no repurchases of our common shares during the quarter ended December 31, 2008.
In June 2008, our Board of Directors authorized the repurchase of up to $75 million of our
common shares, with repurchase transactions to occur in open-market or privately negotiated
transactions at such times and prices as management deemed appropriate and to be funded with our
excess liquidity after giving consideration to internal and external growth opportunities and
future cash flows. The program may be modified, extended or terminated by our Board of Directors at
any time. All shares repurchased under this stock repurchase program were treated as
treasury shares. In January 2009, we entered into an amendment to our revolving credit
facility that prohibits us from repurchasing our common shares. As a
result, we can no longer
repurchase our common shares or withhold common shares to satisfy employee minimum statutory
withholding obligations without lender approval.
26
Item 6. Selected Financial Data
The following table represents our selected financial data. The table should be read in
conjunctions with Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations, and Item 8. Financial Statements and Supplementary Data, of this Report.
|
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|
|
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|
|
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|
|
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|
|
Year Ended December 31, 2006 |
|
|
|
|
Year |
|
Year |
|
July 1, 2006 |
|
Predecessor |
|
|
|
|
Ended |
|
Ended |
|
through |
|
January 1, 2006 |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
to |
|
December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
July 1, 2006 |
|
2005 |
|
2004 |
|
|
(In millions of dollars, except shipments, average sales price and per share amounts) |
Net sales |
|
$ |
1,508.2 |
|
|
$ |
1,504.5 |
|
|
$ |
667.5 |
|
|
$ |
689.8 |
|
|
$ |
1,089.7 |
|
|
$ |
942.4 |
|
|
(Loss) income from continuing
operations |
|
|
(68.5 |
) |
|
|
101.0 |
|
|
|
26.2 |
|
|
|
3,136.9 |
|
|
|
(1,112.7 |
) |
|
|
(868.1 |
) |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
363.7 |
|
|
|
121.3 |
|
|
Cumulative effect of accounting
change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.7 |
) |
|
|
|
|
|
Net (loss) income |
|
$ |
(68.5 |
) |
|
$ |
101.0 |
|
|
$ |
26.2 |
|
|
$ |
3,141.2 |
|
|
$ |
(753.7 |
) |
|
$ |
(746.8 |
) |
|
Basic (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations |
|
$ |
(3.43 |
) |
|
$ |
5.05 |
|
|
$ |
1.31 |
|
|
$ |
39.37 |
|
|
$ |
(13.97 |
) |
|
$ |
(10.88 |
) |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.05 |
|
|
|
4.57 |
|
|
|
1.52 |
|
|
Cumulative effect of accounting
change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.06 |
) |
|
|
|
|
Net (loss) income per share |
|
$ |
(3.43 |
) |
|
$ |
5.05 |
|
|
$ |
1.31 |
|
|
$ |
39.42 |
|
|
$ |
(9.46 |
) |
|
$ |
(9.36 |
) |
|
Diluted (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations |
|
$ |
(3.43 |
) |
|
$ |
4.97 |
|
|
$ |
1.30 |
|
|
$ |
39.37 |
|
|
$ |
(13.97 |
) |
|
$ |
(10.88 |
) |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.05 |
|
|
|
4.57 |
|
|
|
1.52 |
|
|
Cumulative effect of accounting
change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.06 |
) |
|
|
|
|
|
Net (loss) income per share |
|
$ |
(3.43 |
) |
|
$ |
4.97 |
|
|
$ |
1.30 |
|
|
$ |
39.42 |
|
|
$ |
(9.46 |
) |
|
$ |
(9.36 |
) |
|
Shipments (mm lbs) |
|
|
691.6 |
|
|
|
705.0 |
|
|
|
326.9 |
|
|
|
350.6 |
|
|
|
637.5 |
|
|
|
615.2 |
|
|
Average realized third party sales
price (per lb) |
|
$ |
2.18 |
|
|
$ |
2.13 |
|
|
$ |
2.04 |
|
|
$ |
1.97 |
|
|
$ |
1.71 |
|
|
$ |
1.53 |
|
|
Cash dividends declared per common
share |
|
$ |
.66 |
|
|
$ |
.54 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Capital expenditures, net of
accounts payable |
|
$ |
93.2 |
|
|
$ |
61.8 |
|
|
$ |
30.0 |
|
|
$ |
28.1 |
|
|
$ |
31.0 |
|
|
$ |
7.6 |
|
|
Depreciation expense |
|
$ |
14.7 |
|
|
$ |
11.9 |
|
|
$ |
5.5 |
|
|
$ |
9.8 |
|
|
$ |
19.9 |
|
|
$ |
22.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Total assets |
|
$ |
1,145.4 |
|
|
$ |
1,165.2 |
|
|
$ |
655.4 |
|
|
$ |
1,538.9 |
|
|
$ |
1,882.4 |
|
Long-term
borrowings,
including amounts
due within one year |
|
|
43.0 |
|
|
|
|
|
|
|
50.0 |
|
|
|
1.2 |
|
|
|
2.8 |
|
27
The financial information for all prior periods has been reclassified to reflect discontinued
operations. See Note 22 of Notes to Consolidated Financial Statements. Earnings (loss) per share
and share information for the Predecessor may not be meaningful because, pursuant to the Plan, the
equity interests in the Companys existing stockholders were cancelled without consideration.
In addition to the operational results presented in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations, significant items that impacted the
results included, but were not limited to, the following:
2008:
|
|
|
We recorded $87.1 million of non-cash, pre-tax, unrealized mark to market losses on
our derivative positions primarily as a result of the decline in metal price. |
|
|
|
|
We recorded a $65.5 million lower of cost or market inventory adjustment due to
the decline in metal prices. This inventory write-down lowered the LIFO inventory values
that had been established at relatively high prices during the implementation of fresh
start accounting in July 2006. |
|
|
|
|
In December 2008, we announced plans to close operations at our Tulsa, Oklahoma
extrusion facility and significantly reduce operations at our Bellwood, Virginia
facility in response to lower demand for products produced at these locations. These
actions, which are expected to be completed by early 2009, resulted in a restructuring
charge of $8.8 million in the fourth quarter of 2008 related to employee termination
benefits and asset impairment. |
|
|
|
|
Anglesey is expected to fully curtail its smelting operations at the end of September
2009, when its current power contract expires. Based on a review of new facts and
circumstances that came into light during the fourth quarter of 2008 and early 2009
regarding Anglesey, we currently do not expect to be able to recover our investment in
Anglesey. As a result, we recorded an impairment charge of $37.8 million and a
corresponding decrease to Investment in and advances to unconsolidated affiliate. |
|
|
|
|
On June 12, 2008, Anglesey suffered a significant failure in the rectifier yard that
resulted in a localized fire in one of the power transformers. As a result of the fire,
Anglesey was operating below its maximum capacity during the second half of 2008,
returning to its normal production level in the fourth quarter of
2008. In December 2008, Anglesey
received $20 million in a partial insurance settlement, of which $10 million was
recorded as an increase in our equity in earnings and an increase in our investment in
Anglesey. This amount was subsequently impaired at December 31, 2008. |
|
|
|
|
We announced a $75 million stock repurchase plan to commence after July 6, 2008. We
repurchased 572,706 shares of common stock at a weighted-average price of $49.05 per
share, or total cost of $28.1 million, under the repurchase plan. Our revolving credit
facility, as amended on January 9, 2009, currently prohibits us from repurchasing
our common shares, including under the repurchase program. |
|
|
|
|
We began drawing down on our revolving credit facility during the last two quarters
of 2008 and had $36.0 million of outstanding borrowings at December 31, 2008. |
|
|
|
|
We paid dividends totaling $17.2 million in 2008. |
28
2007:
|
|
|
During the fourth quarter we repaid our $50 million term loan. |
|
|
|
|
In June 2007, our Board of Directors initiated a regular quarterly dividend of $.18
per share. We paid total dividends of $7.4 million in 2007. |
|
|
|
|
In addition, in 2007 we determined that we met the more likely than not criteria
for recognition of our deferred tax assets and we released the vast majority of the
valuations allowance. At December 31, 2007, total assets included net deferred tax
assets of $327.8 million. |
2006:
|
|
|
We emerged from chapter 11 bankruptcy on July 6, 2006 with our then-existing
fabricated product facilities and operations and a 49% interest in Anglesey. During the
period from January 1, 2006 to July 1, 2006, we recorded gains upon emergence and other
reorganization related benefits (costs) of approximately $3.1 billion. |
2005:
|
|
|
We were in chapter 11 bankruptcy for the entire year. During 2005, we recorded
reorganization costs of approximately $1.2 billion. |
|
|
|
|
We also recorded a $4.7 million charge as a result of adopting accounting for
conditional asset retirement obligations. |
2004:
|
|
|
We were in chapter 11 bankruptcy for the entire year. |
|
|
|
|
We disposed of various foreign operations and recorded settlement and termination
charges related to the termination of post-retirement medical and pension benefits
plans. |
|
|
|
|
During 2004, we recorded reorganization costs of approximately $39 million. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements appear throughout 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 the negative of the foregoing or other variations of 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 from those in the forward-looking statements as a result of various factors. These
factors include: the effectiveness of managements strategies and decisions; general economic and
business conditions including cyclicality and other conditions in the aerospace, automobile and
other end markets we serve; developments in technology; new or modified statutory or regulatory
requirements; and changing prices and market conditions. This Item and Item 1A. Risk Factors 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.
In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, our management, including
our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our internal
control over financial
29
reporting
and concluded that such control was effective as of December 31, 2008. Managements
report on the effectiveness of our internal control over financial reporting and the related report
of our independent registered public accounting firm are included in Item 8. Financial Statements
and Supplementary Data, of this Annual Report on Form 10-K.
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
is designed to provide a reader of our financial statements with a narrative from the perspective
of our management on our financial condition, results of operations, liquidity and certain other
factors that may affect our future results. Our MD&A is presented in ten sections:
|
|
|
Overview |
|
|
|
|
Financial Reporting Changes |
|
|
|
|
Business Strategy and Core Philosophies |
|
|
|
|
Management Review of 2008 and Outlook for the Future |
|
|
|
|
Results of Operations |
|
|
|
|
Other Information |
|
|
|
|
Liquidity and Capital Resources |
|
|
|
|
Contractual Obligations, Commercial Commitments and Off-Balance-Sheet and Other
Arrangements |
|
|
|
|
Critical Accounting Estimates |
|
|
|
|
New Accounting Pronouncements |
We believe our MD&A should be read in conjunction with the Consolidated Financial Statements
and related Notes included in Item 8. Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
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, 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 fabricating facilities in North America during
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.
30
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 2008, 2007, and 2006, the markets for aerospace and
high strength products in which we participate were strong, resulting in higher shipments and
improved margins. However, demand for our products for general engineering and custom automotive
and industrial applications dramatically declined in the final months of 2008.
Changes in primary aluminum prices 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 7A. Quantitative and Qualitative Disclosures About Market Risks -
Sensitivity.
During 2008, the average London Metal Exchange, or LME, transaction price per pound of primary
aluminum was $1.17. During 2007 and 2006, the average LME price per pound for primary aluminum was
$1.20 and $1.17, respectively. At January 30, 2009, the LME price was approximately $.59 per pound.
Financial Reporting Changes
From the first quarter of 2002 to June 30, 2006, Kaiser and 25 of its subsidiaries operated
under chapter 11 of the United States Bankruptcy Code under the supervision of the Bankruptcy
Court. Pursuant to the Plan, Kaiser and its subsidiaries, which owned all of our then-existing core
fabricated products facilities and operations and a 49% interest in Anglesey, emerged from chapter
11 on July 6, 2006. Pursuant to the Plan, all material pre-petition debt, pension and
post-retirement medical obligations and asbestos and other tort liabilities, along with other
pre-petition claims (which in total aggregated at June 30, 2006 approximately $4.4 billion) were
addressed and resolved. Pursuant to the Plan, all of the equity interests of Kaisers pre-emergence
stockholders were cancelled without consideration. Equity of the newly emerged Kaiser was issued
and delivered to a third-party disbursing agent for distribution to claimholders pursuant to the
Plan. See Notes 2 and 21 of Notes to Consolidated Financial Statements included in this Report for
additional information on Kaisers reorganization and the Plan.
Our emergence from chapter 11 bankruptcy and adoption of fresh start accounting resulted in a
new reporting entity for accounting purposes. Although we emerged from chapter 11 bankruptcy on
July 6, 2006, we adopted fresh start accounting under the provisions of American Institute of
Certified Professional Accountants Statement of Position 90-7 (SOP 90-7), Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, effective as of the beginning of business on
July 1, 2006. As such, it was assumed that the emergence was completed instantaneously at the
beginning of business on July 1, 2006 so that all operating activities during the period from July
1, 2006 through December 31, 2006 are reported as applying to the new reporting entity. We believe
that this is a reasonable presentation as there were no material non-Plan-related transactions
between July 1, 2006 and July 6, 2006.
All financial statement information before July 1, 2006 relates to Kaiser before emergence
from chapter 11 (sometimes referred to herein as the Predecessor). Kaiser after emergence is
sometimes referred to herein as the Successor. As more fully discussed below, there will be a
number of differences between the financial statements before and after emergence that will make
comparisons of financial information difficult and may make it more difficult to assess our future
prospects based on historical performance.
As indicated above, we also made changes to our accounting policies and procedures as part of
the application of fresh start accounting as required by SOP 90-7. In general, our accounting
policies are the same as or similar to those historically used to prepare our financial statements.
In certain cases, however, we adopted different accounting principles for, or applied methodologies
differently to, our post emergence financial statement information. For instance, we changed our
accounting methodologies with respect to inventory accounting. While
31
we still account for inventories on LIFO basis after emergence, we are applying LIFO
differently than we did in the past. Specifically, we now view each quarter on a standalone
year-to-date basis for computing LIFO; in the past, the Predecessor recorded LIFO amounts with a
view to the entire fiscal year, which, with certain exceptions, tended to result in LIFO charges
being recorded in the fourth quarter or second half of the year.
Business Strategy and Core Philosophies
We are a leading manufacturer of fabricated aluminum products. We specialize in providing
highly engineered solutions that meet the demanding needs of the transportation and industrial
markets. We are leaders in our industry, maintaining a strong competitive position in a significant
majority of the markets we serve. In a very competitive marketplace, we distinguish ourselves with
our Best in Class customer satisfaction along with a broad and deep product offering. Our
blue-chip customer base includes some of the top names in industry, with whom we share
long-standing relationships based on quality and trust. We have established a platform for growth
that we believe is well positioned within the industry.
We strive to reinforce our position as supplier of choice through Best in Class customer
satisfaction and seek to continuously improve our cost performance in order to be the low cost
provider by eliminating waste throughout the value stream.
Our line of Kaiser Select® products reflects a structured approach to reduce waste
and variability for our customers. Our Kaiser Select® products are manufactured
according to strict specifications that deliver enhanced product characteristics with improved
consistency that result in better performance and in many cases lower cost for our customers.
Our lean enterprise initiative is facilitated by the Kaiser Production System (KPS), which
is an integrated application of the tools of Lean Enterprise, Six Sigma and Total Productive
Manufacturing which underpins our continuous effort to provide Best in Class customer
satisfaction. We believe KPS enables us to deliver superior customer service through consistent, on-time
delivery of superior quality products on short lead times. We are committed to imbedding KPS as the
common culture through which we continuously improve our operations and enhance our total
competitive position.
Management Review of 2008 and Outlook for the Future
In 2008, we continued our focus on the generation of long-term value through our organic
growth initiatives and ongoing focus on streamlining our existing value streams.
This focus contributed to record Fabricated Products segment shipments of 559 million pounds with
Fabricated Products net sales growth over 2007 of 3%.
During 2008 our results benefited from higher average realized third party sales prices in our
Fabricated Products segment due primarily to favorable mix and higher value-added pricing. We
continued to benefit from strong demand for our products in the aerospace, high strength and
defense markets. During the year, we brought additional heat treat plate capacity online at our
Trentwood facility which, along with robust demand, led to record heat treat plate shipments in
2008. Also in 2008, we continued our $91 million investment program in our rod, bar and tube value
stream including a facility to be located in Kalamazoo, Michigan, and improvements at three
existing extrusion and drawing facilities. This investment program is expected to significantly
improve the capabilities and efficiencies of our rod and bar and seamless extruded and drawn tube
operations and enhance the market position of such products. We expect the facility in Kalamazoo,
Michigan to be equipped with two extrusion presses and a remelt operation. Completion of these
investments is expected to occur by early 2010.
32
In 2008, we also faced a number of challenges. Demand in the ground transportation and general
industrial markets was weak throughout the year, and especially weak in the last few months of
2008. Additionally, service center customers dramatically reduced their inventories in the last few
months of 2008, which exaggerated the effect of reduced end-use demand and dramatically reduced
industry mill shipments of certain service center catalogue products. As a result, our shipments of
general engineering rod and bar products were down significantly in the last two quarters. We also
endured higher freight and energy prices during much of 2008.
In December 2008, we announced
plans to close operations at our Tulsa, Oklahoma extrusion
facility and significantly reduce operations at our Bellwood, Virginia facility. The operations and
workforce reductions were a result of deteriorating economic and market conditions. Approximately 45
employees at the Tulsa, Oklahoma facility and 125 employees at the Bellwood, Virginia facility were
affected. The Tulsa, Oklahoma facility was closed in December 2008 and the
curtailment at the Bellwood, Virginia plant was completed in early 2009. We expect these restructuring activities
to reduce excess capacity and related costs in anticipation of expected reduced demand in the general engineering
and ground transportation end markets in 2009 (see Segment Discussion below). We continue
to
maintain adequate capacity throughout our operations capable of meeting customer needs and serving
anticipated market demand in the core markets of extruded rod and bar, seamless tube, and
automotive products. The Bellwood, Virginia facility will continue to produce drive shaft tube for automotive
applications, seamless tube and large diameter rod and bar for service centers. In addition to the
restructuring costs incurred in 2008, we expect to incur $1 million
to $3 million of additional charges in 2009 relating to
activities such as vendor contract termination and consolidation of facilities.
Looking into 2009 and beyond, we see continued strength in demand for our aerospace and high
strength products, while general industrial and ground transportation demand is expected to be
especially weak. However, our visibility into future market conditions is poor, requiring us to
remain prepared to flex our operations with changing market conditions. We anticipate our main
areas of focus will be:
|
|
completing and realizing the benefits from our organic growth initiatives, particularly
our heat treat plate expansion at our Trentwood facility in Spokane,
Washington (now completed) and our Kalamazoo, Michigan casting and
extrusion facility; |
|
|
improving the manufacturing efficiencies of our facilities to generate significant cost
improvements over our performance in 2008; |
|
|
aligning our resources and output with demand and market conditions; |
|
|
continuing to improve our Best In Class customer satisfaction with strong delivery
performance, improved product quality and consistency, expanded product breadth, and broader
geographic marketing presence; |
|
|
generating cash from operations that funds capital expenditures made in the ordinary
course of business as well as other initiatives; |
|
|
managing our liquidity, debt and capital structure to maintain a strong financial
position and a balance between cost and flexibility; and |
|
|
maximizing of shareholder value. |
Results of Operations
Fiscal 2008 Summary
|
|
|
Net sales for the year ended December 31, 2008 increased to $1,508.2 million compared to
$1,504.5 million for the year ended December 31, 2007. The increase primarily reflected
higher shipments and higher value-added pricing in Fabricated Products, which was largely
offset by the effect of lower shipments in Primary Aluminum as a result of the fire at
Anglesey during the second quarter of 2008. |
|
|
|
|
Our operating loss for the year ended December 31, 2008 was $91.0 million compared to
operating income of $182.0 million for the year ended December 31, 2007. The 2008 operating
loss reflected significant items that we consider to be non-run-rate
which totaled $206.6 million. These items primarily included $87.1 million of
unrealized mark to market loss on our derivative positions, $65.5 million of lower of cost
or market inventory write-down, $37.8 million of impairment charge relating to our
investment in Anglesey, and $8.8 million of restructuring costs and other charges in
connection with the closure of our Tulsa, Oklahoma facility and the curtailment of our
Bellwood, Virginia operation, of which $4.5 million was related to one time employee
termination costs and $4.3 million was related to asset impairment. |
|
|
|
|
Net loss for the year ended December 31, 2008 was $68.5 million compared to net income of
$101.0 million for the year ended December 31, 2007. Net loss for 2008 included all of the
non-run-rate items discussed above. Net income for the year ended December 31, 2007 included
Other operating benefits of $13.6 million related primarily to the reimbursement of $8.3
million of amounts paid in connection with the sale of our interests in and related to
Queensland Alumina Limited (QAL) in 2005, a $4.9 million non-cash gain from the settlement of a
claim by the purchaser of the Gramercy alumina refinery and our interests in and related to
Kaiser Jamaica Bauxite Company, a $1.6 million gain from the resolution of contingencies
relating to the sale of a smelter in Tacoma, Washington, a $1.3 million gain related to a
settlement with the Pension Benefit Guaranty Corporation or PBGC, and a charge of $2.6
million related to other post-emergence chapter 11 |
33
|
|
|
related items (see Note 14 of Notes to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data). |
|
|
|
|
Our effective tax benefit rate was 25.0% for the year ended December 31, 2008 (see
discussion of (Benefit) Provision for Income Taxes). |
|
|
|
|
In 2008, we paid a total of approximately $17.2, or $.84 per common share, in
cash dividends to stockholders, and in dividend equivalents to the holders of restricted
stock, the holders of restricted stock units and the holders of performance shares with
respect to one half of the performance shares. In 2008, we repurchased 572,706 common shares
at the weighted-average price of $49.05 per share during 2008. As of December 31,
2008, $46.9 million remained available for repurchases under the existing repurchase
authorization. |
Consolidated Selected Operational and Financial Information
The table below provides selected operational and financial information on a consolidated
basis (in millions of dollars, except shipments and prices). The selected operational and financial
information after July 6, 2006 is that of the Successor and certain of the information presented is
not comparable to the information of the Predecessor.
The following data should be read in conjunction with our consolidated financial statements
and the notes thereto included in Item 8. Financial and Supplementary Data. See Note 16 of Notes
to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary
Data for further information regarding segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
|
|
(In millions of dollars, except shipments and average sales price) |
|
Shipments (mm lbs): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products |
|
|
558.5 |
|
|
|
547.8 |
|
|
|
249.6 |
|
|
|
273.5 |
|
Primary Aluminum(1) |
|
|
133.1 |
|
|
|
157.2 |
|
|
|
77.3 |
|
|
|
77.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691.6 |
|
|
|
705.0 |
|
|
|
326.9 |
|
|
|
350.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Realized Third
Party Sales Price (per
pound): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products(2) |
|
$ |
2.39 |
|
|
$ |
2.37 |
|
|
$ |
2.27 |
|
|
$ |
2.16 |
|
Primary Aluminum(3) |
|
$ |
1.29 |
|
|
$ |
1.31 |
|
|
$ |
1.30 |
|
|
$ |
1.28 |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products |
|
$ |
1,336.8 |
|
|
$ |
1,298.3 |
|
|
$ |
567.2 |
|
|
$ |
590.9 |
|
Primary Aluminum |
|
|
171.4 |
|
|
|
206.2 |
|
|
|
100.3 |
|
|
|
98.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
1,508.2 |
|
|
$ |
1,504.5 |
|
|
$ |
667.5 |
|
|
$ |
689.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating (Loss)
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products(4)(5) |
|
$ |
53.5 |
|
|
$ |
169.0 |
|
|
$ |
60.8 |
|
|
$ |
61.2 |
|
Primary Aluminum(6)(7) |
|
|
(99.7 |
) |
|
|
46.5 |
|
|
|
10.8 |
|
|
|
12.4 |
|
Corporate and Other |
|
|
(46.2 |
) |
|
|
(47.1 |
) |
|
|
(25.5 |
) |
|
|
(20.3 |
) |
Other Operating Benefits
(Charges), Net(8) |
|
|
1.4 |
|
|
|
13.6 |
|
|
|
2.2 |
|
|
|
(.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating (Loss)
Income |
|
$ |
(91.0 |
) |
|
$ |
182.0 |
|
|
$ |
48.3 |
|
|
$ |
52.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization Items(9) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,090.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)
provision |
|
$ |
(22.8 |
) |
|
$ |
81.4 |
|
|
$ |
23.7 |
|
|
$ |
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
$ |
(68.5 |
) |
|
$ |
101.0 |
|
|
$ |
26.2 |
|
|
$ |
3,141.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures,
(net of accounts payable and excluding
discontinued operations). |
|
$ |
93.2 |
|
|
$ |
61.8 |
|
|
$ |
30.0 |
|
|
$ |
28.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
(1) |
|
Shipments in the Primary Aluminum segment decreased in 2008 primarily due to decrease
in production of primary aluminum as a result of the fire at Anglesey in June 2008 (see
further discussion in Segment Information below). |
|
(2) |
|
Average realized prices for our Fabricated Products business unit are subject to
fluctuations due to changes in product mix as well as underlying primary aluminum
prices and are not necessarily indicative of changes in underlying profitability. See
Item 1. Business. |
|
(3) |
|
Average realized prices for our Primary Aluminum business unit exclude hedging revenues. |
|
(4) |
|
Fabricated Products business unit operating results for 2008, 2007, the period from
July 1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1,
2006 include non-cash LIFO inventory benefits (charges) of $7.5 million, $14.0 million,
$(3.3) million and $(21.7) million, respectively, and metal gains (losses) of
approximately $(11.4) million, $(13.1) million, $4.2 million and $16.6 million,
respectively. Also included in the operating results for 2008 was $65.5 million of
lower of cost or market write-down of inventory. |
|
(5) |
|
Fabricated Products business unit operating results for 2008, 2007, the period from
July 1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1,
2006 include non-cash mark-to-market gains (losses) on natural gas and foreign currency
hedging activities totaling $(5.7) million, $1.7 million,
$(1.2) and $(1.0),
respectively. For further discussion regarding mark-to-market matters, see Note 13 of
Notes to Consolidated Financial Statements included in Item 8. Financial Statements
and Supplementary Data. |
|
(6) |
|
Primary Aluminum business unit operating results for 2008, 2007, the period from July
1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1, 2006,
include non-cash mark-to-market gains (losses) on primary aluminum hedging activities
totaling $(67.2) million, $16.2 million and $6.4 million and $(.7) million,
respectively, and on foreign currency derivatives of $(14.2) million,
$(8.2) million, $3.8 million and $7.8 million, respectively. For further discussion regarding
mark-to-market matters, see Note 13 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and Supplementary Data. |
|
(7) |
|
Primary Aluminum business unit operating results for 2008 includes an impairment charge
of $37.8 million relating to our investment in Anglesey. |
|
(8) |
|
See Note 14 of Notes to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data for a detailed summary of the components
of Other operating benefits (charges), net and the business segment to which the items
relate. |
|
(9) |
|
See Notes 2 and 21 of Notes to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data for a discussion of Reorganization items. |
Summary.
We reported Net loss of $68.5 million for 2008 compared to Net income of $101.0
million for 2007 and Net income of $26.2 million and $3,141.2 million for the periods from July 1,
2006 through December 31, 2006 and the period from January 1, 2006 to July 1, 2006, respectively.
Net loss for 2008 includes (i) a non-cash mark-to-market unrealized loss of $87.1 million on our
derivative positions primarily as a result of the decline in metal price, (ii) a $65.5 million
charge relating to lower of cost or market valuation of inventory, (iii) a non-cash impairment
charge of $37.8 million relating to our investment in Anglesey and (iv) restructuring charges of
$8.8 million relating to the recently announced plant closure and curtailment of operations. Net
income for the Predecessor period in 2006 includes a non-cash gain of $3,110.3 million related to
the implementation of our Plan and application of fresh start accounting. All years include a
number of other non-run-rate items that are more fully explained in the sections below.
35
Net Sales. We reported Net sales in 2008 of $1,508.2 million compared to $1,504.5 million in
2007, $667.5 million for the period from July 1, 2006 through December 31, 2006 and $689.8 million
for the period from January 1, 2006 to July 1, 2006. As more fully discussed below, the increase in
revenues in 2008 is primarily the result of higher shipments and value-added pricing in Fabricated
Products, offset by a decrease in shipments in Primary Aluminum as a result of the fire at Anglesey
during the second quarter of 2008.
The increase in revenues in 2007 as compared to the period from July 1, 2006 through December
31, 2006 and for the period from January 1, 2006 to July 1, 2006 is primarily the result of higher
shipments, favorable product mix and value-added pricing in Fabricated Products as well as a higher
market price for primary aluminum. Such increases in primary aluminum market prices do not
necessarily directly translate to increased profitability because (i) a substantial portion of the
business conducted by the Fabricated Products business unit passes primary aluminum prices on
directly to customers and (ii) our hedging activities, while limiting our risk of losses, may limit
our ability to participate in price increases.
Cost of Products Sold, excluding Depreciation and Other Items. Cost of goods sold, excluding depreciation in
2008 totaled $1,400.7 million compared to $1,251.1 million in 2007 or 93% and 83% of net sales,
respectively. The increase in Cost of products sold, excluding depreciation as a percentage of net
sales in 2008 was primarily the result of a mark-to-market unrealized loss of $87.1 million on our
derivative positions. Additionally, increases in energy, freight, currency exchange, major maintenance
expense, and other manufacturing costs increased the Cost of products
sold, excluding depreciation as a percentage of net sales in 2008.
Cost of products sold, excluding depreciation in 2007 totaled $1,251.1 million compared to
$580.4 million for the period from July 1, 2006 through December 31, 2006 and $596.4 million for
the period from January 1, 2006 to July 1, 2006. Included in Cost of products sold, excluding
depreciation in 2007 was a LIFO gain of $14.0 million. Included in Cost of products, excluding
depreciation for the periods from July 1, 2006 to December 31, 2006 and from January 1, 2006 to
July 1, 2006 were LIFO charges of $3.3 million and $21.7 million, respectively.
Lower of Cost or Market Inventory Write-down. We recorded a lower of
cost or market inventory write-down of $65.5 million in 2008 as a result of declining metal prices.
Impairment of Investment in Anglesey. Anglesey operates under a power
agreement that provides sufficient power to sustain its aluminum reduction operations at full
capacity through September 2009. The nuclear plant that supplies power to Anglesey is currently
slated for decommissioning in late 2010. Anglesey has worked intensively with government
authorities and agencies to find a sustainable alternative to the power supply needs of the
smelter, but has been unable to reach a feasible solution. In January of 2009, we announced that we
expect Anglesey to fully curtail its smelting operations at the end of September 2009, when its
current power contract expires. Although Anglesey will continue to pursue alternative sources of
affordable power, as of the filing date of this Report, no sources have been identified that would
allow the uninterrupted continuation of smelting operations. Additionally, Anglesey is expected to
evaluate alternative operating activities in line with the needs of the local community and market
opportunities, including the potential continuation of remelt and casting operations and the
production of anodes for use by other smelting facilities. Taking into account Angleseys inability
to obtain affordable power, the resulting expected curtailment of smelting operations, the growing
uncertainty with respect to the future of Angleseys operations, and Angleseys expected cash
requirements for redundancy and pension payments, we do not expect to receive any dividends from
Anglesey in the future and, as a result, we recorded a $37.8 million impairment charge to fully
impair our 49% equity investment in Anglesey during the fourth quarter of 2008.
Restructuring Costs and Other Charges. In December 2008, we announced plans to close
our Tulsa, Oklahoma facility and to curtail operations at our Bellwood, Virginia facility. Total
restructuring charges for 2008 were $8.8 million, of which $4.5 million was related to one time
employee termination costs and $4.3 million was related to asset impairment as a result of the
restructuring plan.
Depreciation and Amortization. Depreciation and amortization for 2008 was $14.7 million
compared to $11.9 million for 2007. Higher depreciation expense was the result of Construction in
progress being placed into production throughout the second half of 2007 and 2008 primarily in
relation to the various expansion projects, including the expansion project at our Trentwood
facility in Spokane, Washington.
Depreciation and amortization for 2007 was $11.9 million compared to $5.5 million and $9.8
million for the period from July 1, 2006 through December 31, 2006 and the period from January 1,
2006 and July 1, 2006,
36
respectively. The period from July 1, 2006 to December 31, 2006 and the year ended December
31, 2007 benefited from lower depreciation as a result of the application of fresh start
accounting. This accounted for a reduction in depreciation expense of approximately $4.5 million
related to the first half of 2007 compared to the period from January 1, 2006 to July 1, 2006. This
reduction was partially offset in 2007 by an increase in depreciation expense as a result of
construction in progress being placed into production during the second half of 2007.
Selling, Administrative, Research and Development, and General. Selling, administrative,
research and development, and general expense totaled $73.1 million in 2008 which is comparable to
$73.1 million in 2007.
Selling, administrative, research and development, and general expense totaled $73.1 million
in 2007 compared to $35.5 million and $30.3 million for the period from July 1, 2006 through
December 31, 2006 and the period from January 1, 2006 to July 1, 2006, respectively. Selling,
administrative, research and development, and general expense for 2007 included non-cash equity
compensation expense of $9.1 million as compared to the period from July 1, 2006 through December
31, 2006 where non-cash compensation expense was $4.0 million. In addition, in 2007 we incurred
$2.8 million of additional expenses in relation to the continued investment in research and
development, our Kaiser Production System group and management of our capital spending programs.
Other Operating (Benefits) Charges, Net. Included within Other operating (benefits) charges,
net (in millions of dollars) for 2008, 2007, the period from July 1, 2006 through December 31, 2006
and the period from January 1, 2006 to July 1, 2006 were the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Reimbursement of
amounts paid in
connection with
sale of the
Companys interests
in and related to
QAL Corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMT (Note 9) |
|
$ |
|
|
|
$ |
(7.2 |
) |
|
$ |
|
|
|
$ |
|
|
Professional fees |
|
|
|
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
Bad debt recoveries
relating to
pre-emergence
write-offs
Corporate |
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefit
related to
terminated pension
plans Corporate
(Notes 10 and 24) |
|
|
|
|
|
|
|
|
|
|
(4.2 |
) |
|
|
|
|
Resolution of a
pre-emergence
contingency
Corporate |
|
|
|
|
|
|
|
|
|
|
(3.0 |
) |
|
|
|
|
PBGC settlement
Corporate(1) |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
Non-cash benefit
resulting from
settlement of a
$5.0 claim by the
purchaser of the
Gramercy, Louisiana
alumina refinery
and Kaiser Jamaica
Bauxite Company for
payment of $.1
Corporate |
|
|
|
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
Resolution of
contingencies
relating to sale of
property prior to
emergence
Corporate(2) |
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
Post emergence
Chapter 11
related items
Corporate(3) |
|
|
.2 |
|
|
|
2.6 |
|
|
|
4.5 |
|
|
|
|
|
Charges associated
with retroactive
portion of
contributions to
defined
contribution plans
upon termination of
defined benefit
plans(4) (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Fabricated Products |
|
|
|
|
|
|
|
|
|
|
.4 |
|
|
|
|
|
Other |
|
|
|
|
|
|
(.1 |
) |
|
|
.1 |
|
|
|
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.4 |
) |
|
$ |
(13.6 |
) |
|
$ |
(2.2 |
) |
|
$ |
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The PBGC proceeds consist of a payment related to a settlement
agreement entered into with the PBGC in connection with the our
chapter 11 reorganization. |
|
(2) |
|
During 2007, certain contingencies related to the sale of the
Predecessors interest in a smelter in Tacoma, Washington were
resolved with the buyer. As a result, approximately $1.6 million of
the sale proceeds which had been placed into escrow at the time of
sale, were released to us. At our emergence from chapter 11, no value
had been ascribed to the funds in escrow because they were deemed to
be contingent assets at that time. |
|
(3) |
|
Post-emergence chapter 11-related items include primarily professional
fees and expenses incurred after emergence which related directly to
our reorganization. |
|
(4) |
|
Amount in 2006 represents a one time contribution related to the
retroactive implementation of the hourly defined benefit plans
(See
Note 10). |
Interest Expense. Interest expense was $1.0 million in 2008 compared with $4.3 million in
2007 resulting in a decrease of $3.3 million. The decrease is primarily the result of the repayment
of our term loan during the fourth quarter of 2007.
Interest expense was $4.3 million in 2007 compared with $1.1 million and $.8 million for the
period from July 1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1,
2006, respectively. Interest expense in 2007 is primarily related to the prepayment of a term loan
resulting in a $1.5 million write-off of the remaining unamortized deferred financing costs and
total borrowing outstanding during the period.
Reorganization Items. We recognized a benefit of $3,090.3 million for the period from January
1, 2006 to July 1, 2006. The primary component of the benefit recognized in 2006 was a gain of
$3,110.3 million related to the implementation of our Plan and the application of fresh start
accounting.
Other Income (Expense) Net. Other income (expense) net was a benefit of
$.7 million in
2008 compared to a benefit of $4.7 million in 2007. The decrease was primarily due to a decrease in
interest income of $3.6 million as a result of lower interest earning cash balance during 2008.
Other income (expense) net was a benefit of $4.7 million in 2007 compared to a benefit of
$2.7 million and $1.2 million for the period from July 1, 2006 through December 31, 2006 and the
period from January 1, 2006 to July 1, 2006, respectively. The benefit in 2007 is primarily related
to interest income of $5.3 million. Interest income was recorded as a reduction in reorganization
expense before our emergence from bankruptcy.
(Benefit) provision for Income Taxes. Our effective tax benefit rate was 25.0% for 2008.
The tax benefit from the United States pre-tax book loss was partially offset by the
tax provision for Canada and United Kingdom relating to Anglesey resulting in a blended statutory
tax benefit rate of 39.6%.
The difference between the effective tax benefit rate and the blended statutory tax benefit rate was primarily due to the following factors:
|
|
|
Increase in the valuation allowance for certain state net operating losses and the
impairment related to Anglesey resulted in $7.1 million being included in the income tax
provision, decreasing the blended statutory tax benefit rate by approximately 7.7%. |
|
|
|
|
Our equity in income before income taxes of Anglesey is treated as a
reduction (increase) in Cost of products sold excluding depreciation. The income tax
effects of our equity in income are included in the tax provision. This resulted
in $3.5 million being included in the income tax provision, decreasing the blended statutory tax benefit rate
by approximately 3.8%. |
|
|
|
|
Unrecognized tax benefits, including interest and penalties, decreased the income tax
benefit by $2.4 million and the blended statutory tax benefit rate by approximately 2.7%. |
38
|
|
|
The foreign currency impact on unrecognized tax benefits, interest and penalties
resulted in a $5.2 million currency translation adjustment that was recorded in Accumulated other comprehensive income. |
Comparison of the 2007 effective tax rate to the rates for the period from July 1, 2006
through December 31, 2006 and the period from January 1, 2006 to July 1, 2006 are not useful due to
the significant reorganization related benefits and costs recognized in those periods that were not
subject to normal income tax treatment. Accordingly, no comparison to prior years is provided.
Income from Discontinued Operations. Income from discontinued operations for the period from
January 1, 2006 to July 1, 2006 included a payment from an insurer for certain residual claims
relating to the 2000 incident at our Gramercy, Louisiana alumina facility, which was sold in 2004,
and a refund related to certain energy surcharges, which had been pending for a number of years.
These amounts were partially offset by a charge resulting from an agreement between the Bonneville
Power Administration and us for a rejected electric power contract (see Note 22 of Notes to
Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary
Data).
Derivatives
In conducting our business, we use various instruments, including forward contracts and
options, to manage the risks arising from fluctuations in aluminum prices, energy prices and
exchange rates. We have historically entered into derivative transactions from time to time to
limit our economic (i.e. cash) exposure resulting from (i) our anticipated sales of primary
aluminum and fabricated aluminum products, net of expected purchase costs for items that fluctuate
with aluminum prices, (ii) the energy price risk from fluctuating prices for natural gas used in
our production process, and (iii) foreign currency requirements with respect to our cash
commitments for equipment purchases and with respect to our foreign subsidiaries and affiliate. As
our hedging activities are generally designed to lock-in a specified price or range of prices,
realized gains or losses on the derivative contracts utilized in the hedging activities generally
offset at least a portion of any losses or gains, respectively, on the transactions being hedged at
the time the transaction occurs. However, due to mark-to-market accounting, during the term of the
derivative contract, significant unrealized, non-cash gains and losses may be recorded in the
income statement as a reduction or increase in Cost of products sold, excluding depreciation.
We may also be exposed to margin calls placed on derivative contracts entered into
when aluminum prices, energy prices and/or currency exchange rates were high, which we try to minimize or offset, after considering our liquidity
requirements, through (i) counterparty credit lines, and (ii) the purchasing and/or use of options.
From
time to time, we may modify the terms of the derivative contracts based on operational needs.
The fair value of our derivatives recorded on the Consolidated Balance Sheets at December 31,
2008 and December 31, 2007 was a net liability of $59.6 million and a net asset of $20.6 million,
respectively. The primary reason for this change was the effect of declining metal prices,
declining natural gas prices, and fluctuation in foreign currency rates. These changes resulted in
the recognition of $87.1 million of unrealized mark-to-market losses on derivatives for the year
ended December 31, 2008, which we consider to be a non-run-rate item (see Note 13 of Notes to
Consolidated Financial Statements included in Part II. Item 1. Financial Statements and
Supplemental Data of this Report). In addition, we had $17.2
million of margin call on deposit with our counterparties at December 31, 2008, which was included in Other assets.
Segment Information
Our continuing operations are organized and managed by product type and include two operating
segments and the Corporate segment. The accounting policies of the segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements included in Item 8. Financial
Statements and Supplementary Data. Segment results are evaluated internally by us before any
allocation of Corporate overhead and without any charge for income taxes, interest expense, or
Other operating (benefits) charges, net.
39
Fabricated Products
The table below provides selected operational and financial information for our Fabricated
Products segment for 2008, 2007, the period from July 1, 2006 through December 31, 2006 and the
period from January 1, 2006 to July 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
Predecessor |
|
|
Year Ended |
|
Year Ended |
|
through |
|
January 1, 2006 |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
to |
|
|
2008 |
|
2007 |
|
2006 |
|
July 1, 2006 |
Shipments (mm lbs) |
|
|
558.5 |
|
|
|
547.8 |
|
|
|
249.6 |
|
|
|
273.5 |
|
Average realized
third party sales
price (per pound) |
|
$ |
2.39 |
|
|
$ |
2.37 |
|
|
$ |
2.27 |
|
|
$ |
2.16 |
|
Net sales |
|
$ |
1,336.8 |
|
|
$ |
1,298.3 |
|
|
$ |
567.2 |
|
|
$ |
590.9 |
|
Segment Operating
Income |
|
$ |
53.5 |
|
|
$ |
169.0 |
|
|
$ |
60.8 |
|
|
$ |
61.2 |
|
Net sales of fabricated products increased by 3% to $1,336.8 million for 2008 as compared to
2007, primarily due to a 2% increase in shipments and a 1% increase in average realized prices.
Shipments of products for aerospace, high-strength and defense applications were slightly higher in
2008 as compared to 2007, reflecting continued strong demand for such products. Shipments of
general engineering products were also higher as compared to 2007, but shipments for automotive and
custom industrial products declined as compared to 2007. The increase in average realized price in
2008 as compared to 2007 was primarily due to higher realized value-added pricing.
The second phase of the heat treat plate expansion project at our Trentwood facility in
Spokane, Washington became operational at the beginning of 2008 and the third and final phase of
the heat treat plate capacity expansion was completed in October of 2008. Our record heat treat
plate shipments in 2008 were made possible by this new, incremental capacity as well as continued
strong demand.
The table below provides shipment and value-added revenue information for our three end-use
product groupings for 2008, 2007, the period from July 1, 2006 through December 31, 2006 and the
period from January 1, 2006 to July 1, 2006 for our Fabricated Products segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Shipments (mm lbs): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace and high
strength products |
|
|
157.7 |
|
|
|
155.0 |
|
|
|
67.4 |
|
|
|
74.3 |
|
General
engineering
products |
|
|
258.1 |
|
|
|
245.8 |
|
|
|
109.4 |
|
|
|
117.2 |
|
All other products |
|
|
142.7 |
|
|
|
147.0 |
|
|
|
72.8 |
|
|
|
82.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
558.5 |
|
|
|
547.8 |
|
|
|
249.6 |
|
|
|
273.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value added
revenue(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace and high
strength products |
|
$ |
323.8 |
|
|
$ |
297.4 |
|
|
$ |
125.2 |
|
|
$ |
130.4 |
|
General
engineering
products |
|
|
248.9 |
|
|
|
225.3 |
|
|
|
101.1 |
|
|
|
90.3 |
|
All other products |
|
|
99.8 |
|
|
|
116.5 |
|
|
|
55.4 |
|
|
|
62.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
672.5 |
|
|
$ |
639.2 |
|
|
$ |
281.7 |
|
|
$ |
283.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value added revenue
per pound: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace and high
strength products |
|
$ |
2.05 |
|
|
$ |
1.92 |
|
|
$ |
1.86 |
|
|
$ |
1.75 |
|
General
engineering
products |
|
|
.96 |
|
|
|
.92 |
|
|
|
.92 |
|
|
|
.77 |
|
All other products |
|
|
.70 |
|
|
|
.79 |
|
|
|
.76 |
|
|
|
.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.20 |
|
|
$ |
1.17 |
|
|
$ |
1.13 |
|
|
$ |
1.04 |
|
|
|
|
(1) |
|
Value added revenue represents net sales less hedged cost of
alloyed metal. |
Recent trends that could affect 2009 include managements expectation for continuing strong
aerospace and defense demand for heat treat plate and other products. We anticipate armor plate
demand to remain strong, although lower than the record levels of 2008. Significant uncertainty
regarding demand from U.S. industrial markets will affect our general engineering products during
the year, and we expect that the first quarter of 2009 will continue to be negatively impacted by
aggressive service center de-stocking. Ground transportation end use demand is expected to remain
weak as North American automotive build rates continue to decline.
40
We introduced an energy surcharge for new orders and new contracts placed beginning July 1,
2008. The surcharge is intended to pass through increases over the 2007 average prices for natural
gas, electricity and diesel fuel costs. The surcharge passed approximately $1 million of costs onto
customers in the third quarter shipments. In the fourth quarter, energy prices declined to a point
that the surcharge recovery was insignificant. While we intend to maintain the surcharge as part of
our routine pricing mechanism to pass on higher energy costs in the future, at current energy
prices, which are below the 2007 average prices, the surcharge has no effect.
Net sales of fabricated products increased to $1,298.3 million for 2007 as compared to the
period July 1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1, 2006,
primarily due to a 5% increase in shipments and a 7% increase in average realized prices. Shipments
of products for aerospace and defense applications were higher in 2007 as compared to the period
July 1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1, 2006,
reflecting continued strong demand for such products as well as incremental capacity from two new
heat treat plate furnaces at our Trentwood facility in Spokane, Washington which were fully
operational for the entire year in 2007. This was partially offset by lower shipments of products
for ground transportation and other industrial applications as compared to the period July 1, 2006
through December 31, 2006 and the period from January 1, 2006 to July 1, 2006. The increase in the
average realized prices primarily reflects improved value-added pricing and a favorable product mix
as well as the pass-through to customers of higher underlying primary aluminum prices.
Operating income for the twelve
months ended December 31, 2008 of $53.5 million was $115.5
million lower than the comparable period in 2007. Operating income for the twelve months ended
December 31, 2008 included several large non-run-rate items
totaling a loss of $88.9 million
(discussed and listed below). Excluding non-run-rate items, 2008
operating income was $24.9 million lower than 2007, reflecting the
following factors:
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
Favorable |
|
|
(unfavorable) |
Sales impact |
|
$ |
24.8 |
|
Manufacturing
inefficiencies(1) |
|
|
(23.7 |
) |
Energy costs |
|
|
(12.1 |
) |
Planned major maintenance |
|
|
(2.6 |
) |
Freight costs |
|
|
(3.4 |
) |
Depreciation expense |
|
|
(2.8 |
) |
Currency exchange related |
|
|
(1.3 |
) |
Other |
|
|
(3.8 |
) |
|
|
|
(1) |
|
Manufacturing inefficiencies were primarily the result of (i) planned interruptions in connection
with the implementation of various investment programs, including the completion of our heat
treat plate expansion project at our Trentwood facility in Spokane, Washington, (ii) challenges
created by sudden drop in demand, and (iii) weather related inefficiencies.
|
41
Operating income for 2007 was $169.0 million compared to $60.8 million for the period from
July 1, 2006 through December 31, 2006 and $61.2 million for the period from January 1, 2006 to
July 1, 2006. Operating income for 2007 included favorable impacts from heat treat plate of
approximately $41.5 million from higher shipments and stronger value added pricing as compared to
the prior year. The unfavorable impact of shipments for ground transportation and other industrial
applications to operating income was approximately $2.1 million. The results of 2007 also reflect
higher planned major maintenance expense and other costs, including energy and research and
development as compared to the periods from July 1, 2006 through December 31, 2006 and the period
from January 1, 2006 to July 1, 2006, partially offset by improved general cost performance.
Depreciation and amortization in 2007 was approximately $3.4 million lower than the periods from
July 1, 2006 to December 31, 2006 and from January 1, 2006 to July 1, 2006, primarily as a result
of the application of fresh start accounting partially offset by Construction in progress being
placed into production in 2007.
Operating income for 2008, 2007, and the periods from July 1, 2006 to December 31, 2006 and
from January 1, 2006 to July 1, 2006 includes non-run-rate items. Non-run-rate items to us 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 fluctuations in underlying metal
prices, natural gas prices and currency exchange rates. These items are listed below (in millions
of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Metal gains (losses) (before considering LIFO) |
|
$ |
(11.4 |
) |
|
$ |
(13.1 |
) |
|
$ |
4.2 |
|
|
$ |
16.6 |
|
Non-cash LIFO benefit (charges) |
|
|
7.5 |
|
|
|
14.0 |
|
|
|
(3.3 |
) |
|
|
(21.7 |
) |
Non-cash lower of cost or market inventory write down (1) |
|
|
(65.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market gains (losses) |
|
|
(5.7 |
) |
|
|
1.7 |
|
|
|
(1.2 |
) |
|
|
(1.0 |
) |
Restructuring charges (2) |
|
|
(8.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pre-emergence related environmental costs (3) |
|
|
(5.0 |
) |
|
|
(.9 |
) |
|
|
(.6 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-run-rate items |
|
$ |
(88.9 |
) |
|
$ |
1.7 |
|
|
$ |
(.9 |
) |
|
$ |
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The $65.5 million lower of cost or market inventory write-down in 2008 was the result of the decline in metal prices in late 2008. |
|
(2) |
|
Restructuring charges of $8.8 million in 2008 was the result of the restructuring plan to close the Tulsa, Oklahoma extrusion facility and to
curtail operations at the Bellwood, Virginia facility. Of the $8.8 million, $4.3 million was a non-cash charge related the impairment of
property, plant and equipment and $4.5 million was related to termination costs which we expect to pay during the first quarter of 2009. |
|
(3) |
|
Pre-emergence related environmental costs were related to
environmental issues at our Spokane, Washington facility that existed before our
emergence from
chapter 11 bankruptcy. |
Segment operating results for 2008, 2007, the period from July 1, 2006 through December 31,
2006 and the period from January 1, 2006 to July 1, 2006 include gains on intercompany hedging
activities with the Primary Aluminum business unit totaling
$16.9 million, $19.8 million, $19.9
million and $24.7 million, respectively. These amounts eliminate in consolidation.
42
Primary Aluminum
The table below provides selected operational and financial information (in millions of
dollars except shipments and prices) for our Primary Aluminum segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
Predecessor |
|
|
Year Ended |
|
Year Ended |
|
through |
|
January 1, 2006 |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
to |
|
|
2008 |
|
2007 |
|
2006 |
|
July 1, 2006 |
Shipments (mm lbs) |
|
|
133.1 |
|
|
|
157.2 |
|
|
|
77.3 |
|
|
|
77.1 |
|
Average realized third
party sales price (per
pound) |
|
$ |
1.29 |
|
|
$ |
1.31 |
|
|
$ |
1.30 |
|
|
$ |
1.28 |
|
Net sales |
|
$ |
171.4 |
|
|
$ |
206.2 |
|
|
$ |
100.3 |
|
|
$ |
98.9 |
|
Segment Operating Income |
|
$ |
(99.7 |
) |
|
$ |
46.5 |
|
|
$ |
10.8 |
|
|
$ |
12.4 |
|
During 2008, third party net sales of primary aluminum decreased 17% compared to 2007. The
decrease in net sales is primarily due to a 15% decrease in shipments and a 2% decrease in average
realized prices. The lower shipments during the 2008 periods reflect the loss of production from
the outage triggered by the fire on June 12, 2008 discussed below. During 2007, third party net
sales of primary aluminum increased 4% compared to 2006. The increase in net sales is primarily due
to a 2% increase in shipments and a 2% increase in average realized prices. The net sales and unit
prices do not consider the impact of hedging transactions.
The following table recaps the major components of segment operating results for the current
and prior year periods (in millions of dollars) and the discussion following the table looks at the
primary factors leading to such differences. Many of such factors indicated are subject to
significant fluctuation from period to period and are largely impacted by items outside
managements control. See Item 1A. Risk Factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Profit on metal sales (net of alumina sales)(1)
|
|
$ |
15.5 |
|
|
$ |
7.1 |
|
|
$ |
(1.2 |
) |
|
$ |
10.1 |
|
Anglesey
joint venture(2) |
|
|
7.5 |
|
|
|
51.6 |
|
|
|
22.8 |
|
|
|
17.7 |
|
Impairment of investment in Anglesey |
|
|
(37.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Internal
hedging with Fabricated Products(3) |
|
|
(16.9 |
) |
|
|
(19.8 |
) |
|
|
(19.9 |
) |
|
|
(24.7 |
) |
Derivative
settlements Pound Sterling(4)(5) |
|
|
(2.9 |
) |
|
|
10.2 |
|
|
|
1.1 |
|
|
|
(1.2 |
) |
Derivative
settlements External metal hedging(4)(5) |
|
|
16.4 |
|
|
|
(10.6 |
) |
|
|
(2.2 |
) |
|
|
3.4 |
|
Market-to-market on derivative instruments(4) |
|
|
(81.4 |
) |
|
|
8.0 |
|
|
|
10.2 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(99.7 |
) |
|
$ |
46.5 |
|
|
$ |
10.8 |
|
|
$ |
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating income represents earnings on metal purchases from
Anglesey and resold by us and on alumina purchases from third parties
by us and sold to Anglesey. This is impacted by
the market price for primary aluminum and alumina pricing, offset by
the impact of foreign currency translation. |
|
(2) |
|
Represents our share of earnings
from Anglesey. |
(3) |
|
Eliminates in consolidation. |
|
(4) |
|
Impacted by positions and market prices. |
|
(5) |
|
In 2007 we began to track Pound Sterling and external metal hedging
derivative settlement gains and losses separately from the Anglesey joint ventures operating results. As such we have conformed the presentation
for the periods from July 1, 2006 through December 31, 2006 and from
January 1, 2006 to July 1, 2006 to that of 2007 and 2008 to allow for
an appropriate comparison of results. |
43
On June 12, 2008, Anglesey suffered a significant failure in the rectifier yard that resulted
in a localized fire in one of the power transformers. As a result of the fire, Anglesey was
operating below its production capacity during the latter half of 2008 until normal production was
resumed in December 2008 and incurred incremental costs, primarily associated with repair and
maintenance costs, as well as loss of margin due to the outage. Anglesey has property damage and
business interruption insurance that is expected to cover financial losses for Anglesey and its
owners (net of applicable deductibles) and is in the process of pursuing an insurance claim. In
December 2008, Anglesey received a partial insurance settlement of $20 million, of which $10
million was included in Anglesey related operations above and was subsequently impaired as we do
not expect to receive any of the insurance proceeds (see discussion below regarding impairment).
Anglesey operates under a power agreement that provides sufficient power to sustain its
aluminum reduction operations at full capacity through September 2009. The nuclear plant that
supplies power to Anglesey is currently slated for decommissioning in late 2010. Anglesey has
worked intensively with government authorities and agencies to find a sustainable alternative to
the power supply needs of the smelter, but has been unable to reach a feasible solution. In January
of 2009, we announced that we expect Anglesey to fully curtail its smelting operations at the end
of September 2009, when its current power contract expires. Although Anglesey will continue to
pursue alternative sources of affordable power, as of the filing date of this Report, no sources
have been identified that would allow the uninterrupted continuation of smelting operations.
Additionally, Anglesey is expected to evaluate alternative operating activities in line with the
needs of the local community and market opportunities, including the potential continuation of
remelt and casting operations and the production of anodes for use by other smelting facilities.
Taking into account Angleseys inability to obtain affordable power, the resulting expected
curtailment of smelting operations, the growing uncertainty with respect to the future of
Angleseys operations, and Angleseys expected cash requirements for redundancy and pension
payments, we do not expect to receive any dividends from Anglesey in the future and as a result, we
recorded a $37.8 million charge to fully impair our 49% equity investment in Anglesey during the
fourth quarter. During 2009, we do not expect to recognize our share of the operating results of Anglesey unless we can determine that those results will be recoverable through receipt of dividends.
In 2009, we anticipate that the Primary Aluminum segment will be favorably impacted by
approximately $1 million due to the impact of Pound Sterling exchange rates, reflecting derivative
transactions that were set at a lower effective exchange rate in 2009 than those in place for 2008.
In addition, we anticipate that the Primary Aluminum segment will be
favorably impacted by approximately $3 million due to the favorable
ocean freight rate in our 2009 ocean freight contract as compared to the ocean freight rate in 2008.
44
Corporate and Other
Corporate operating expenses represent corporate general and administrative expenses that are
not allocated to our business segments. Corporate operating expenses exclude Other operating
(benefit) charges, net discussed above.
Corporate operating expenses for 2008 were $.9 million lower than in 2007. Of this decrease,
salary and incentive compensation were $1.6 million lower primarily as a result of lower operating
results in 2008 as compared to 2007, and costs for outside services related to compliance with the
Sarbanes-Oxley Act of 2002 were lower by $2.1 million. These decreases were partially offset by an
increase in non-cash charges associated with equity compensation of $1.0 million (see Note 11 of
Notes to Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data) and a reduction in VEBA net periodic benefit income of $2.0 million.
Corporate operating expenses for 2007 were $1.3 million higher than the periods from July 1,
2006 through December 31, 2006 and from January 1, 2006 to July 1, 2006. Of this increase, salary
and incentive compensation accruals were $9.6 million higher primarily as a result of better
operating results in 2007 as compared to the periods from July 1, 2006 through December 31, 2006
and from January 1, 2006 to July 1, 2006. Included in the increase was an increase of $5.1 million
in non-cash charges associated with equity compensation (see Note 11 of Notes to Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary Data). These
increases were partially offset by a reduction in retiree medical expense of $1.0 million, a
reduction in VEBA net periodic benefit income (costs) of $3.2 million and lower costs for outside
services related to compliance with the Sarbanes-Oxley Act of 2002 of $1.1 million.
Other Information
We
have significant federal income tax attributes.
Section 382 of the Code affects a corporations ability to use its federal income tax
attributes, including its net operating loss carry-forwards, following a more than 50% change in
ownership during any period of 36 consecutive months, all as determined under the Code (an
ownership change). Under Section 382(l)(5) of the Code, if we were to have an ownership change,
our ability to use our federal income tax attributes would be limited to an amount equal to the
product of (a) the aggregate value of our outstanding common shares immediately prior to the
ownership change and (b) the applicable federal long-term tax exempt rate in effect on the date of
the ownership change.
In order to reduce the risk that any change in our ownership would jeopardize the preservation
of our federal income tax attributes existing upon our emergence from chapter 11 bankruptcy, our
certificate of incorporation prohibits certain transfers of our equity securities. More
specifically, subject to certain exceptions for transactions that would not impair our federal
income tax attributes, our certificate of incorporation prohibits a transfer of our equity
securities without the prior approval of our Board of Directors if either (a) the transferor holds
5% or more of the total fair market value of all of our issued and outstanding equity securities
(such person, a 5% shareholder) or (b) as a result of such transfer, either (i) any person or
group of persons would become a 5% shareholder or (ii) the percentage stock ownership of any 5%
shareholder would be increased (any such transfer, a 5% transaction).
In addition, we entered into a stock transfer restriction agreement with the Union VEBA, which
upon our emergence from chapter 11 bankruptcy, was and continue to be our largest shareholder.
Under the stock transfer restriction agreement, until the restriction release date, subject to
exceptions for certain transactions that would not impair our federal income tax attributes, the
Union VEBA is prohibited from transferring or otherwise disposing of more than 15% of the total
common shares issued to the Union VEBA pursuant to our Plan during any 12-month period without the
prior approval of our Board of Directors.
The
number of common shares that generally may be sold by the Union VEBA
during any 12-month period is 1,321,485. The next date on which
the Union VEBA may sell common shares without the prior consent of our Board of Directors is
January 31, 2010.
45
Preserving our federal income tax attributes affects our ability to issue new common shares
because such issuances must be considered in determining whether an ownership change has occurred
under Section 382 of the Code. The IRS ruling increased the number of common shares that we can
issue without potentially impairing our ability to use our federal income tax attributes. As a
result of the IRS ruling, we can currently issue approximately
17.5 million common shares without
potentially impairing our ability to use our federal income tax attributes. However, additional
sales by the Union VEBA could, and other 5% transactions would, decrease the number of common
shares we can issue during any 36 month period without impairing our ability to use our federal
income tax attributes. Similarly, any issuance of common shares by us would limit the number of
shares that could be transferred in 5% transactions (other than sales permitted to be made by the
Union VEBA under the stock transfer restriction agreement without the consent of our Board of
Directors). If at any time we were to issue the maximum number of common shares that we could
possibly issue without potentially impairing our ability to use of our federal income tax
attributes, there could be no 5% transactions (other than sales by the Union VEBA permitted under
the stock transfer restriction agreement without the consent of our Board of Directors) during the
36-month period thereafter.
Liquidity and Capital Resources
Summary
Cash and cash equivalents were $.2 million as of December 31, 2008, down from $68.7 million as
of December 31, 2007. The decrease in cash and cash equivalents during 2008 is due to an increase
in inventories (before considering the effect of inventory write-down), capital spending, stock
repurchases and dividends. Working capital, the excess of current assets over current liabilities,
was $193.7 million as of December 31, 2008, down from $289.2 million as of December 31, 2007.
Included in this decrease were $82.3 million of non-cash decrease relating to changes in our current
derivative assets and liabilities, current deferred tax assets, and the lower of cost or market inventory write-down.
Excluding the non-cash impact of these items, working capital as of
December 31, 2008 was $13.2 million less than December 31,
2007. This decrease is primarily the result of a decrease in cash and
cash equivalents, partially offset by increases in inventories
(before considering the effect of lower of cost or market inventory
write-down) and other receivables, and a decrease in accounts payable.
Despite the decrease in cash and cash equivalents, the revolving credit agreement is a
source of additional liquidity for operations.
Cash equivalents consist primarily of money market accounts and other highly liquid
investments with an original maturity of three months or less when purchased. Our liquidity is
affected by restricted cash that is pledged as collateral for
derivative contracts with our counterparties and for certain letters of credit or
restricted to use for workers compensation requirements and other agreements. Short term
restricted cash, included in Prepaid expenses and other current assets, totaled $1.4 million and
$1.5 million as of December 31, 2008 and 2007, respectively. Long term restricted cash, which was
included in Other assets, was $35.4 million and $14.4 million as of December 31, 2008 and 2007,
respectively. Included in long term restricted cash at December 31,
2008 was $17.2 million of margin call deposits with our
counterparties.
46
Cash Flows
The following table summarizes our cash flow from operating, investing and financing
activities for each of the past three years (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Period from |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to July 1, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Total cash provided by
(used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products |
|
$ |
82.9 |
|
|
$ |
162.1 |
|
|
$ |
82.6 |
|
|
$ |
39.0 |
|
Primary Aluminum |
|
|
14.0 |
|
|
|
6.8 |
|
|
|
(28.1 |
) |
|
|
10.3 |
|
Corporate and Other |
|
|
(50.0 |
) |
|
|
(39.3 |
) |
|
|
(35.7 |
) |
|
|
(69.5 |
) |
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
46.9 |
|
|
$ |
129.6 |
|
|
$ |
18.8 |
|
|
$ |
(11.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products |
|
|
(91.6 |
) |
|
|
(61.8 |
) |
|
|
(30.0 |
) |
|
|
(27.1 |
) |
Primary
Aluminum |
|
|
(17.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other |
|
|
(3.7 |
) |
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(112.5 |
) |
|
$ |
(52.6 |
) |
|
$ |
(30.0 |
) |
|
$ |
(27.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other |
|
|
(2.9 |
) |
|
|
(58.3 |
) |
|
|
49.2 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2.9 |
) |
|
$ |
(58.3 |
) |
|
$ |
49.2 |
|
|
$ |
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Fabricated Products Cash provided by Fabricated Products segment decreased in 2008 compared
to 2007 primarily due to lower operating results and increases in accounts receivables and
inventories (excluding the effect of lower of cost or market inventory write-down). Cash provided
by Fabricated Products segment in 2007 increased compared to cash provided in periods from July 1,
2006 through December 31, 2006 and from January 1, 2006 through July 1, 2006 primarily due to
improved operating results offset in part by increased working capital. The increase in working
capital in 2007 was primarily the result of the impact of higher primary aluminum prices and
increased demand for fabricated aluminum products on inventories and accounts receivable.
Primary
Aluminum In 2008, Primary Aluminum operating activities
provided $14.0 million in cash
compared to 2007 and the periods from July 1, 2006 through December 31, 2006 and from January 1,
2006 through July 1, 2006, when Primary Aluminum operating activities provided (used) $6.8 million,
$(28.1) million and $10.3 million of cash, respectively. The cash provided (used) in all periods
are primarily attributable to our interest in and related to Anglesey and related hedging
activities. Cash used in 2008 was primarily due to operating income (after adjusting for non-cash
impairment charge relating to the investment in Anglesey and non-cash
mark to market loss on derivatives), an increase in payable to
affiliate partially offset by an increase in receivables. Cash provided
in 2007 was primarily due to operating income, a decrease in prepaid expense and an increase in
account payable partially offset by an increase in accounts receivable. Cash used in the period
from July 1, 2006 through December 31, 2006 and cash provided in the period from January 1, 2006
through July 1, 2006 were primarily due to operating income and changes in working capital.
Corporate and Other In 2008, cash outflow primarily consisted of payment in respect of
general and administrative costs of $44.1 million and annual
VEBA contribution of $8.5 million. In
2007, cash outflow
primarily consisted of payment in respect of general and administrative costs of $43.2 million
and payment for reorganization costs of $7.0 million partially offset by $8.7 million of proceeds
from Other operating (benefit)
47
charges, net. The cash outflow for the periods from July 1, 2006
through December 31, 2006 and from January 1, 2006 to July 1, 2006 primarily consisted of payments
pursuant to our Plan of $25.3 million, payments of $11.4 million in respect of former employee and
retiree medical obligations through funding of the VEBAs; payments for reorganization costs of
$27.6 million, and payments in respect of general and administrative costs.
Discontinued Operations In the period from January 1, 2006 to July 1, 2006, Discontinued
Operations operating activities provided $8.5 million of cash. Cash provided by Discontinued
Operations in the period from January 1, 2006 to July 1, 2006 consisted of the proceeds from a
$7.5 million payment from an insurer and a $1.0 million refund from commodity interests energy
vendors.
Investing Activities
Fabricated Products Cash used in investing activities for Fabricated Products was
$91.6 million in 2008 compared to 2007 when Fabricated Products investing activities used
$61.8 million in cash and the periods from July 1, 2006 though December 31, 2006 and from January
1, 2006 to July 1, 2006 when Fabricated Products investing activities used $30.0 million and $27.1
million in cash, respectively. Cash used in investing activities in 2008, 2007 and periods from
July 1, 2006 through December 31, 2006 and from January 1, 2006 to July 1, 2006 were primarily
related to our capital expenditures. Refer to Capital Expenditures below for additional
information.
Primary
Aluminum Cash used in investing activities for Primary
Aluminum was $17.2 million in 2008. This amount was related to
the margin call deposits we transferred to our counterparties
relating to our derivative positions at December 31, 2008.
Corporate and Other Cash used in investing activities for Corporate and Other was
$3.7 million in 2008 compared to $9.2 million of cash provided in 2007. Cash used in the Corporate
and Other segment in 2008 is primarily related to cash deposits required relating to workers
compensation with the State of Washington. Cash provided in 2007 was related to the release of
restricted funds that we had on deposit as financial assurance for workers compensation claims
from the State of Washington.
Financing Activities
Corporate
and Other Cash used in financing activities for Corporate and Other was $2.9
million in 2008. The cash outflow was primarily related to $28.1 million used in share repurchases
and $17.2 million in cash dividends paid to shareholders, partially offset by $36.0 million of net
borrowings under our revolving credit facility and $7.0 million of borrowing under a note payable (see Debt and Capital below). Cash used in financing activities for Corporate and Other in 2007 was primarily
related to a $50 million repayment of the term loan and $7.4 million in cash dividends paid to
shareholders. Cash provided in the period from July 1, 2006 through December 31, 2006 was primarily
related to drawing upon the $50 million term loan facility subsequent to emergence from chapter 11
bankruptcy.
Sources of Liquidity
Our most significant sources of liquidity are funds generated by operating activities,
available cash and cash equivalents, and borrowing availability under our revolving credit
facility. We believe funds generated from the expected results of operations, together with
available cash and cash equivalents and borrowing availability under our revolving credit facility,
will be sufficient to finance expansion plans and strategic initiatives, which could include
acquisitions, for at least the next fiscal year. There can be no assurance, however, that we will
continue to generate cash flows at or above current levels or that we will be able to maintain our
ability to borrow under our revolving credit facility.
Under the revolving credit facility, we are able to borrow (or obtain letters of credit) from
time to time in an aggregate amount equal to the lesser of $265 million 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. Of the aggregate amount available under the revolving credit facility, a maximum of $60
million may be utilized for letters of credit. The revolving credit facility matures in July 2011,
at which time all principal amounts outstanding thereunder will be due and payable. Borrowings
under the revolving credit facility bear interest at a rate equal to either a base prime rate or
LIBOR, at our option, plus a 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
48
increased up to $275 million. At December 31, 2008, the
Company had $218.0 million available for borrowing and letters of credit under the revolving credit
facility, of which $36.0 million of borrowings and $10.0 million of letters of credit were
outstanding, leaving $172.0 million for additional borrowing and letters of credit.
Due to the non-cash charges and resulting net income impact in the fourth quarter of 2008, our
revolving credit agreement would have precluded payment of our normal quarterly dividend due to a
limitation based on net earnings. As a result, on January 9, 2009, we and certain of our
subsidiaries entered into an amendment pursuant to which the lenders agreed to permit us, among
other things, to declare and pay dividends ratably with respect to our common shares in an
aggregate amount not to exceed $25 million during any fiscal year, provided that no such dividend
may be paid unless at the time of such payment and after giving effect thereto, (i) no default is
continuing or would result therefrom and (ii) the borrowing availability under the revolving credit
facility is at least $100 million. As part of the amendment, we agreed to, among other things, an
increase of the non-use commitment fee rate from 0.20% to 0.50% and an increase of the applicable
interest rate margin. As noted above, borrowings under the revolving credit facility bear interest
at a rate equal to a base rate or LIBOR, at our option, plus a specified variable percentage
determined by reference to the then-remaining borrowing availability under the revolving credit
facility. The amendment increases the specified variable percentages. The amendment also prohibits
us from repurchasing our common shares.
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 interest payments when due and breaches of covenants, representations and warranties set forth
in the agreement.
The revolving credit facility is secured by a first priority lien on substantially all of our
assets and the assets of our U.S. operating subsidiaries that are also borrowers thereunder. The
amended revolving credit facility continues to place restrictions on our ability and certain of our
subsidiaries to, among other things, incur debt, create liens, make investments, sell assets,
undertake transactions with affiliates and enter into unrelated lines of business. At January 30,
2009, $10.8 million of borrowings and $10.0 million of letters of credit were outstanding under the
revolving credit facility.
Capital Expenditures
A component of our long-term strategy is our capital expenditure program including our organic
growth initiatives.
The final phase for our $139 million heat treat plate expansion project at our Trentwood
facility in Spokane, Washington, has been completed. This project significantly increased our heat
treat plate production capacity and augmented our product offerings by increasing the thickness of
heat treat stretched plate we can produce for aerospace, defense and general engineering
applications.
In 2007, we announced a $91 million investment program in our rod, bar and tube value stream
including a facility to be located in Kalamazoo, Michigan, as well as improvements at three
existing extrusion and drawing facilities. This investment program is expected to significantly
improve the capabilities and efficiencies of our rod and bar and seamless extruded and drawn tube
operations and enhance the market position of such products. We expect the facility in Kalamazoo,
Michigan to be equipped with two extrusion presses and a remelt operation. Completion of these
investments is expected to occur by early 2010. We estimate that an additional $45 million to $55 million will be incurred in 2009.
During
2008, we purchased for $10 million the real property of our Los Angeles, California
facility, which we previously leased. The majority of the remainder of our capital
spending in 2008 included projects to enhance Kaiser Select® capabilities at various
plants, significantly reduce energy consumption at one of the casting units in our Trentwood
facility in Spokane, Washington and increase capacity at our Tennalum facility in Jackson,
Tennessee. Remaining amounts were spread among all manufacturing locations on projects expected to
reduce operating costs, improve product quality, increase capacity or enhance operational security.
49
The following table presents our capital expenditures, net of accounts payable, for each of
the past three fiscal years (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
July 1, 2006
through |
|
|
Predecessor
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Heat treat expansion project |
|
$ |
20 |
|
|
$ |
41 |
|
|
$ |
26 |
|
|
$ |
22 |
|
Rod, bar and tube value
stream investment |
|
|
28 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Purchase of real property of our
Los Angeles, California facility
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
36 |
|
|
|
17 |
|
|
|
10 |
|
|
|
8 |
|
Capital expenditures in
accounts payable |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures,
net of accounts payable |
|
$ |
93 |
|
|
$ |
62 |
|
|
$ |
30 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures for Fabricated Products are currently expected to be up to $60
million to $70 million for all of 2009 and are expected to be funded using cash from
operations, borrowings under our revolving credit facility, or other
third party financing sources.
The level of anticipated capital expenditures for future periods may be adjusted from time to
time depending on our business plans, price outlook for fabricated aluminum products, our ability
to maintain adequate liquidity and other factors. No assurance can be provided as to the timing or
success of any such expenditures.
Debt and Capital
On
December 19, 2008, we executed a promissory note (the Note) in the amount of
$7.0 million in connection with the purchase of real property of our Los Angeles, California facility.
Interest is payable on the unpaid principal balance of the Note monthly in arrears on the
outstanding principal balance at the prime rate, as defined in the Note, plus 1.5%, in no event to
exceed 10% per annum, on the first day of each month commencing on February 1, 2009. A principal
payment of $3.5 million is due February 1, 2012 and the remaining principal of $3.5 million is due
on February 1, 2013. The Note is secured by the deed of trust of the property.
On July 6, 2006, concurrent with the execution of the revolving credit facility, discussed in
the Sources of Liquidity section above, we entered into a term loan facility with a group of
lenders that provided for a $50 million term loan guaranteed by certain of our domestic operating
subsidiaries. The term loan facility was fully drawn on August 4, 2006. The term loan facility had
a five-year term expiring in July 2011, at which time all principal amounts outstanding thereunder
would be due and payable. Borrowings under the term loan facility bore interest at a rate equal to
either a premium over a base prime rate or a premium over LIBOR, at our option. On December 13,
2007, the term loan was paid in full without incurring any pre-payment penalties.
Dividends
In June 2007, our Board of Directors initiated the payment of a regular quarterly cash
dividend of $.18 per common share. In June 2008, our Board of Directors increased the payment of a
regular quarterly cash dividend to $.24 per common share. Each declared dividend in 2008 and 2007
was paid in the subsequent quarter. In 2008 and 2007, we paid a total of $17.2 million, or $.84 per
common share, and $7.4 million, or $.36 per common share, respectively, in cash dividends under
this program.
In
January 2009, our Board of Directors declared another quarterly
cash dividend of $0.24 per
common share, or $4.8 million, to stockholders of record at the close of business on January 26, 2009, which was
paid on February 13, 2009.
50
Stock Repurchase Plan
During the second quarter of 2008, our Board of Directors authorized the repurchase of up to
$75 million of our common shares, with repurchase transactions to occur in open-market or privately
negotiated transactions at such times and prices as management deemed appropriate and to be funded
with our excess liquidity after giving consideration to internal and external growth opportunities
and future cash flows. The program may be modified, extended or terminated by our Board of
Directors at any time. We repurchased 572,706 common shares at the weighted-average price of $49.05
per share during 2008. As of December 31, 2008, $46.9 million remained available for repurchases
under the existing repurchase authorization.
As discussed in the Sources of Liquidity above, in January 2009, we amended our revolving
credit facility to permit continued quarterly dividend payments subject to certain conditions. The
amendment also prohibits us from making share repurchases. As a result, we can no longer repurchase
our common shares or withhold common shares to satisfy employee minimum statutory withholding
obligations without lender approval.
Capital Structure
Successor: On July 6, 2006, the effective date of our Plan, pursuant to the Plan, all equity
interests in Kaiser outstanding immediately prior to such date were cancelled without
consideration, and 20,000,000 new common shares were issued to a third-party disbursing agent for
distribution in accordance with our Plan. As we discussed in Note 10 of Notes to Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary Data and
elsewhere in this Report, there are restrictions on the transfer of our common shares. In addition,
our revolving credit facility, as amended, prohibits us from repurchasing our common stock and
limits our ability to pay dividends.
Predecessor: Prior to July 6, 2006, effective date of our Plan, MAXXAM Inc. and one of its
wholly owned subsidiaries collectively owned approximately 63% of our common shares, with the
remaining approximately 37% being publicly held. Pursuant to our Plan, all of the pre-emergence
equity interests in Kaiser were cancelled without consideration upon our emergence from chapter 11
bankruptcy on July 6, 2006.
Environmental Commitments and Contingencies
We are subject to a number of environmental laws and regulations, to fines or penalties
assessed for alleged breaches of the environmental laws and regulations, and to claims and
litigation based upon such laws and regulations. Based on our evaluation of these and other
environmental matters, we have established environmental accruals of $9.6 million at December 31,
2008. However, we believe that it is reasonably possible that changes in various factors could
cause costs associated with these environmental matters to exceed current accruals by amounts that
could be, in the aggregate, up to an estimated $14.0 million, primarily in connection with our
ongoing efforts to address the historical use of oils containing polychlorinated biphenyls, or
PCBs, at the Trentwood facility in Spokane, Washington where we are working with regulatory
authorities and performing studies and remediation pursuant to several consent orders with the
State of Washington.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet and Other Arrangements
Contractual Obligations and Commercial Commitments
We are obligated to make future payments under various contracts such as long-term purchase
obligations and lease agreements. We have grouped these contractual obligations into operating
activities, investing activities and financing activities in the same manner as they are classified
in the Statement of Consolidated Cash Flows in order to provide a better understanding of the
nature of the obligations and to provide a basis for comparison to historical information.
51
The following table provides a summary of our significant contractual obligations at
December 31, 2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 and |
|
|
|
Total |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(1) |
|
$ |
210.5 |
|
|
$ |
197.5 |
|
|
$ |
1.5 |
|
|
$ |
1.4 |
|
|
$ |
1.3 |
|
|
$ |
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases(1) |
|
|
51.8 |
|
|
|
5.6 |
|
|
|
4.1 |
|
|
|
2.7 |
|
|
|
2.3 |
|
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental liability(1) |
|
|
9.6 |
|
|
|
3.3 |
|
|
|
1.6 |
|
|
|
2.7 |
|
|
|
1.4 |
|
|
|
.6 |
|
Deferred revenue arrangements(1) |
|
|
.9 |
|
|
|
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital equipment(2) |
|
|
12.4 |
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
|
|
36.0 |
|
|
|
|
|
|
|
|
|
|
|
36.0 |
|
|
|
|
|
|
|
|
|
Note payable |
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
3.5 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit(3) |
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax liabilities (FIN 48)(4) |
|
|
21.8 |
|
|
|
11.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations(5) |
|
|
|
|
|
$ |
231.5 |
|
|
$ |
7.2 |
|
|
$ |
42.8 |
|
|
$ |
8.5 |
|
|
$ |
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Obligations for Operating Activities below. |
|
(2) |
|
See Obligations for Investing Activities below. |
|
(3) |
|
This amount represents the total amount committed under standby
letters of credit, substantially all of which expire within
approximately twelve months. The letters of credit relate primarily to
workers compensation, environmental and other activities. As the
amounts under these letters of credit are contingent on nonpayment to
third parties, it is not practical to present annual payment
information. |
|
(4) |
|
At December 31, 2008, we had uncertain tax positions which ultimately
could result in a tax payment. We could pay up to $11.8 million in the
third quarter of 2009. With respect to the remaining amount, as the amount of ultimate tax payment
is contingent on the tax authorities assessment, it is not practical
to present annual payment information. |
|
(5) |
|
Total contractual obligations exclude future annual variable cash
contributions to the VEBAs, which cannot be determined at this time.
See Off-Balance Sheet and Other Arrangements below for a summary of
possible annual variable cash contribution amounts at various levels
of earnings and cash expenditures. |
Obligations for Operating Activities
Cash outlays for operating activities primarily consist of purchase obligations with respect
to our primary aluminum, other raw materials, energy and alumina commitments and operating leases.
We have various contracts with suppliers of aluminum that require us to purchase minimum
quantities of aluminum in future years at a price to be determined at the time of purchase
primarily based on the underlying metal price at that time. Amounts included in the table are based
on minimum quantity at the December 31, 2008 metal price. We believe the minimum quantities are
lower than our current requirements for aluminum. Actual quantity and actual metal prices at the
time of purchase could be different.
Operating leases represent multi-year obligations for certain manufacturing facilities,
warehousing, office space and equipment.
Deferred revenue arrangements relate to commitment fees received from customers for future
delivery of products over the specified contract period. While these obligations are not expected
to result in cash payments, they represent contractual obligations for which we would be obligated
if the specified product deliveries could not be made. Purchase obligations represent raw-material,
energy and other purchase obligations.
Environmental liability represents the December 31, 2008 environmental accrual.
52
Obligations for Investing Activities
Capital project spending included in the preceding table represents non-cancelable capital
commitments as of December 31, 2008. We expect capital projects to be funded through cash from our
operations, borrowing under our revolving credit facility or other
financing sources.
Obligations for Financing Activities
Cash outlays for financing activities consist of our obligations under long term debt. As of
December 31, 2008, we had $36.0 million outstanding borrowings under our revolving credit facility
and $7.0 million of note payable.
Off-Balance Sheet and Other Arrangements
We have agreements to supply alumina to and to purchase aluminum from Anglesey through
September 2009, the end of the current power contract. Both the alumina sales agreement and primary
aluminum purchase agreement are tied to primary aluminum prices.
Our employee benefit plans include the following:
|
|
|
We are obligated to make monthly contributions of one dollar per hour worked by each
bargaining unit employee to the appropriate multi-employer pension plans sponsored by the
USW and IAM and certain other unions at six of our production facilities. This obligation
came into existence in December 2006 for four of our production facilities upon the
termination of four defined benefit plans. The arrangement for the other two locations came
into existence during the first quarter of 2005. We currently estimate that contributions
will range from $2 million to $4 million per year. |
|
|
|
|
We have a defined contribution 401(k) savings plan for hourly bargaining unit employees
at five of our production facilities. We are required to make contributions to this plan for
active bargaining unit employees at these production facilities that will range from $800 to
$2,400 per employee per year, depending on the employees age and/or service. This
arrangement came into existence in December 2004 for two production facilities upon the
termination of a defined benefit plan. The arrangement for the other three locations came
into existence in December 2006. We currently estimate that contributions to such plans will
range from $1 million to $3 million per year. |
|
|
|
|
We have a defined benefit plan for our salaried employees at our production facility in
London, Ontario with annual contributions based on each salaried employees age and years of
service. At December 31, 2008, approximately 53% of the plan assets are invested in equity
securities, 40% of plan assets are invested in debt securities and the remaining plans
assets are invested in short term securities. The Companys investment committee reviews and
evaluates the investments portfolio. The asset mix target allocation on
the long term is approximately 60% in equity securities and 36% in debt securities with the
remaining assets in short term securities. |
|
|
|
|
We have a defined contribution 401(k) savings plan for salaried and non-bargaining unit
hourly employees providing for a match of certain contributions dollar for dollar on the
first four percent of compensation made by employees plus an annual contribution of between
2% and 10% of their compensation depending on their age and years of service. All new hires
after January 1, 2004 receive a fixed 2% contribution. We currently estimate that
contributions to such plan will range from $4 million to $6 million per year. |
|
|
|
|
We have a non-qualified defined contribution restoration plan for key employees who would
otherwise suffer a loss of benefits under our defined contribution 401(k) savings plan as a
result of the limitations by the Code. |
|
|
|
|
We have an annual variable cash contribution to the VEBA under agreements reached during
our chapter 11 bankruptcy. Under these agreements, the amount to be contributed to the VEBAs
will be 10% of the first $20 million of annual cash flow (as defined; but generally,
earnings before interest, 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 million. Our agreement with the Union VEBA
terminates for periods beginning after December 31, 2012. Under these agreements the
aggregate annual |
53
|
|
|
payments may not exceed $20 million and are also limited (with no carryover
to future years) to the extent
that the payments would cause our liquidity to be less than $50 million. Such amounts are
determined on an annual basis and payable within 120 days following the end of fiscal year, or
within 15 days following the date on which we file our Annual Report on Form 10-K with the SEC
(or, if no such report is required to be filed, within 15 days of the delivery of the
independent auditors opinion of our annual financial
statements), whichever is earlier. At December 31, 2008, an annual
contribution of $4.9 million was accrued and is payable in the first quarter of 2009. |
|
|
|
|
The following table shows (in millions of dollars) the estimated amount of variable VEBA
payments that would occur under these agreements at differing levels of earnings before
depreciation, interest, income taxes (EBITDA) and cash payments in respect of, among other
items, interest, income taxes and capital expenditures. The table below does not consider the
liquidity limitation and certain other factors that could impact the amount of variable VEBA
payments due and, therefore, should be considered only for illustrative purposes. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments for |
|
|
Capital Expenditures, Income Taxes, |
|
|
Interest Expense, etc. |
EBITDA |
|
$25.0 |
|
$50.0 |
|
$75.0 |
|
$100.0 |
$ 20.0 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
40.0 |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
60.0 |
|
|
5.0 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
80.0 |
|
|
9.0 |
|
|
|
4.0 |
|
|
|
.5 |
|
|
|
|
|
100.0 |
|
|
13.0 |
|
|
|
8.0 |
|
|
|
3.0 |
|
|
|
|
|
120.0 |
|
|
17.0 |
|
|
|
12.0 |
|
|
|
7.0 |
|
|
|
2.0 |
|
140.0 |
|
|
20.0 |
|
|
|
16.0 |
|
|
|
11.0 |
|
|
|
6.0 |
|
160.0 |
|
|
20.0 |
|
|
|
20.0 |
|
|
|
15.0 |
|
|
|
10.0 |
|
180.0 |
|
|
20.0 |
|
|
|
20.0 |
|
|
|
19.0 |
|
|
|
14.0 |
|
200.0 |
|
|
20.0 |
|
|
|
20.0 |
|
|
|
20.0 |
|
|
|
18.0 |
|
|
|
|
We have a short term incentive compensation plan for certain members of management
payable in cash which is based primarily on earnings, adjusted for certain safety and
performance factors. Most of our production facilities have similar programs for both hourly
and salaried employees. |
|
|
|
|
We have a stock-based long-term incentive plan for certain members of management and our
directors. As more fully discussed in Note 11 of Notes to Consolidated Financial Statements,
included in Item 8. Financial Statements and Supplementary Data, an initial,
emergence-related award was made under this program in the second half of 2006. Awards were
also made in 2007 and 2008, and additional awards are expected to be made in 2009 and future
years. |
|
|
|
|
We have outstanding letters of credit of $10.0 million
under our revolving credit facility as of
December 31, 2008. |
54
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with United States generally
accepted accounting principles (GAAP). In connection with the preparation of our financial
statements, we are required to make assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the
related disclosures. We base our assumptions, estimates and judgments on historical experience,
current trends and other factors that management believes to be relevant at the time our
consolidated financial statements are prepared. On a regular basis, management reviews the
accounting policies, assumptions, estimates and judgments to ensure that our financial statements
are presented fairly and in accordance with United States GAAP. However, because future events and
their effects cannot be determined with certainty, actual results could differ from our assumptions
and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 of Notes to Consolidated Financial
Statements, included in Item 8. Financial Statements and Supplementary Data. Management believes
that the following accounting estimates are the most critical to aid in fully understanding and
evaluating our reported financial results, and require managements most difficult, subjective or
complex judgments, resulting from the need to make estimates about the effects of matters that are
inherently uncertain. Management has reviewed these critical accounting estimates and related
disclosures with the Audit Committee of our Board of Directors.
|
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|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Application of fresh start
accounting. |
|
|
|
|
|
|
|
|
|
Upon emergence from chapter 11
bankruptcy, we applied fresh
start accounting to our
consolidated financial
statements as required by SOP
90-7. As such, in July 2006, we
adjusted stockholders equity
to equal the reorganization
value of the entity at
emergence. Additionally, items
such as accumulated
depreciation, accumulated
deficit and accumulated other
comprehensive income (loss)
were reset to zero. We
allocated the reorganization
value to our individual assets
and liabilities based on their
estimated fair value at the
emergence date based, in part,
on information from a third
party appraiser. Such items as
current liabilities, accounts
receivable and cash reflected
values similar to those
reported prior to emergence.
Items such as inventory,
property, plant and equipment,
long-term assets and long-term
liabilities were significantly
adjusted from amounts
previously reported. Because
fresh start accounting was
adopted at emergence and
because of the significance of
liabilities subject to
compromise that were relieved
upon emergence, meaningful
comparisons between the
historical financial statements
and the financial statements
from and after emergence are
difficult to make.
|
|
We determine fair value using widely
accepted valuation techniques,
including discounted cash flow and
market multiple analyses. These types
of analyses contain uncertainties
because they require management to make
assumptions and to apply judgment to
estimate industry economic factors and
the profitability of future business
strategies.
|
|
Although we believe that the
judgments and estimates discussed
herein are reasonable, if actual
results are not consistent with
our estimates or assumptions, we
may be exposed to an impairment
charge that could be significant. |
55
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Our judgments and estimates
with respect to commitments and
contingencies. |
|
|
|
|
|
|
|
|
|
Valuation of legal and other
contingent claims is subject to
a great deal of judgment and
substantial uncertainty. Under
United States GAAP, companies
are required to accrue for
contingent matters in their
financial statements only if
the amount of any potential
loss is both probable and the
amount (or a range) of possible
loss is estimatable. In
reaching a determination of the
probability of an adverse
ruling in respect of a matter,
we typically consult outside
experts. However, any such
judgments reached regarding
probability are subject to
significant uncertainty. We
may, in fact, obtain an adverse
ruling in a matter that we did
not consider a probable loss
and which, therefore, was not
accrued for in our financial
statements. Additionally, facts
and circumstances in respect of
a matter can change causing key
assumptions that were used in
previous assessments of a
matter to change. It is
possible that amounts at risk
in respect of one matter may be
traded off against amounts
under negotiations in a
separate matter.
|
|
In estimating the amount of any loss,
in many instances a single estimation
of the loss may not be possible.
Rather, we may only be able to estimate
a range for possible losses. In such
event, United States GAAP requires that
a liability be established for at least
the minimum end of the range assuming
that there is no other amount which is
more likely to occur.
|
|
Although we believe that the
judgments and estimates discussed
herein are reasonable, actual
results could differ, and we may
be exposed to losses or gains
that could be material if
different than those reflected in
our accruals.
To the extent we prevail in
matters for which reserves have
been established or are required
to pay amounts in excess of our
reserves, our future results from
operations could be materially
affected. |
56
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Our judgments and estimates in
respect of our employee defined
benefit plans. |
|
|
|
|
|
|
|
|
|
At December 31, 2008, we had
two defined benefit
postretirement medical plans
(the postretirement medical
plans maintained by the VEBAs
which we are required to
reflect on our financial
statements) and a pension plan
for our Canadian plant.
Liabilities and expenses for
pension and other
postretirement benefits are
determined using actuarial
methodologies and incorporate
significant assumptions,
including the rate used to
discount the future estimated
liability, the long-term rate
of return on plan assets, and
several assumptions relating to
the employee workforce (i.e.
salary increases, medical
costs, retirement age, and
mortality). The most
significant assumptions used in
determining the estimated
year-end obligations were the
assumed discount rate,
long-term rate of return
(LTRR) and the assumptions
regarding future medical cost
increases.
See Note 10 of Notes to
Consolidated Financial
Statements in Item 8.
Financial Statements and
Supplementary Data for
additional information in
respect of the benefit plans.
|
|
Since recorded obligations represent
the present value of expected pension
and postretirement benefit payments
over the life of the plans, decreases
in the discount rate (used to compute
the present value of the payments)
would cause the estimated obligations
to increase. Conversely, an increase in
the discount rate would cause the
estimated present value of the
obligations to decline. The LTRR on
plan assets reflects an assumption
regarding what the amount of earnings
would be on existing plan assets
(before considering any future
contributions to the plans). Increases
in the assumed LTRR would cause the
projected value of plan assets
available to satisfy pension and
postretirement obligations to increase,
yielding a reduced net expense in
respect of these obligations. A
reduction in the LTRR would reduce the
amount of projected net assets
available to satisfy pension and
postretirement obligations and, thus,
cause the net expense in respect of
these obligations to increase. As the
assumed rate of increase in medical
costs goes up, so does the net
projected obligation. Conversely, if
the rate of increase was assumed to be
smaller, the projected obligation would
decline.
|
|
The rate used to discount future
estimated liabilities is
determined considering the rates
available at year end on debt
instruments that could be used to
settle the obligations of the
plan. A change in the discount
rate of 1/4 of 1% would impact the
accumulated pension benefit
obligations by approximately $.1
million, $1.4 million and $8.0
million in relation to the
Canadian pension plan, the
Salaried VEBA and the Union VEBA,
respectively, and impact 2009
results by $.6 million.
The LTRR on plan assets is
estimated by considering
historical returns and expected
returns on current and projected
asset allocations. A change in
the assumption for LTRR on plan
assets of 1/4 of 1% would impact
net loss by approximately $.1
million and $.7 million in 2009
in relation to the Salaried VEBA
and the Union VEBA, respectively.
An increase in the health care
trend rate of 1/4 of 1% would
increase the accumulated benefit
obligations of the Union VEBA by
approximately $8.3 million and
increase 2009 expense by $1.3
million in 2009 and a decrease in
the health care trend rate of 1/4
of 1% would decrease accumulated
benefit obligations of the Union
VEBA by approximately $6.9
million and decrease 2009 expense
by $1.1 million in 2009. |
57
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Our judgments and estimates in respect to
environmental commitments and contingencies. |
|
|
|
|
|
|
|
|
|
We are subject to a number of environmental laws
and regulations, to fines or penalties assessed for
alleged breaches of such laws and regulations and
to claims and litigation based upon such laws and
regulations. Based on our evaluation of
environmental matters, we have established
environmental accruals, primarily related to
potential solid waste disposal and soil and
groundwater remediation matters. These
environmental accruals represent our estimate of
costs reasonably expected to be incurred on a going
concern basis in the ordinary course of business
based on presently enacted laws and regulations,
currently available facts, existing technology and
our assessment of the likely remediation action to
be taken.
See Note 12 of Notes to Consolidated Financial
Statements in Item 8. Financial Statements and
Supplementary Data for additional information in
respect of environmental contingencies.
|
|
Making estimates of
possible
environmental
remediation costs
is subject to
inherent
uncertainties. 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.
|
|
Although we believe that the
judgments and estimates discussed
herein are reasonable, actual
results could differ, and we may
be exposed to losses or gains
that could be material if
different than those reflected in
our accruals.
To the extent we prevail in
matters for which reserves have
been established, or are required
to pay amounts in excess of our
reserves, our future results from
operations could be materially
affected. |
58
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Our judgments and estimates in respect of
conditional asset retirement obligations. |
|
|
|
|
|
|
|
|
|
We recognize conditional asset retirement
obligations (CAROs) related to legal obligations
associated with the normal operations of certain of
our facilities. These CAROs consist primarily 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) of
certain of the older facilities if such facilities
were to undergo major renovation or be demolished.
No plans currently exist for any such renovation or
demolition of such facilities and our
current assessment is that the most probable
scenarios are that no such CARO would be triggered
for 20 or more years, if at all.
Under current accounting guidelines, liabilities
and costs for CAROs must be recognized in a
companys financial statements even if it is
unclear when or if the CARO will be triggered. If
it is unclear when or if a CARO will be triggered,
companies are required to use probability weighting
for possible timing scenarios to determine the
probability weighted amounts that should be
recognized in the companys financial statements.
See Note 5 of Notes to Consolidated Financial
Statements in Item 8. Financial Statements and
Supplementary Data for additional information in
respect of environmental contingencies.
|
|
The estimation of
CAROs is subject to
a number of
inherent
uncertainties
including: (1) the
timing of when any
such CARO may be
incurred, (2) the
ability to
accurately identify
all materials that
may require special
handling or
treatment, (3) the
ability to
reasonably estimate
the total
incremental special
handling and other
costs, (4) the
ability to assess
the relative
probability of
different scenarios
which could give
rise to a CARO, and
(5) other factors
outside a companys
control including
changes in
regulations, costs
and interest rates.
As such, actual
costs and the
timing of such
costs may vary
significantly from
the estimates,
judgments and
probable scenarios
we considered,
which could, in
turn, have a
material impact on
our future
financial
statements.
|
|
Although we believe that the
judgments and estimates discussed
herein are reasonable, actual
results could differ, and we may
be exposed to losses or gains
that could be material if
different than those reflected in
our accruals. |
59
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Long Lived Assets |
|
|
|
|
|
|
|
|
|
Long-lived assets other than goodwill and
indefinite-lived intangible assets, which are
separately tested for impairment, are evaluated for
impairment whenever events or changes in
circumstances indicate that the carrying value may
not be recoverable. When evaluating long-lived
assets for potential impairment, we first compare
the carrying value of the asset to the assets
estimated future cash flows (undiscounted and
without interest charges). If the estimated future
cash flows are less than the carrying value of the
asset, we calculate an impairment loss. The
impairment loss calculation compares the fair
value, which may be based on estimated future cash
flows (discounted and with interest charges). We
recognize an impairment loss if the amount of the
assets carrying value exceeds the assets estimated
fair value. If we recognize an impairment loss, the
adjusted carrying amount of the asset becomes its
new cost basis. For a depreciable long-lived asset,
the new cost basis will be depreciated (amortized)
over the remaining useful life of that asset.
|
|
Our impairment loss
calculations would
contain
uncertainties
because they
require management
to make assumptions
and apply judgment
to estimate future
cash flows and
asset fair values,
including
forecasting useful
lives of the assets
and selecting the
discount rate that
reflects the risk
inherent in future
cash flows.
|
|
We have not made any material
changes in our impairment loss
assessment methodology during the
past three fiscal years.
We do not believe there is a
reasonable likelihood that there
will be a material change in the
estimates or assumptions we use
to calculate long-lived asset
impairment losses. However, if
actual results are not consistent
with our estimates and
assumptions used in estimating
future cash flows and asset fair
values, we may be exposed to
further losses from impairment
charges that could be material. |
60
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Income Tax Provision. |
|
|
|
|
|
|
|
|
|
We have substantial tax attributes available to
offset the impact of future income taxes. We have a
process for determining the need for a valuation
allowance with respect to these attributes. The
process includes an extensive review of both
positive and negative evidence including our
earnings history, future earnings, adverse recent
occurrences, carry forward periods, an assessment
of the industry and the impact of the timing
differences. At the conclusion of this process in
2007, we determined we met the more likely than
not criteria to recognize the vast majority of our
tax attributes. The benefit associated with the
reduction of the valuation allowance, previously
recorded against these tax attributes, was recorded
as an adjustment to Stockholders equity rather
than as a reduction of income tax expense.
We expect to record a full statutory tax provision
in future periods and, therefore, the benefit of
any tax attributes realized will only affect future
balances sheets and statements of cash flows.
In accordance with United States GAAP, financial
statements for interim periods include an income
tax provision based on the effective tax rate
expected to be incurred in the current year.
|
|
Inherent within the
completion of our
assessment of the
need for a
valuation
allowance, we made
significant
judgments and
estimates with
respect to future
operating results,
timing of the
reversal of
deferred tax assets
and our assessment
of current market
and industry
factors. In order
to determine the
effective tax rate
to apply to interim
periods estimates
and judgments are
made (by taxable
jurisdiction) as to
the amount of
taxable income that
may be generated,
the availability of
deductions and
credits expected
and the
availability of net
operating loss
carry forwards or
other tax
attributes to
offset taxable
income.
Making such
estimates and
judgments is
subject to inherent
uncertainties given
the difficulty
predicting such
factors as future
market conditions,
customer
requirements, the
cost for key inputs
such as energy and
primary aluminum,
overall operating
efficiency and many
other items.
However, if among
other things, (1)
actual results vary
from our forecasts
due to one or more
of the factors
cited above or
elsewhere in this
Report, (2) income
is distributed
differently than
expected among tax
jurisdictions, (3)
one or more
material events or
transactions occur
which were not
contemplated, (4)
other
uncontemplated
transactions occur,
or (5) certain
expected
deductions, credits
or carry forwards
are not available,
it is possible that
the effective tax
rate for a year
could vary
materially from the
assessments used to
prepare the interim
consolidated
financial
statements. See
Note 9 of Notes to
Consolidated
Financial
Statements included
in Item 8.
Financial
Statements and
Supplementary Data
for additional
discussion of these
matters.
|
|
Although we believe that the
judgments and estimates discussed
herein are reasonable, actual
results could differ, and we may
be exposed to losses or gains
that could be material.
A change in our effective tax
rate by 1% would have had an
impact of approximately $.9 to
net loss for the year ended
December 31, 2008. |
61
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Tax Contingencies. |
|
|
|
|
|
|
|
|
|
We adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109 (FIN 48) at emergence.
The adoption of FIN 48 did not have a material
impact on our financial statements.
In accordance with FIN 48, we use a more likely
than not threshold for recognition of tax
attributes that are subject to uncertainties and
measure reserves in respect of such expected
benefits based on their probability as prescribed
by FIN 48. A number of years may elapse before a
particular matter, for which we have established a
reserve, is audited and fully resolved or
clarified. We adjust our FIN 48 reserve and income
tax provision in the period in which actual results
of a settlement with tax authorities differs from
our established reserve, the statute of limitations
expires for the relevant tax authority to examine
the tax position or when more information becomes
available.
|
|
Our FIN 48 reserve
contains
uncertainties
because management
is required to make
assumptions and to
apply judgment to
estimate the
exposures
associated with our
various filing
positions.
Our effective
income tax rate is
also affected by
changes in tax law,
the tax
jurisdiction of new
plants or business
ventures, the level
of earnings and the
results of tax
audits.
|
|
Although management believes that
the judgments and estimates
discussed herein are reasonable,
actual results could differ, and
we may be exposed to losses or
gains that could be material.
To the extent we prevail in
matters for which reserves have
been established, or are required
to pay amounts in excess of our
reserves, our effective income
tax rate in a given financial
statement period could be
materially affected. An
unfavorable tax settlement could
require use of our cash and would
result in an increase in our
effective income tax rate in the
period of resolution. A favorable
tax settlement would be
recognized as a reduction in our
effective income tax rate in the
period of resolution.
A change in our effective tax
rate by 1% would have had an
impact of approximately $.9 to
net loss for the year ended
December 31, 2008. |
|
|
|
|
|
Inventory Valuation |
|
|
|
|
|
We value our inventories 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 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
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. We determine the
market value of our inventories in according to
Accounting Research Bulletin No. 43 (ARB No. 43),
Chapter 4, Inventory Pricing, whereby market is
determined based on the current replacement cost,
by purchase or by reproduction, except
that it does
not exceed the net realizable value and it is not
less than net realizable value reduced by an
approximate normal profit margin.
|
|
Our estimate of
market value of our
inventories
contains
uncertainties
because management
is required to make
assumptions and to
apply judgment to
estimate selling
price of our
inventories, costs
to complete our
inventories and
normal profit
margin.
Making such
estimates
and
judgments is
subject to inherent
uncertainties given
the difficulty
predicting such
factors as future
commodity prices
and market
conditions.
|
|
Although we believe that the
judgments and estimates discussed
herein are reasonable, actual
results could differ, and we may
be exposed to losses or gains
that could be material.
A change in our normal profit
margin by 1% would have had an
impact of approximately $2.9 to
net loss for the year ended
December 31, 2008.
A change in our selling price by
10% would have had an impact of
approximately $1.5 to net loss
for the year ended December 31,
2008.
A change in our cost to complete
by
10% would have had an impact
of approximately $7.4 to net loss
for the year ended December 31,
2008.
|
62
Predecessor:
For a discussion of critical accounting policies of the Predecessor before emergence, see Note
20 of Notes to Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data of this Report.
New Accounting Pronouncements
On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with US GAAP, and 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 Financial Accounting Standards No. 13,
Accounting for Leases. SFAS No. 157 establishes a fair value hierarchy that distinguishes between
(i) market participant assumptions developed based on market data obtained from independent sources
(observable inputs) and (ii) an entitys 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:
|
|
|
Level 1 Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. |
|
|
|
|
Level 2 Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly, including quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that
are observable for the asset or liability (e.g., interest rates); and inputs that are
derived principally from or corroborated by observable market data by correlation or other
means. |
|
|
|
|
Level 3 Inputs that are both significant to the fair value measurement and
unobservable. |
Our 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 majority 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.
We have some derivative contracts that do not have observable market quotes. For these
financial instruments, management uses significant other observable inputs (i.e., information
concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various
factors such as bid/offer spreads.
63
The following table presents our 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 December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum swap contracts |
|
$ |
|
|
|
$ |
32.7 |
|
|
$ |
|
|
|
$ |
32.7 |
|
Aluminum option contracts |
|
|
|
|
|
|
14.5 |
|
|
|
|
|
|
|
14.5 |
|
Krona forward contract |
|
|
|
|
|
|
.1 |
|
|
|
|
|
|
|
.1 |
|
Midwest premium swap contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
47.3 |
|
|
$ |
|
|
|
$ |
47.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum swap contracts |
|
$ |
|
|
|
$ |
(82.0 |
) |
|
$ |
|
|
|
$ |
(82.0 |
) |
Aluminum option contracts |
|
|
|
|
|
|
(3.1 |
) |
|
|
|
|
|
|
(3.1 |
) |
Pound Sterling forward contract |
|
|
|
|
|
|
(14.4 |
) |
|
|
|
|
|
|
(14.4 |
) |
Euro dollar forward contracts |
|
|
|
|
|
|
(.9 |
) |
|
|
|
|
|
|
(.9 |
) |
Krona forward contract |
|
|
|
|
|
|
(.5 |
) |
|
|
|
|
|
|
(.5 |
) |
Natural gas swap contracts |
|
|
|
|
|
|
(4.9 |
) |
|
|
|
|
|
|
(4.9 |
) |
Midwest premium swap contracts |
|
|
|
|
|
|
|
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
(105.8 |
) |
|
$ |
(1.1 |
) |
|
$ |
(106.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
64
|
|
|
|
|
|
|
Level 3 |
|
Balance at January 1, 2008: |
|
$ |
|
|
Total realized/unrealized losses included in: |
|
|
|
|
Cost of goods sold excluding depreciation expense |
|
|
(1.1 |
) |
Purchases, sales, issuances and settlements |
|
|
|
|
Transfers in and (or) out of Level 3 |
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
(1.1 |
) |
|
|
|
|
Total losses included in earnings attributable to the change in
unrealized losses relating to derivative contracts still held at
December 31, 2008: |
|
$ |
(1.1 |
) |
|
|
|
|
For all other recently issued and recently adopted accounting pronouncements, see the section
New Accounting Pronouncements from Note 1 of Notes to Consolidated Financial Statements included
in Item 8. Financial Statements and Supplementary Data of this Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our operating results are sensitive to changes in the prices of alumina, primary aluminum and
fabricated aluminum products, and also depend to a significant degree upon the volume and mix of
all products sold. As discussed more fully in Note 13 of Notes to Consolidated Financial
Statements, we historically have utilized hedging transactions to lock-in a specified price or
range of prices for certain products which we sell or consume in our production process and to
mitigate our exposure to changes in foreign currency exchange rates and energy prices.
Sensitivity
Primary Aluminum. Our share of primary aluminum production from Anglesey, at maximum
production capacity, is approximately 150 million pounds annually. Because we purchase alumina for
Anglesey at prices linked to primary aluminum prices, only a portion of our net revenues associated
with Anglesey is exposed to price risk. We estimate the maximum net portion of our share of
Anglesey production exposed to primary aluminum price risk to be approximately 100 million pounds
annually (before considering income tax effects).
Our pricing of fabricated aluminum products is generally intended to lock-in a conversion
margin (representing the value added from the fabrication process(es)) and to pass metal price risk
on to customers. However, in certain instances, we do enter into firm price arrangements. In such
instances, we do have price risk on anticipated primary aluminum purchases in respect of the
customer orders. Total fabricated products shipments during 2008, 2007, the period from July 1,
2006 through December 31, 2008 and the period from January 1, 2006 to July 1, 2006, for which we
had price risk were (in millions of pounds) 228.3, 239.1, 96.0 and 103.9, respectively.
During the last three years, the volume of fabricated products shipments with underlying
primary aluminum price risk was at least as much as our net exposure to primary aluminum price risk
at Anglesey. As such, we considered our 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 our
Fabricated Products segment exceed the Anglesey-related primary aluminum shipments, we used third party hedging instruments to eliminate any net remaining primary aluminum price exposure
existing at any time.
On June 12, 2008, Anglesey suffered a significant failure in the rectifier yard that resulted
in a localized fire in one of the power transformers. As a result of the fire, Anglesey was
operating below its maximum capacity throughout the majority of the third and fourth quarter and
returned to maximum production in December. Anglesey has property damage and business interruption
insurance policies in place and expects to recover (net of applicable deductibles) the incremental
costs and any loss of margin (assuming production that will be lost due to the outage sold at
primary aluminum prices that would have been applicable on such volume) due to business
interruption through its insurance coverage. We expected to recover, through our equity
income in Anglesey, amounts that preserve the natural hedge for our firm price Fabricated
Products contracts. Accordingly, we did not adjust third party hedging volume for the
lower production rate of Anglesey in the latter half of 2008. However, as a
65
result of the expected curtailment of Angleseys production discussed in Part I, Item 1.
Business Overview of this Report, the natural hedge against primary aluminum price fluctuations
created by our participation in the primary aluminum market would be eliminated. Accordingly, we
deemed it appropriate to increase our hedging activity to limit exposure to such price risks, which
may have an adverse effect on our financial position, results of operations and cash flows.
At December 31, 2008, the Fabricated Products segment held contracts for the delivery of
fabricated aluminum products that have the effect of creating price risk on anticipated primary
aluminum purchases for the period 2009 through 2012 totaling approximately (in millions of pounds):
2009 142.2, 2010 89.7, 2011 76.6 and 2012 13.4.
Foreign Currency. We from time to time enter into forward exchange contracts to hedge
material exposures for foreign currencies. Our primary foreign exchange exposure is the
Anglesey-related commitment that we fund in Pound Sterling. We estimate that, before consideration
of any hedging activities, and any potential impairment of results of Angleseys operations, a US $0.01 increase (decrease) in the value of the Pound Sterling
results in an approximate $.4 million (decrease) increase in our annual pre-tax operating income.
As of December 31, 2008, we had forward purchase agreements for a total of
40.6 million Pound Sterling through September 2009.
Energy. We are exposed to energy price risk from fluctuating prices for natural gas. We
estimate that, before consideration of any hedging activities and the potential to pass through
higher natural gas prices to customers, each $1.00 change in natural gas prices (per mmbtu) impacts
our annual pre-tax operating results by approximately $4.0 million.
From time to time in the ordinary course of business, we enter into hedging transactions with
major suppliers of energy and energy-related financial investments. As of December 31, 2008, our
exposure to increases in natural gas prices had been substantially limited for approximately 85% of
natural gas purchases for January 2009 through March 2009, approximately 54% of natural gas
purchases for April 2009 through June 2009, approximately 48% of natural gas purchases for July
2009 through September 2009 and approximately 43% of natural gas purchases for October 2009 through
December 2009.
66
Item 8. Financial Statements and Supplementary Data
|
|
|
|
|
Page |
|
|
68 |
|
|
69 |
|
|
70 |
|
|
71 |
|
|
72 |
|
|
73 |
|
|
76 |
|
|
77 |
|
|
126 |
67
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Managements Report on the Financial Statements
Our management is responsible for the preparation, integrity and objectivity of the
accompanying consolidated financial statements and the related financial information. The financial
statements have been prepared in conformity with accounting principles generally accepted in the
United States of America and necessarily include certain amounts that are based on estimates and
informed judgments. Our management also prepared the related financial information included in this
Annual Report on Form 10-K and is responsible for its accuracy and consistency with the financial
statements.
The consolidated financial statements have been audited by Deloitte & Touche LLP for the years
ended December 31, 2008 and 2007, the period from July 1, 2006 through December 31, 2006, and the
period from January 1, 2006 to July 1, 2006, an independent registered public accounting firm who
conducted their audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). The independent registered public accounting firms responsibility is to
express an opinion as to the fairness with which such financial statements present our financial
position, results of operations and cash flows in accordance with accounting principles generally
accepted in the United States.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our
internal control over financial reporting is designed under the supervision of our principal
executive officer and principal financial officer, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States and include those policies and
procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect our transactions and the dispositions of our assets;
(2) Provide reasonable assurance that our transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally accepted
in the United States, and that our receipts and expenditures are being made only in accordance
with authorizations of our management and Board of Directors; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we assessed the effectiveness of our internal
control over financial reporting as of December 31, 2008, using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on its assessment, management has concluded that our internal control
over financial reporting was effective as of December 31, 2008. Deloitte & Touche LLP, the
independent registered public accounting firm that audited our consolidated financial statements
for the year ended December 31, 2008. included in Item 8, Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K, has issued an audit report on the effectiveness of our
internal control over financial reporting.
|
|
|
|
|
/s/ Jack A. Hockema
|
|
/s/ Daniel J. Rinkenberger
|
|
|
|
|
|
|
|
President and Chief Executive Officer
|
|
Senior Vice President and Chief Financial Officer |
|
|
(Principal Executive Officer)
|
|
(Principal Financial Officer) |
|
|
68
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kaiser Aluminum Corporation
Foothill Ranch, California
We have audited the accompanying consolidated balance sheets of Kaiser Aluminum Corporation and
subsidiaries (the Company) as of December 31, 2008 and 2007 (Successor Company balance sheets),
and the related consolidated statements of income (loss), stockholders equity (deficit) and
comprehensive income (loss), and cash flows for each of the two years ended December
31, 2008 and December 31, 2007 (Successor Company operations), the period from July 1, 2006 to December 31, 2006
(Successor Company operations), and the period from January 1, 2006 to July 1, 2006 (Predecessor
Company operations). These financial statements and financial statement schedules are the
responsibility of the Companys management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company emerged from
bankruptcy on July 6, 2006. In connection with its emergence, the Company adopted fresh-start
reporting pursuant to American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, as of July 1,
2006. As a result, the consolidated financial statements of the Successor Company are presented on
a different basis than those of the Predecessor Company and, therefore, are not comparable.
In our opinion, the Successor Company consolidated financial statements present fairly, in all
material respects, the financial position of Kaiser Aluminum Corporation and subsidiaries as of
December 31, 2008 and 2007, and the results of their operations and their cash flows for each of
the two years ended December 31, 2008 and December 31, 2007, and for the period from July 1, 2006 to
December 31, 2006, in conformity with accounting principles generally accepted in the United States
of America. Further, in our opinion, the Predecessor Company consolidated financial statements
referred to above present fairly, in all material respects, and the results of its operations and
its cash flows for the period from January 1, 2006 to July 1, 2006, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, effective
January 1, 2008.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2008, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18,
2009 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 18, 2009
69
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kaiser Aluminum Corporation
Foothill Ranch, California
We have audited the internal control over financial reporting of Kaiser Aluminum Corporation and
subsidiaries (the Company) as of December 31, 2008, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys
Board of Directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended December
31, 2008 of the Company and our report dated February 18, 2009 expressed an unqualified opinion on
those financial statements.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, CA
February 18, 2009
70
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions of dollars, except share amounts) |
|
ASSETS |
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
.2 |
|
|
$ |
68.7 |
|
Receivables: |
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful receivables of $.8 and $1.4 |
|
|
98.5 |
|
|
|
96.5 |
|
Due from affiliate |
|
|
11.8 |
|
|
|
9.5 |
|
Other |
|
|
17.5 |
|
|
|
6.3 |
|
Inventories |
|
|
172.3 |
|
|
|
207.6 |
|
Prepaid expenses and other current assets |
|
|
128.4 |
|
|
|
66.0 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
428.7 |
|
|
|
454.6 |
|
Investments in and advances to unconsolidated affiliate |
|
|
|
|
|
|
41.3 |
|
Property, plant, and equipment net |
|
|
296.7 |
|
|
|
222.7 |
|
Net asset in respect of VEBA(s) |
|
|
56.2 |
|
|
|
134.9 |
|
Deferred tax assets net |
|
|
313.3 |
|
|
|
268.6 |
|
Other assets |
|
|
50.5 |
|
|
|
43.1 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,145.4 |
|
|
$ |
1,165.2 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
52.4 |
|
|
$ |
70.1 |
|
Accrued salaries, wages, and related expenses |
|
|
41.2 |
|
|
|
40.1 |
|
Other accrued liabilities |
|
|
113.9 |
|
|
|
36.6 |
|
Payable to affiliate |
|
|
27.5 |
|
|
|
18.6 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
235.0 |
|
|
|
165.4 |
|
Net liability in respect of VEBA |
|
|
14.0 |
|
|
|
|
|
Long-term liabilities |
|
|
65.3 |
|
|
|
57.0 |
|
Revolving credit facility and other long-term debt |
|
|
43.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
357.3 |
|
|
|
222.4 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, par value $.01, 90,000,000 shares authorized at
December 31, 2008 and 45,000,000 shares authorized at
December 31, 2007; 20,044,913 shares issued and outstanding
at December 31, 2008; 20,580,815 shares issued and
outstanding at December 31, 2007 |
|
|
.2 |
|
|
|
.2 |
|
Additional capital |
|
|
958.6 |
|
|
|
948.9 |
|
Retained earnings |
|
|
34.1 |
|
|
|
116.1 |
|
Common stock owned by Union VEBA subject to transfer
restrictions, at reorganization value, 4,845,465 shares at
both December 31, 2008 and December 31, 2007 |
|
|
(116.4 |
) |
|
|
(116.4 |
) |
Treasury stock, at cost, 572,706 shares at December 31,2008 |
|
|
(28.1 |
) |
|
|
|
|
Accumulated
other comprehensive loss |
|
|
(60.3 |
) |
|
|
(6.0 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
788.1 |
|
|
|
942.8 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,145.4 |
|
|
$ |
1,165.2 |
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
71
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
|
|
(In millions of dollars, except share and per share amounts) |
|
Net sales |
|
$ |
1,508.2 |
|
|
$ |
1,504.5 |
|
|
$ |
667.5 |
|
|
$ |
689.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold, excluding depreciation and other items |
|
|
1,400.7 |
|
|
|
1,251.1 |
|
|
|
580.4 |
|
|
|
596.4 |
|
Lower of cost or market inventory write-down |
|
|
65.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of investment in Anglesey |
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs and other charges |
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
14.7 |
|
|
|
11.9 |
|
|
|
5.5 |
|
|
|
9.8 |
|
Selling, administrative, research and development, and general |
|
|
73.1 |
|
|
|
73.1 |
|
|
|
35.5 |
|
|
|
30.3 |
|
Other operating (benefits) charges, net |
|
|
(1.4 |
) |
|
|
(13.6 |
) |
|
|
(2.2 |
) |
|
|
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,599.2 |
|
|
|
1,322.5 |
|
|
|
619.2 |
|
|
|
637.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(91.0 |
) |
|
|
182.0 |
|
|
|
48.3 |
|
|
|
52.4 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (excluding unrecorded contractual interest expense of $47.4 for the
period from January 1, 2006 to July 1, 2006) |
|
|
(1.0 |
) |
|
|
(4.3 |
) |
|
|
(1.1 |
) |
|
|
(.8 |
) |
Reorganization items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,090.3 |
|
Other income (expense) net |
|
|
.7 |
|
|
|
4.7 |
|
|
|
2.7 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and discontinued operations |
|
|
(91.3 |
) |
|
|
182.4 |
|
|
|
49.9 |
|
|
|
3,143.1 |
|
Income taxes benefit (provision) |
|
|
22.8 |
|
|
|
(81.4 |
) |
|
|
(23.7 |
) |
|
|
(6.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(68.5 |
) |
|
|
101.0 |
|
|
|
26.2 |
|
|
|
3,136.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of income taxes, including minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(68.5 |
) |
|
$ |
101.0 |
|
|
$ |
26.2 |
|
|
$ |
3,141.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(3.43 |
) |
|
$ |
5.05 |
|
|
$ |
1.31 |
|
|
$ |
39.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3.43 |
) |
|
$ |
5.05 |
|
|
$ |
1.31 |
|
|
$ |
39.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(3.43 |
) |
|
$ |
4.97 |
|
|
$ |
1.30 |
|
|
$ |
39.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3.43 |
) |
|
$ |
4.97 |
|
|
$ |
1.30 |
|
|
$ |
39.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (000): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
19,980 |
|
|
|
20,014 |
|
|
|
20,003 |
|
|
|
79,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
19,980 |
|
|
|
20,308 |
|
|
|
20,089 |
|
|
|
79,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
72
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS) Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned by |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Union |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VEBA |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Subject to |
|
|
Comprehensive |
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
Earnings |
|
|
Transfer |
|
|
Income |
|
|
|
|
|
|
Stock |
|
|
Capital |
|
|
(Deficit) |
|
|
Restriction |
|
|
(Loss) |
|
|
Total |
|
|
|
(In millions of dollars) |
|
BALANCE, December 31, 2005 |
|
|
.8 |
|
|
|
538.0 |
|
|
|
(3,671.2 |
) |
|
|
|
|
|
|
(8.8 |
) |
|
|
(3,141.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (same as Comprehensive income) |
|
|
|
|
|
|
|
|
|
|
35.9 |
|
|
|
|
|
|
|
|
|
|
|
35.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2006 |
|
|
.8 |
|
|
|
538.0 |
|
|
|
(3,635.3 |
) |
|
|
|
|
|
|
(8.8 |
) |
|
|
(3,105.3 |
) |
|
Cancellation of Predecessor common stock |
|
|
(.8 |
) |
|
|
.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Successor common stock (20,000,000 shares) to creditors |
|
|
.2 |
|
|
|
480.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480.4 |
|
|
Common stock owned by Union VEBA subject to transfer restrictions,
at reorganization value, 6,291,945
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151.1 |
) |
|
|
|
|
|
|
(151.1 |
) |
|
Plan and fresh start adjustments |
|
|
|
|
|
|
(538.8 |
) |
|
|
3,635.3 |
|
|
|
|
|
|
|
8.8 |
|
|
|
3,105.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, July 1, 2006 |
|
$ |
.2 |
|
|
$ |
480.2 |
|
|
$ |
|
|
|
$ |
(151.1 |
) |
|
$ |
|
|
|
$ |
329.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
73
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned by |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Union |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VEBA |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to |
|
|
Other |
|
|
|
|
|
|
Common |
|
|
Common |
|
|
Additional |
|
|
Retained |
|
|
Transfer |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Restriction |
|
|
Income (Loss) |
|
|
Total |
|
|
|
(In millions of dollars, except for shares) |
|
BALANCE, July 1, 2006 |
|
|
20,000,000 |
|
|
$ |
.2 |
|
|
$ |
480.2 |
|
|
$ |
|
|
|
$ |
(151.1 |
) |
|
$ |
|
|
|
$ |
329.3 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.2 |
|
|
|
|
|
|
|
|
|
|
|
26.2 |
|
Benefit plan adjustments not recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.9 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.1 |
|
Issuance of common stock to directors in lieu of annual retainer fees |
|
|
4,273 |
|
|
|
|
|
|
|
.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2 |
|
Recognition of pre-emergence tax benefits in accordance with fresh
start
accounting |
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Issuance of restricted stock to employees and directors |
|
|
521,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned equity compensation |
|
|
|
|
|
|
|
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2006 |
|
|
20,525,660 |
|
|
|
.2 |
|
|
|
487.5 |
|
|
|
26.2 |
|
|
|
(151.1 |
) |
|
|
7.9 |
|
|
|
370.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.0 |
|
|
|
|
|
|
|
|
|
|
|
101.0 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.7 |
) |
|
|
(3.7 |
) |
Benefit plan adjustments not recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.2 |
) |
|
|
(10.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87.1 |
|
Removal of transfer restrictions on 1,446,480 shares of common stock
owned by Union VEBA, net of income taxes of $9.9 |
|
|
|
|
|
|
|
|
|
|
48.2 |
|
|
|
|
|
|
|
34.7 |
|
|
|
|
|
|
|
82.9 |
|
Recognition of pre-emergence tax benefits in accordance with fresh
start accounting (including release of valuation allowance of $343.0
and current year tax benefits of $14.1 and $62.2 for the quarter and
year ended December 31, 2007, respectively) |
|
|
|
|
|
|
|
|
|
|
404.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404.5 |
|
Equity compensation recognized by an unconsolidated affiliate |
|
|
|
|
|
|
|
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.3 |
|
Cancellation of common stock held by employees on vesting of
restricted stock |
|
|
(8,346 |
) |
|
|
|
|
|
|
(.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.7 |
) |
Issuance of common stock to directors in lieu of annual retainer fees |
|
|
3,877 |
|
|
|
|
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.3 |
|
Issuance of restricted stock to employees and directors |
|
|
61,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to employees upon vesting of restricted
stock units |
|
|
1,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock upon forfeiture |
|
|
(3,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.1 |
) |
|
|
|
|
|
|
|
|
|
|
(11.1 |
) |
Amortization of unearned equity compensation (including unearned
equity compensation of $2.3 for the quarter ended December 31, 2007) |
|
|
|
|
|
|
|
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,580,815 |
|
|
$ |
.2 |
|
|
$ |
948.9 |
|
|
$ |
116.1 |
|
|
$ |
(116.4 |
) |
|
$ |
(6.0 |
) |
|
$ |
942.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
74
STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned by |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Union |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VEBA |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Shares |
|
|
Common |
|
|
Additional |
|
|
Retained |
|
|
Transfer |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Restriction |
|
|
Stock |
|
|
Income (Loss) |
|
|
Total |
|
|
|
(In millions of dollars, except for shares) |
|
BALANCE, December 31, 2007 |
|
|
20,580,815 |
|
|
$ |
.2 |
|
|
$ |
948.9 |
|
|
$ |
116.1 |
|
|
$ |
(116.4 |
) |
|
$ |
|
|
|
$ |
(6.0 |
) |
|
$ |
942.8 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68.5 |
) |
Tax effect of prior year pension adjustments |
|
|
|
|
|
|
|
|
|
|
(.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.7 |
|
|
|
|
|
Defined benefit plans adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss arising during the
period (net of tax of $34.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55.4 |
) |
|
|
(55.4 |
) |
Prior service cost arising during the
period (net of tax of 3.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.5 |
) |
|
|
(5.5 |
) |
Less: amortization of prior service cost
(net of tax of (.3)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.5 |
|
|
|
.5 |
|
Less: amortization of net actuarial loss
(net of tax of (.1)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2 |
|
|
|
.2 |
|
Foreign currency translation adjustment,
net of tax of $0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123.5 |
) |
Recognition of pre-emergence tax benefits
in accordance with fresh start accounting |
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9 |
|
Equity compensation recognized by an
unconsolidated affiliate (net of tax of .1) |
|
|
|
|
|
|
|
|
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.1 |
) |
Capital distribution by unconsolidated
affiliate to its parent company (net of tax
of $.6) |
|
|
|
|
|
|
|
|
|
|
(.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.9 |
) |
Issuance of non-vested shares to employees |
|
|
52,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares to directors |
|
|
3,689 |
|
|
|
|
|
|
|
.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2 |
|
Issuance of common shares to employees upon
vesting of restricted stock units and
performance shares |
|
|
1,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of employee non-vested shares |
|
|
(9,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of shares to cover employees
tax withholdings upon vesting of non-vested
shares |
|
|
(11,423 |
) |
|
|
|
|
|
|
(.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.7 |
) |
Cash dividends on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13.5 |
) |
Repurchase of common stock |
|
|
(572,706 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28.1 |
) |
|
|
|
|
|
|
(28.1 |
) |
Excess tax benefit upon vesting of
non-vested shares and dividend payment on
unvested shares expected to vest |
|
|
|
|
|
|
|
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.1 |
|
Amortization of unearned equity compensation |
|
|
|
|
|
|
|
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008 |
|
|
20,044,913 |
|
|
$ |
.2 |
|
|
$ |
958.6 |
|
|
$ |
34.1 |
|
|
$ |
(116.4 |
) |
|
$ |
(28.1 |
) |
|
$ |
(60.3 |
) |
|
$ |
788.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
75
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
|
|
(In millions of dollars) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(68.5 |
) |
|
$ |
101.0 |
|
|
$ |
26.2 |
|
|
$ |
3,141.2 |
|
Less net income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(68.5 |
) |
|
|
101.0 |
|
|
|
26.2 |
|
|
|
3,136.9 |
|
Adjustments to reconcile (loss) income from continuing operations to net cash used by
continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of pre-emergence tax benefits in accordance with fresh start accounting |
|
|
|
|
|
|
62.2 |
|
|
|
3.3 |
|
|
|
|
|
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested
shares expected to vest |
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (including deferred financing costs of $.2, $2.1, $.3,
and $.9, respectively) |
|
|
14.9 |
|
|
|
14.0 |
|
|
|
5.7 |
|
|
|
10.7 |
|
Deferred income taxes |
|
|
(31.0 |
) |
|
|
|
|
|
|
3.0 |
|
|
|
(.7 |
) |
Non-cash equity compensation |
|
|
10.1 |
|
|
|
9.1 |
|
|
|
4.0 |
|
|
|
|
|
Gain on discharge of pre-petition obligations and fresh start adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,110.3 |
) |
Payments pursuant to plan of reorganization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.3 |
) |
Net non-cash (benefit) charges in other operating (benefits) charges, net, LIFO charges
(benefits) and lower of cost or market inventory write-down |
|
|
57.7 |
|
|
|
(18.9 |
) |
|
|
3.3 |
|
|
|
21.7 |
|
Non-cash unrealized (gains) losses on derivative positions |
|
|
87.1 |
|
|
|
(9.7 |
) |
|
|
(9.0 |
) |
|
|
(6.1 |
) |
Non-cash impairment charges |
|
|
42.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-cash changes in assets and liabilities |
|
|
.3 |
|
|
|
.1 |
|
|
|
.1 |
|
|
|
.1 |
|
(Gains)/losses on sale and disposition of property, plant and equipment |
|
|
(.1 |
) |
|
|
.6 |
|
|
|
|
|
|
|
(1.6 |
) |
Equity in loss (income) of unconsolidated affiliates, net of distributions |
|
|
1.8 |
|
|
|
(22.4 |
) |
|
|
(7.5 |
) |
|
|
(10.1 |
) |
(Increase) decrease in trade and other receivables |
|
|
(13.2 |
) |
|
|
1.9 |
|
|
|
15.8 |
|
|
|
(18.3 |
) |
Increase in receivable from affiliates |
|
|
(2.3 |
) |
|
|
(8.2 |
) |
|
|
(1.3 |
) |
|
|
|
|
Increase in inventories, excluding LIFO adjustments, lower of cost or market inventory
write-down and other non-cash operating items |
|
|
(22.7 |
) |
|
|
(5.5 |
) |
|
|
(19.4 |
) |
|
|
(29.5 |
) |
(Increase) decrease in prepaid expenses and other current assets |
|
|
(7.1 |
) |
|
|
9.5 |
|
|
|
3.7 |
|
|
|
(5.4 |
) |
(Decrease) increase in accounts payable |
|
|
(18.9 |
) |
|
|
(6.2 |
) |
|
|
13.1 |
|
|
|
5.7 |
|
Increase (decrease) in other accrued liabilities |
|
|
7.2 |
|
|
|
1.5 |
|
|
|
(17.0 |
) |
|
|
(2.3 |
) |
Increase (decrease) in payable to affiliates |
|
|
8.9 |
|
|
|
2.4 |
|
|
|
(16.8 |
) |
|
|
18.2 |
|
(Decrease) increase in accrued income taxes |
|
|
(.4 |
) |
|
|
(1.4 |
) |
|
|
5.9 |
|
|
|
.2 |
|
Net cash impact of changes in long-term assets and liabilities |
|
|
(18.9 |
) |
|
|
(0.4 |
) |
|
|
5.7 |
|
|
|
(4.1 |
) |
Net cash provided by discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
46.9 |
|
|
|
129.6 |
|
|
|
18.8 |
|
|
|
(11.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures, net of accounts payable of $1.2, $3.1, $5.8, and $1.6, respectively |
|
|
(93.2 |
) |
|
|
(61.8 |
) |
|
|
(30.0 |
) |
|
|
(28.1 |
) |
Net proceeds from dispositions of property, plant and equipment: |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
1.0 |
|
(Increase) decrease in restricted cash |
|
|
(20.9 |
) |
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(112.5 |
) |
|
|
(52.6 |
) |
|
|
(30.0 |
) |
|
|
(27.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Term Loan Facility |
|
|
|
|
|
|
|
|
|
|
50.0 |
|
|
|
|
|
Financing costs |
|
|
|
|
|
|
(.2 |
) |
|
|
(.8 |
) |
|
|
(.2 |
) |
Borrowings under the revolving credit facility |
|
|
171.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of borrowings under the revolving credit facility |
|
|
(135.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under note payable |
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of term loan |
|
|
|
|
|
|
(50.0 |
) |
|
|
|
|
|
|
|
|
Cash dividend paid to shareholders |
|
|
(17.2 |
) |
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
Retirement of common stock |
|
|
(.7 |
) |
|
|
(.7 |
) |
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
(28.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested
shares expected to vest |
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities |
|
|
(2.9 |
) |
|
|
(58.3 |
) |
|
|
49.2 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents during the period |
|
|
(68.5 |
) |
|
|
18.7 |
|
|
|
38.0 |
|
|
|
(37.5 |
) |
Cash and cash equivalents at beginning of period |
|
|
68.7 |
|
|
|
50.0 |
|
|
|
12.0 |
|
|
|
49.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
.2 |
|
|
$ |
68.7 |
|
|
$ |
50.0 |
|
|
$ |
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
76
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts)
The accompanying financial statements include the financial statements of Kaiser Aluminum
Corporation (the Company) both before and after emergence from chapter 11 bankruptcy. Financial
information related to the Company after emergence is generally referred to throughout this Report
as Successor information. Information of the Company before emergence is generally referred to as
Predecessor information. The financial information of the Successor entity is not comparable to
that of the Predecessor given the impacts of the plan of reorganization, implementation of fresh
start reporting and other factors as more fully described below.
The Notes to Consolidated Financial Statements are grouped into two categories: (1) those
primarily affecting the Successor entity (Notes 1 through 19) and (2) those primarily affecting the
Predecessor entity (Notes 20 through 25).
SUCCESSOR
1. Summary of Significant Accounting Policies
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
affiliate for the periods covered by this Report was Anglesey Aluminium Limited (Anglesey).
Intercompany balances and transactions are eliminated.
The Companys emergence from chapter 11 bankruptcy and adoption of fresh start accounting
resulted in a new reporting entity for accounting purposes. Although the Company emerged from
chapter 11 bankruptcy on July 6, 2006 (the Effective Date), the Company adopted fresh start
accounting as required by the American Institute of Certified Professional Accountants Statement of
Position 90-7 (SOP 90-7), Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code, effective as of the beginning of business on July 1, 2006. As such, it was assumed that the
emergence was completed instantaneously at the beginning of business on July 1, 2006 such that all
operating activities during the period from July 1, 2006 through December 31, 2006 are reported as
applying to the Successor. The Company believes that this is a reasonable presentation as there
were no material transactions between July 1, 2006 and July 6, 2006 that were not related to
Kaisers Second Amended Plan of Reorganization (the Plan). Due to the implementation of the Plan,
the application of fresh start accounting and changes in accounting policies and procedures, the
financial statements of the Successor are not comparable to those of the Predecessor.
The Predecessor Statement of Consolidated Cash Flows for the period January 1, 2006 to July 1,
2006 includes Plan-related payments of $25.3 made between July 1, 2006 and July 6, 2006.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial
statements in accordance with United States generally accepted accounting principles (US GAAP)
requires the use of estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities known to exist as of the date the
financial statements are published, and the reported amounts of revenues and expenses during the
reporting period. Uncertainties, with respect to such estimates and assumptions, are inherent in
the preparation of the Companys consolidated financial statements; accordingly, it is possible
that the actual results could differ from these estimates and assumptions, which could have a
material effect on the reported amounts of the Companys consolidated financial position and
results of operation.
Recognition of Sales. Sales are recognized when title, ownership and risk of loss pass to the
buyer and collectability 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.
77
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In certain circumstances, based on the terms of certain sales contracts which provide for
periodic, such as quarterly or annual, billing throughout the contract, the Company may recognize
revenue prior to billing the customer. At December 31, 2008 and 2007, the Company had $.1 and $1.9
of unbilled receivables, respectively, included within Trade receivables on the Companys
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.
On June 30, 2008, the Company announced a surcharge on new orders and new contracts of
fabricated aluminum products in an effort to reduce exposure to rising costs for natural gas,
electricity and diesel fuel beginning July 1, 2008. The surcharge is based on a calculation tied to
indices provided by the U.S. Department of Energy. The Company records the surcharge as revenue
when the revenue recognition criteria are met as stated above.
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 employees 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 15).
Stock-Based Employee Compensation. The Company accounts for stock-based employee compensation
plans at fair value. The Company measures the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award and the number of
awards expected to ultimately vest. The cost of the award is recognized as an expense over the
period that the employee provides service for the award. The Company has elected to amortize
compensation expense for equity awards with grading vesting using the straight line method. During
2008, 2007 and the period from July 1, 2006 through December 31, 2006, $9.9, $9.1 and $4.0 of
compensation cost, respectively, was recognized in connection with vested and non-vested stock,
restricted stock units and stock options issued to executive officers, other key employees and
directors (see Note 11).
During the first half of 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 Companys
economic value added (EVA) performance measured over the three year performance period. The EVA
is a measure of the excess of the Companys pretax operating income for a particular year over a
pre-determined percentage of the net assets of the immediately preceding year, as defined in the
2008 2010 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 Statement of Financial 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 Companys 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 year ended December 31, 2008, $.2 of compensation
expense was recognized, in connection with the performance shares.
Restructuring Costs and Other Charges. Restructuring costs and other charges include employee
severance and benefit costs, impairment of owned equipment to be disposed of and other costs
associated with the exit activities. The Company applies the provisions of Statement of Financial
Accounting Standards 146, Accounting for Costs Associated with Exit or Dispose Activities
(SFAS No. 146) relating to one-time termination benefits. Severance costs accounted for under
SFAS 146 are recognized when the Companys management with the proper level of authority has
committed to a restructuring plan and communicated those actions to employees. For owned facilities
and equipment, the impairment loss recognized was based on the fair value less costs to sell, with
fair value estimated based on existing market prices for similar assets. Other exit costs include
costs to consolidate facilities or
78
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
close facilities and relocate employees. A liability for such costs is recorded at its fair
value in the period in which the liability is incurred. At each reporting date, the Company
evaluates its accruals for exit costs and employee separation costs to ensure the accruals are
still appropriate.
Other Income (Expense), net. Amounts included in Other income (expense), other than interest
expense and reorganization items in 2008, 2007 and the periods from July 1, 2006 through December
31, 2006 and from January 1, 2006 to July 1, 2006, included the following pre-tax gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
January 1, |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to July 1, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Interest income(1) |
|
$ |
1.7 |
|
|
$ |
5.3 |
|
|
$ |
2.0 |
|
|
$ |
|
|
All other, net |
|
|
(1.0 |
) |
|
|
(.6 |
) |
|
|
.7 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
.7 |
|
|
$ |
4.7 |
|
|
$ |
2.7 |
|
|
$ |
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with S0P 90-7, interest income during the pendency of
the chapter 11 reorganization proceedings was treated as a reduction
of reorganization expense. |
Income Taxes. Deferred income taxes reflect the future tax effect of temporary differences
between the carrying amount of assets and liabilities for financial and income tax reporting and
are measured by applying statutory tax rates in effect for the year during which the differences
are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent it
is more likely than not that the deferred tax assets will not be realized.
Although the Company had approximately $981 of tax attributes, including the net operating
loss (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 at December 31, 2006 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. During the fourth quarter of 2007, after the completion of a robust analysis of expected
future taxable income and other factors, the Company concluded that it had met the more likely
than not criteria for recognition of its deferred tax assets and as a result released the vast
majority of the valuation allowance as of December 31, 2007. In accordance with fresh start
accounting, the release of the valuation allowance was recorded as an adjustment to Stockholders
equity rather than through the income statement (see Note 9). The Company currently maintains a
valuation allowance on deferred tax assets that did not meet the more likely than not recognition
criteria which are related to state NOL carryforwards and general business credits that the Company
believes will more likely than not expire unused.
In accordance with SOP 90-7, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109 (FIN 48) at emergence. In accordance with FIN 48, the Company uses a more
likely than not threshold for recognition of tax attributes that are subject to uncertainties and
measures any reserves in respect of such expected benefits based on their probability as prescribed
by FIN 48.
Cash and Cash Equivalents. The Company considers only those short-term, highly liquid
investments with original maturities of 90 days or less when purchased to be cash equivalents.
Restricted Cash.
The Company is required to keep certain amounts on deposit relating to
workerscompensation, collateral for derivative contracts with
its counterparties, certain letters of credit and other agreements
totaling $36.8
and $15.9 at December 31, 2008 and December 31, 2007, respectively. Of the restricted cash balance,
$1.4 and $1.5 were considered short term and included in Prepaid expenses and other current assets
on the Consolidated Balance Sheets at December 31, 2008 and December 31, 2007, respectively; and
$35.4 and $14.4 were considered long term and included in Other assets on the Consolidated Balance
Sheets at December 31, 2008 and December 31, 2007,
respectively. Included in long term restricted cash at
December 31, 2008 was $17.2 of margin call deposits with the
Company's
counterparties.
79
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trade Receivables and Allowance for Doubtful Accounts . Our trade receivables consist of
amounts billed to customers for products sold. Accounts receivable are generally due within 30
days. For the majority of our receivables, the Company establishes an allowance for doubtful
accounts based collection experience and other factors. On certain other receivables where the
Company is aware of a specific customers inability or reluctance to pay, an allowance for doubtful
accounts is established against amounts due to reduce the net receivable balance to the amount the
Company reasonably expects to collect. However, if circumstances change, the Companys estimate of
the recoverability of accounts receivable could be different. Circumstances that could affect the
Companys estimates include, but are not limited to, customer credit issues and general economic
conditions. Accounts are written off once deemed to be uncollectible.
Inventories. Inventories are stated at the lower of cost or market value. Finished products,
work in process and raw material inventories are stated on the last-in, first-out (LIFO) basis.
Other inventories, principally operating supplies and repair and maintenance parts, are stated at
average cost. Inventory costs consist of material, labor and manufacturing overhead, including
depreciation. Abnormal costs, such as idle facility expenses, freight, handling costs and spoilage,
are accounted for as current period charges (see Note 3). During the fourth quarter of 2008, the
Company recorded an inventory write-down of $65.5 to reflect the market value as of December 31,
2008 (See Note 3). According to Accounting Research Bulletin No. 43 (ARB No. 43), Chapter 4,
Inventory Pricing, market is determined based on the current replacement cost, by purchase or by
reproduction, except that it does not exceed the net realizable value and it is not less than net
realizable value reduced by an approximate normal profit margin.
Shipping and Handling Costs. Shipping and handling costs are recorded as a component of Cost
of products sold excluding depreciation.
Advertising Costs. Advertising costs, which are included in Selling, administrative, research
and development, and general, are expensed as incurred. Advertising costs for 2008, 2007, for the
period from July 1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1,
2006 were $.3, $.6, $.1 and zero, respectively.
Research and Development Costs. Research and development costs, which are included in Selling,
research and development, and general, are expensed as incurred. Research and development costs for
2008, 2007, the period from July 1, 2006 through December 31, 2006 and the period from
January 1, 2006 to July 1, 2006 were $4.8, $3.0, $.9 and $.8, respectively.
Depreciation. Depreciation is computed principally using the straight-line method at rates
based on the estimated useful lives of the various classes of assets. The principal estimated
useful lives, are as follows:
|
|
|
|
|
Useful Life |
|
|
(Years) |
Land improvements
|
|
3-7 |
Buildings
|
|
15-35 |
Machinery and equipment
|
|
2-22 |
Upon emergence from reorganization, the accumulated depreciation was reset to zero as a result
of applying fresh start accounting as required by SOP 90-7. The new lives and carrying values
assigned to the individual assets and the application of fresh start accounting (see Notes 2 and
6) will cause future depreciation expense to be different than the historical depreciation expense
of the Predecessor. Depreciation expense relating to Fabricated Products is not included in Cost of
products sold excluding depreciation and is shown separately on the Statements of Consolidated
Income (Loss).
Major Maintenance Activities. All of the major maintenance costs are accounted for using the
direct expensing method.
Leases. For leases that contain predetermined fixed escalations of the minimum rent, the
Company recognizes the related rent expense on a straight-line basis from the date it takes
possession of the property to the end of the initial lease term. The Company records any difference
between the straight-line rent amounts and the amount
80
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
payable under the lease as part of deferred rent, in accrued liabilities or Other long term
liabilities, as appropriate. Deferred rent for all periods presented was not material.
Capitalization of Interest. Interest related to the construction of qualifying assets is
capitalized as part of the construction costs. The aggregate amount of interest capitalized is
limited to the interest expense incurred in the period.
Deferred Financing Costs. Costs incurred to obtain debt financing are deferred and amortized
over the estimated term of the related borrowing. Such amortization is included in Interest
expense. Deferred financing costs included in other assets at December 31, 2008 and 2007 were $.7
and $.9, respectively.
Foreign Currency. For the Companys foreign subsidiary using the local currency as its
functional currency, assets and liabilities are translated at exchange rates in effect at the
balance sheet date, and the statement of operations is translated at weighted average monthly rates
of exchange prevailing during the year. Resulting translation adjustments are recorded directly to
a separate component of stockholders equity in accordance with Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation (SFAS 52). Where the U.S. dollar is the functional
currency of foreign facility or subsidiaries, re-measurement adjustments are recorded in other
income. At December 31, 2008, the amount of translation adjustment relating to the foreign
subsidiary using local currency as its functional currency was immaterial.
Derivative Financial Instruments. Hedging transactions using derivative financial instruments
are primarily designed to mitigate the Companys exposure to changes in prices for certain of the
products which the Company sells and consumes and, to a lesser extent, to mitigate the Companys
exposure to changes in foreign currency exchange rates and energy prices. The Company does not
utilize derivative financial instruments for trading or other speculative purposes. The Companys
derivative activities are initiated within guidelines established by management and approved by the
Companys Board of Directors. Hedging transactions are executed centrally on behalf of all of the
Companys business segments to minimize transaction costs, monitor consolidated net exposures and
allow for increased responsiveness to changes in market factors.
The Company recognizes all derivative instruments as assets or liabilities in its balance
sheet and measures those instruments at fair value by marking-to-market all of its hedging
positions at each period-end (see Note 13). The Company does not meet the documentation
requirements for hedge (deferral) accounting under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). Changes in
the market value of the Companys open derivative positions resulting from the mark-to-market
process are reflected in Net income.
Concentration
of credit risk. Financial instruments, which
potentially subject the Company to
concentrations of credit risk, consist of metal, currency and natural gas derivative contracts and cash and cash
equivalents. If the market value of the Companys net derivative positions with the counterparty exceeds a
specified threshold, if any, the counterparty is required to transfer cash
collateral in excess of the threshold to the
Company. Conversely, if the market value of the net derivative positions falls
below a specified threshold, the Company is required to transfer cash collateral below the threshold to the counterparty. The Company is exposed to credit loss in the event of
nonperformance by counterparties on derivative contracts used in hedging activities as well as failure to return cash collateral previously transferred to the counterparties. The counterparties to
the Companys derivative contracts are major financial institutions and the Company has never experienced
nonperformance by any of its counterparties.
The Company places its temporary
cash investments in money market funds with high credit quality financial institutions which
invest primarily in commercial paper of prime quality, short term
repurchase agreements, and U.S. government agency notes in accordance
with our loan covenants. The Company has never experienced any material losses on its temporary cash investments.
Conditional Asset Retirement Obligations (CAROs). The Company has 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) of certain of the older plants
if such plants were to undergo major renovation or be demolished. The Company accounts for its
CAROs in accordance with FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143 (SFAS No. 143). In accordance
with FIN 47, the Company estimates incremental costs for special handling, removal and disposal
costs of materials that may or will give rise to CAROs and then discounts the expected costs back
to the current year using a credit adjusted risk free rate. Under the guidelines clarified in
FIN 47, the Company recognizes liabilities and costs for CAROs even if it is unclear when or if
CAROs may/will be triggered. When it is unclear when or if a CAROs will be triggered, the Company
uses probability weighting for possible timing scenarios to determine the probability weighted
amounts that should be recognized in the Companys financial statements.
The Companys estimates and judgments that affect the probability weighted estimated future
contingent cost amounts did not change during the year ended December 31, 2008. However, revisions
were made to the estimated timing for certain future contingent costs during the year ended
December 31, 2008 which resulted in an immaterial amount of incremental charge (see Note 5). At
December 31, 2008 and 2007, the Company had $3.3 and $3.0 of
CARO liabilities, respectively,
included in Long term liabilities, on its Consolidated Balance Sheets.
81
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Anglesey (see Note 4) also recorded CARO liabilities of approximately $24.0 in its financial
statements through December 31, 2007. No new CARO was recorded in 2008. The time period over which the fair value of the CAROs is
estimated under United Kingdom generally accepted accounting principles (UK GAAP) treatment
applied by Anglesey is different from the time period over which the fair value of CAROs is
estimated under the principles of SFAS No. 143 and FIN 47. As such, the resulting accretion
expenses are different under UK GAAP and US GAAP. Accordingly, the Company adjusted its equity in
earnings for Anglesey for 2008, 2007, the period from July 1, 2006 through December 31, 2006 and
the period from January 1, 2006 to July 1, 2006 by $1.3, $1.3, $.3 and $.3, respectively, to
reflect the impact of applying US GAAP with respect to the Anglesey CAROs.
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, restricted stock units and performance
shares, exercising of stock options and payment of dividends or dividend equivalents on non-vested
share awards, restricted stock units 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 Companys net operating loss (NOL)
carryforwards from prior years. Under this method, Additional capital would be credited when an
excess tax benefit is realized, creating an additional paid in capital pool, to absorb potential
future tax deficiencies resulting from vesting of non-vested share awards and performance shares
and from the exercising of stock options.
Adoption of Emerging Issues Task Force Issue(EITF) 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards, (EITF 06-11). Beginning January 1, 2008, the Company
adopted EITF 06-11. In accordance with the EITF 06-11, the Company records a credit to Additional
capital for tax deductions resulting from a dividend and dividend equivalent payment on non-vested
share awards, restricted stock units and performance shares the Company expects to vest. The impact
of adopting EITF 06-11 in 2008 was immaterial to the Companys consolidated financial statements.
Adoption of Statement of Financial Accounting Standards 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 No. 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 any other financial assets and financial liabilities.
Fair Value Measurements. On January 1, 2008, the Company adopted Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in accordance with US GAAP, and 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 US GAAP for the definition of fair value, except
for the fair value of leased property as defined in Statement of Financial 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 entitys 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:
|
|
|
Level 1 Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. |
82
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
Level 2 Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly, including quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that
are observable for the asset or liability (e.g., interest rates); and inputs that are
derived principally from or corroborated by observable market data by correlation or other
means. |
|
|
|
|
Level 3 Inputs that are both significant to the fair value measurement and
unobservable. |
The Companys 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 a majority 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 some derivative contracts that do not have observable market quotes. For these
financial instruments, management uses significant other observable inputs (i.e., information
concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various
factors, such as bid/offer spreads.
The following table presents the Companys assets and liabilities that are measured and
recognized at fair value on a recurring basis classified under the appropriate level of the fair
value hierarchy as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum swap contracts |
|
$ |
|
|
|
$ |
32.7 |
|
|
$ |
|
|
|
$ |
32.7 |
|
Aluminum option contracts |
|
|
|
|
|
|
14.5 |
|
|
|
|
|
|
|
14.5 |
|
Krona forward contract |
|
|
|
|
|
|
.1 |
|
|
|
|
|
|
|
.1 |
|
Midwest premium swap contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
47.3 |
|
|
$ |
|
|
|
$ |
47.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum swap contracts |
|
$ |
|
|
|
$ |
(82.0 |
) |
|
$ |
|
|
|
$ |
(82.0 |
) |
Aluminum option contracts |
|
|
|
|
|
|
(3.1 |
) |
|
|
|
|
|
|
(3.1 |
) |
Pound Sterling forward contract |
|
|
|
|
|
|
(14.4 |
) |
|
|
|
|
|
|
(14.4 |
) |
Euro dollar forward contracts |
|
|
|
|
|
|
(.9 |
) |
|
|
|
|
|
|
(.9 |
) |
Krona forward contract |
|
|
|
|
|
|
(.5 |
) |
|
|
|
|
|
|
(.5 |
) |
Natural gas swap contracts |
|
|
|
|
|
|
(4.9 |
) |
|
|
|
|
|
|
(4.9 |
) |
Midwest premium swap contracts |
|
|
|
|
|
|
|
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
(105.8 |
) |
|
$ |
(1.1 |
) |
|
$ |
(106.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments classified as Level 3 in the fair value hierarchy represent derivative
contracts in which management has used at least one significant unobservable input in the valuation
model. The following table presents a reconciliation of activity for such derivative contracts on a
net basis:
|
|
|
|
|
|
|
Level 3 |
|
Balance at January 1, 2008: |
|
$ |
|
|
Total realized/unrealized losses included in: |
|
|
|
|
Cost of goods sold excluding depreciation expense |
|
|
(1.1 |
) |
Purchases, sales, issuances and settlements |
|
|
|
|
Transfers in and (or) out of Level 3 |
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
(1.1 |
) |
|
|
|
|
Total losses included in earnings attributable to the
change in unrealized losses relating to derivative
contracts still held at December 31, 2008: |
|
$ |
(1.1 |
) |
|
|
|
|
Effective September 30, 2008, the Company adopted FASB Staff Position 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3), which
was issued on October 10, 2008. FSP 157-3 clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to
83
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
illustrate key considerations in determining the fair value of a financial asset when the
market for the financial asset is not active. The adoption of FSP 157-3 did not have an impact on
the Companys consolidated financial statements.
New Accounting Pronouncements. Statement of Financial 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 acquirer 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 acquirer
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 Financial 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 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 Company does not currently expect SFAS No. 160 to have a
material impact on the Companys consolidated financial statements.
Statement of Financial 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 SFAS No. 133; and (c)
derivative instruments and related hedged items affect an entitys 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 does not currently expect SFAS No. 161 to have a
material impact on the Companys consolidated financial statements.
Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principle (SFAS No. 162) was issued in May 2008. SFAS No. 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in conformity US GAAP
for nongovernmental entities. SFAS No. 162 is effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board amendments to Auditing Standards Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company
currently does not expect SFAS No. 162 to have a material impact on the Companys consolidated
financial statements.
FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP EITF 03-6-1) was issued in June 2008. FSP
EITF 03-06-01 provides that unvested share-based payment awards that contain nonforfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the two-class method in
accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. FSP EITF
03-6-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. Upon adoption, the Company is required to
retrospectively adjust its earnings per share data to conform with the provisions in this FSP.
Early application of FSP EITF 03-6-1 is prohibited. The Company currently does not expect FSP EITF
03-6-1 to have a material impact on its consolidated financial statements.
FASB Staff Position No. SFAS 132(R)-1, Employers Disclosures about Postretirement Benefit
Plan Assets (FSP SFAS 132(R)-1) was issued in December 2008. FSP FAS 132(R)-1 amends FASB
Statement No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement
Benefits, (SFAS 132(R)), to provide guidance on an employers disclosures about plan assets of a
defined benefit pension or other postretirement plan. The additional disclosure requirements under
this FSP include expanded disclosures about an entitys investment policies and strategies, the
categories of plan assets, concentrations of credit risk and fair value
84
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
measurements of plan assets. The Company expects that the adoption of this statement will have
a material impact on its consolidated financial statement footnote disclosures.
2. Emergence from Reorganization Proceedings.
Summary. As more fully discussed in Note 21, from the first quarter of 2002 to June 30, 2006,
the Company and 25 of its subsidiaries operated under chapter 11 of the United States Bankruptcy
Code (the Bankruptcy Code) under the supervision of the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court).
As also outlined in Note 21, Kaiser and its debtor subsidiaries which included all of the
Companys then-existing core fabricated products facilities and a 49% interest in Anglesey which
owns a smelter in the United Kingdom, emerged from chapter 11 on the Effective Date pursuant to the
Plan. Four subsidiaries not related to the Fabricated Products operations were liquidated in
December 2005. Pursuant to the Plan, all material pre-petition debt, pension and postretirement
medical obligations and asbestos and other tort liabilities, along with other pre-petition claims
(which in total aggregated to approximately $4.4 billion in the June 30, 2006 consolidated
financial statements) were addressed and resolved. Pursuant to the Plan, the equity interests of
all of Kaisers pre-emergence stockholders were cancelled without consideration. The equity of the
newly emerged Kaiser was issued and delivered to a third-party disbursing agent for distribution to
claimholders pursuant to the Plan.
Impacts on the Opening Balance Sheet After Emergence. As a result of the Companys emergence
from chapter 11, the Company applied fresh start accounting to its opening July 2006 consolidated
financial statements as required by SOP 90-7. As such, the Company adjusted its stockholders
equity to equal the reorganization value at the Effective Date. Items such as accumulated
depreciation, accumulated deficit and accumulated other comprehensive income (loss) were reset to
zero. The Company allocated the reorganization value to its individual assets and liabilities based
on their estimated fair value. Items such as current liabilities, accounts receivable, and cash
reflected values similar to those reported prior to emergence. Items such as inventory, property,
plant and equipment, long-term assets and long-term liabilities were significantly adjusted from
amounts previously reported. Because fresh start accounting was applied at emergence and because of
the significance of liabilities subject to compromise that were relieved upon emergence,
comparisons between the historical financial statements and the financial statements from and after
emergence are difficult to make.
85
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following shows the impacts of the Plan and the adoption of fresh start accounting on the
opening balance sheet of the new reporting entity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
Plan |
|
|
Fresh Start |
|
|
Balance |
|
|
|
Historical |
|
|
Adjustments(a) |
|
|
Adjustments(b) |
|
|
Sheet |
|
ASSETS |
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
37.3 |
|
|
$ |
(25.3 |
) |
|
$ |
|
|
|
$ |
12.0 |
|
Receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful receivables |
|
|
114.1 |
|
|
|
|
|
|
|
.7 |
|
|
|
114.8 |
|
Other |
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
5.7 |
|
Inventories |
|
|
123.1 |
|
|
|
|
|
|
|
48.9 |
|
|
|
172.0 |
|
Prepaid expenses and other current assets |
|
|
34.0 |
|
|
|
(.3 |
) |
|
|
|
|
|
|
33.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
314.2 |
|
|
|
(25.6 |
) |
|
|
49.6 |
|
|
|
338.2 |
|
Investments in and advances to unconsolidated affiliate |
|
|
22.7 |
|
|
|
(.3 |
) |
|
|
(11.3 |
) |
|
|
11.1 |
|
Property, plant, and equipment net |
|
|
242.7 |
|
|
|
(4.1 |
) |
|
|
(98.9 |
) |
|
|
139.7 |
|
Personal injury-related insurance recoveries receivable |
|
|
963.3 |
|
|
|
(963.3 |
) |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
11.4 |
|
|
|
(11.7 |
) |
|
|
12.6 |
|
|
|
12.3 |
|
Net assets in respect of VEBAs |
|
|
|
|
|
|
33.2 |
(c) |
|
|
|
|
|
|
33.2 |
|
Other assets |
|
|
43.6 |
|
|
|
2.1 |
|
|
|
(.8 |
) |
|
|
44.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,597.9 |
|
|
$ |
(969.7 |
) |
|
$ |
(48.8 |
) |
|
$ |
579.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Liabilities not subject to compromise |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
56.1 |
|
|
$ |
(.5 |
) |
|
$ |
(1.8 |
) |
|
$ |
53.8 |
|
Accrued interest |
|
|
1.1 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
Accrued salaries, wages, and related expenses |
|
|
37.0 |
|
|
|
(4.1 |
) |
|
|
.7 |
|
|
|
33.6 |
|
Other accrued liabilities |
|
|
61.0 |
|
|
|
(1.8 |
) |
|
|
|
|
|
|
59.2 |
|
Payable to affiliate |
|
|
33.0 |
|
|
|
|
|
|
|
|
|
|
|
33.0 |
|
Long-term debt current portion |
|
|
1.1 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
Discontinued operations current liabilities |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
190.8 |
|
|
|
(8.6 |
) |
|
|
(1.1 |
) |
|
|
181.1 |
|
Long-term liabilities |
|
|
49.0 |
|
|
|
17.5 |
|
|
|
2.5 |
|
|
|
69.0 |
|
Long-term debt |
|
|
1.2 |
|
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
Discontinued operations liabilities (liabilities
subject to compromise) |
|
|
73.5 |
|
|
|
(73.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314.5 |
|
|
|
(65.8 |
) |
|
|
1.4 |
|
|
|
250.1 |
|
Liabilities subject to compromise |
|
|
4,388.0 |
|
|
|
(4,388.0 |
) |
|
|
|
|
|
|
|
|
Minority interests |
|
|
.7 |
|
|
|
(.7 |
) |
|
|
|
|
|
|
|
|
Commitments and contingencies Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
.8 |
|
|
|
.2 |
(d) |
|
|
(.8 |
) |
|
|
.2 |
|
Additional capital |
|
|
538.0 |
|
|
|
480.2 |
(d) |
|
|
(538.0 |
) |
|
|
480.2 |
|
Common stock owned by Union VEBA subject to transfer
restrictions |
|
|
|
|
|
|
(151.1 |
)(c) |
|
|
|
|
|
|
(151.1 |
) |
Accumulated deficit |
|
|
(3,635.3 |
) |
|
|
3,155.5 |
(e) |
|
|
479.8 |
(f) |
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
(8.8 |
) |
|
|
|
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(3,105.3 |
) |
|
|
3,484.8 |
|
|
|
(50.2 |
) |
|
|
329.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,597.9 |
|
|
$ |
(969.7 |
) |
|
$ |
(48.8 |
) |
|
$ |
579.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
(a) |
|
Reflects impacts on the Effective Date of implementing the Plan,
including the settlement of liabilities subject to compromise and
related payments, distributions of cash and new shares of common stock
and the cancellation of predecessor common stock (see Note 21).
Includes the reclassification of approximately $21.0 from Liabilities
subject to compromise to Long-term liabilities in respect of certain
pension and benefit plans retained by the Company pending the outcome
of the litigation with the Pension Benefit Guaranty Corporation
(PBGC). |
|
(b) |
|
Reflects the adjustments to reflect fresh start accounting. These
include the write up of Inventories (see Note 3) and Property, plant
and equipment to their appraised values and the elimination of
Accumulated deficit and Additional paid in capital. The fresh start
adjustments for intangible assets and stockholders equity are based
on a third party appraisal report. |
|
|
|
In accordance with US GAAP, the reorganization value is allocated to individual assets and
liabilities by first allocating value to current assets, current liabilities and monetary and
similar long-term items for which specific market values are determinable. The remainder is
allocated to long-term assets such as property, plant and equipment, equity investments,
identified intangibles and unidentified intangibles (e.g, goodwill). To the extent that there
is insufficient value to allocate to long-term assets after first allocating to the current,
monetary and similar items, such shortfall is first used to reduce unidentified intangibles to
zero and then to proportionately reduce the amount allocated to property, plant and equipment,
equity investments and identified intangibles based on the initial (pre-reorganization value
allocation) assessed fair value. In allocating the reorganization value, the Company determined
that the value of the long-term assets exceeded the amount of reorganization value available to
be allocated to such items by approximately $187.2. Such excess value was allocated to
Property, plant and equipment, Investment in unconsolidated affiliate and Identified
intangibles in the following amounts based on initial fair value assessments determined by a
third party appraisal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraised Value |
|
Allocation of |
|
Opening Balance |
|
|
Based on Third |
|
Reorganization |
|
Sheet Amount at |
|
|
Party Appraisal |
|
Value Shortfall |
|
July 1, 2006 |
Property, plant and equipment |
|
$ |
299.8 |
|
|
$ |
(160.1 |
) |
|
$ |
139.7 |
|
Investment in and advances to unconsolidated affiliate |
|
$ |
24.0 |
|
|
$ |
(12.9 |
) |
|
$ |
11.1 |
|
Identified intangibles |
|
$ |
26.5 |
|
|
$ |
(14.2 |
) |
|
$ |
12.3 |
|
|
|
|
(c) |
|
As more fully discussed in Note 10, after discussions with the staff of the
Securities and Exchange Commission, the Company concluded that, while the
Companys only obligations in respect of two VEBAs is an annual variable
contribution obligation based primarily on earnings and capital spending,
the Company should account for the VEBAs as defined benefit postretirement
plans with a cap. |
|
(d) |
|
Reflects the issuance of new common stock to pre-petition creditors. |
|
(e) |
|
Reflects gain extinguishment of obligations from implementation of the Plan. |
|
(f) |
|
Reflects fresh start loss of $47.4 and elimination of retained deficit. |
87
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Inventory.
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 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:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Fabricated Products segment |
|
|
|
|
|
|
|
|
Finished products |
|
$ |
73.4 |
|
|
$ |
68.6 |
|
Work in process |
|
|
81.3 |
|
|
|
76.9 |
|
Raw materials |
|
|
69.1 |
|
|
|
49.5 |
|
Operating supplies and repairs and maintenance parts |
|
|
13.2 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
237.0 |
|
|
|
207.5 |
|
Lower of cost or market inventory valuation |
|
|
(65.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171.5 |
|
|
|
207.5 |
|
Primary Aluminum segment |
|
|
|
|
|
|
|
|
Primary aluminum |
|
|
.8 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
$ |
172.3 |
|
|
$ |
207.6 |
|
|
|
|
|
|
|
|
The Company recorded a net non-cash LIFO benefit of approximately $7.5 and $14.0 during 2008
and 2007, respectively, and net non-cash LIFO charges of $3.3, and $21.7 for the period from
July 1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1, 2006,
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 Companys emergence from chapter 11 bankruptcy on July 6, 2006, given the
application of fresh start accounting, was higher than long term historical averages. Since the Company values its inventories on a LIFO basis, with
the inevitable ebb and flow of business cycles, non-cash LIFO charges can result when inventory
levels drop and metal prices decline, and potential lower of cost and market adjustments will
result when metal prices decline and margins compress. During the fourth quarter of 2008, the
Company recorded a lower of cost or market adjustment of $65.5 due to continued decline in the
London Metal Exchange price of primary aluminum.
4. Investment In and Advances To Unconsolidated Affiliate.
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 Companys equity in income before income taxes of Anglesey is treated as a reduction (increase)
in Cost of products sold gross of our share of United Kingdom corporation tax. The income tax
effects of the Companys equity in income are included in the Companys income tax provision.
Summary of Angleseys Financial Position (1)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Current assets(2) |
|
$ |
125.2 |
|
|
$ |
160.0 |
|
Non-current assets (primarily property, plant, and equipment, net) |
|
|
27.8 |
|
|
|
52.0 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
153.0 |
|
|
$ |
212.0 |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
32.8 |
|
|
$ |
81.1 |
|
Long-term liabilities |
|
|
21.5 |
|
|
|
26.2 |
|
Stockholders equity |
|
|
98.7 |
|
|
|
104.7 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
153.0 |
|
|
$ |
212.0 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance sheet items were translated based on the period end exchange rate. |
|
(2) |
|
Includes cash and cash equivalents of $46.5 at December 31, 2008 and
$85.2 at December 31, 2007. |
88
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary of Angleseys Operations (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Net sales |
|
$ |
312.3 |
|
|
$ |
408.7 |
|
|
$ |
198.1 |
|
|
$ |
170.1 |
|
Costs and expenses |
|
|
(297.4 |
) |
|
|
(319.7 |
) |
|
|
(155.2 |
) |
|
|
(132.1 |
) |
Provision for income taxes |
|
|
(9.9 |
) |
|
|
(26.0 |
) |
|
|
(12.2 |
) |
|
|
(11.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5.0 |
|
|
$ |
63.0 |
|
|
$ |
30.7 |
|
|
$ |
26.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys equity in income
(loss)(2) |
|
$ |
(1.5 |
) |
|
$ |
33.4 |
|
|
$ |
18.3 |
|
|
$ |
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received |
|
$ |
3.9 |
|
|
$ |
14.3 |
|
|
$ |
9.1 |
|
|
$ |
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income statement items were translated based on the average exchange rate for the periods. |
|
(2) |
|
The Companys equity income (loss) differs from 49% of the summary net income (loss) from
Anglesey primarily due to (a) share based compensation adjustments of $(2.6), $4.0, $1.8
and zero for 2008, 2007, the period from July 1, 2006 through December 31, 2006 and the
period from January 1, 2006 to July 1, 2006, respectively, relating to Angleseys
separate reimbursement agreement with its parent (Rio Tinto) under Angleseys share
based award arrangement (see discussion below) and, (b) US GAAP adjustment relating to
Angleseys CARO (defined below in Note 5) in the amount of $(1.3), $(1.3), $(.3), and
$(.3) for 2008, 2007, the period from July 1, 2006 through December 31, 2006 and the
period from January 1, 2006 to July 1, 2006, respectively, (see Note 5). |
On June 12, 2008, Anglesey suffered a significant failure in the rectifier yard that resulted
in a localized fire in one of the power transformers. As a result of the fire, Anglesey was
operating at one third of its production capacity during the latter half of June and incurred
incremental costs, primarily associated with repair and maintenance costs, as well as loss of
margin due to the outage. Anglesey has property damage and business interruption insurance policies
in place and expects to recover (net of applicable deductibles) the incremental costs and any loss
of margin (assuming production that has been or will be lost due to the outage sold at primary
aluminum prices that would have been applicable on such volume) due to business interruption
through its insurance coverage. A partial insurance settlement payment of $20 was received in
December 2008 of which $10 was recorded as the Companys equity income. The timing and the total
amount of any remaining insurance recovery is uncertain. Anglesey resumed normal production in
December 2008.
The Company and Anglesey have interrelated operations. The Company is responsible for selling
alumina to Anglesey in respect of its ownership percentage. The Company has a contract
in place to purchase alumina that provides adequate alumina for operations
through September 2009. The Company is responsible
for purchasing primary aluminum from Anglesey in respect to its ownership percentage at prices tied
to primary aluminum market prices.
Purchases from and sales to Anglesey were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
Predecessor |
|
|
Year Ended |
|
Year Ended |
|
through |
|
January 1, 2006 |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
to |
|
|
2008 |
|
2007 |
|
2006 |
|
July 1, 2006 |
Purchases |
|
$ |
155.9 |
|
|
$ |
199.3 |
|
|
$ |
95.0 |
|
|
$ |
82.4 |
|
Sales |
|
|
52.1 |
|
|
|
50.2 |
|
|
|
24.4 |
|
|
|
24.9 |
|
89
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2008 and 2007, the receivables from Anglesey were $11.8 and $9.5,
respectively, and payables to Anglesey were $27.5 and $18.6, respectively.
Anglesey operates under a power agreement that provides sufficient power to sustain its
aluminum reduction operations at full capacity through September 2009. The nuclear plant that
supplies power to Anglesey is currently slated for decommissioning in late 2010. Anglesey has
worked intensively with government authorities and agencies to find a sustainable alternative to
the power supply needs of the smelter, but has been unable to reach a feasible solution. In January
of 2009, the Company announced that it expects Anglesey to fully curtail its smelting operations at
the end of the September 2009, when its current power contract expires. Although Anglesey will
continue to pursue alternative sources of affordable power, as of the date of filing of this
Report, no sources have been identified that would allow the uninterrupted continuation of smelting
operations. Additionally, Anglesey is expected to evaluate alternative operating activities in line
with the needs of the local community and market opportunities, including the potential
continuation of remelt and casting operations and the production of anodes for use by other
smelting facilities. Taking into account Angleseys inability to obtain affordable power, the
resulting expected curtailment of smelting operations, the growing uncertainty with respect to the
future of Angleseys operations, and Angleseys expected cash requirements for redundancy and
pension payments, the Company does not expect to receive any dividends from Anglesey in the future
and as a result, fully impaired its 49% equity investment in Anglesey in its 2008 fourth quarter
results which amounted to be $37.8. During the last five years, cash dividends received were as
follows: 2008 $3.9, 2007 $14.3, 2006 $11.8, 2005 $9.0, and 2004 $4.5.
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 Notes to Consolidated Financial
Statements included in the Companys Annual Report on Form 10-K for the year ended December 31,
2007). In accordance with Accounting Principles Board Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock (APB No. 18), the difference of $11.6 between the
Companys share of Angleseys equity and the investment amount reflected
in the Companys
Consolidated Balance Sheet was being amortized (included in Cost of products sold) over the period
from July 2006 to September 2009, the end of Angleseys current power contract, and thereby the end
of the useful life based on the stated term of that contract. The non-cash amortization was
approximately $3.6, $3.6 and $1.8 for 2008, 2007 and the period from July 1, 2006 through December
31, 2006, respectively. At December 31, 2008, the remaining unamortized amount was $2.7. The
Company does not expect to amortize the remaining balance as it is deemed
unrecoverable as discussed above.
During 2008 and 2007, the Company recorded charges of $(.2) and $.3, respectively, for
share-based equity compensation for employees of Anglesey who participate in the employee share
savings plan of its parent (Rio Tinto). These charges have been recognized as reductions in the
equity in earnings of Anglesey for 2008 and 2007. In accordance with APB No. 18, these transactions
have been accounted for as capital transactions of Anglesey. As a result, the Company recorded
$(.2) and $.3 (before considering tax effect) in its Additional capital for 2008 and 2007, respectively, rather than adjusting 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 2008, Anglesey made payments totaling $3.1 to Rio Tinto under this agreement. In accordance
with APB No. 18, the Companys ownership share of this payment has been accounted for as a capital
distribution resulting in a reduction of $1.5 in both the Companys Additional capital and the
value of its investment in Anglesey on the Consolidated Balance Sheet.
5. Conditional Asset Retirement Obligations
The Company has conditional asset retirement obligations, or 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
90
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
or piping) at certain of the older plants
if such plants were to undergo major renovation or be demolished. No plans
currently exist for any such renovation or demolition of such facilities and the Companys
current assessment is that the most probable scenarios are that no such significant CARO would be
triggered for 20 or more years, if at all.
The Companys estimates and judgments that affect the probability weighted estimated future
contingent cost amounts did not change during the year ended December 31, 2008. However, there were
revisions to the estimated timing for certain future contingent costs during the quarters ended
June 30, 2008 and December 31, 2008 that resulted in an immaterial charge to Net income. In
addition, the Companys results for 2008, 2007 and for the periods from July 1, 2006 through
December 31, 2006 and from January 1, 2006 to July 1, 2006, included an immaterial incremental
amount of depreciation expense and an incremental accretion of the estimated liability of $.3, $.2,
$.1 and $.1, respectively, (recorded in Cost of products sold). The estimated fair value of CARO
liabilities at December 31, 2008 was $3.3.
Anglesey
(see Note 4) also recorded CAROs of approximately $24.0 in its financial statements
in prior years. The time period over which the fair value of the CAROs is estimated under UK GAAP
treatment applied by Anglesey is different from the time period over which the fair value of the
CAROs is estimated under SFAS No. 143 or FIN 47. As such, the resulting accretion expenses are
different under UK GAAP and US GAAP. Accordingly, the Company adjusted its equity in earnings from
Anglesey for 2008, 2007, the period from July 1, 2006 through December 31, 2006 and the period from
January 1, 2006 to July 1, 2006 by $1.3, $1.3, $.3, and $.3, respectively, to reflect the impact of
applying US GAAP with respect to the Anglesey CAROs.
For purposes of the Companys fair value estimates with respect to the CARO liabilities, a
credit adjusted risk free rate of 7.5% was used.
6. Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The major classes of property, plant, and
equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Land and improvements |
|
$ |
22.8 |
|
|
$ |
12.9 |
|
Buildings |
|
|
29.6 |
|
|
|
25.2 |
|
Machinery and equipment |
|
|
211.0 |
|
|
|
168.7 |
|
Construction in progress |
|
|
63.3 |
|
|
|
33.0 |
|
|
|
|
|
|
|
|
|
|
|
326.7 |
|
|
|
239.8 |
|
Accumulated depreciation |
|
|
(30.0 |
) |
|
|
(17.1 |
) |
|
|
|
|
|
|
|
Property, plant, and equipment, net |
|
$ |
296.7 |
|
|
$ |
222.7 |
|
|
|
|
|
|
|
|
At December 31, 2008, the major components of Construction in progress were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Heat treat expansion project (Spokane, Washington facility) |
|
$ |
8.9 |
|
|
$ |
9.3 |
|
Rod, bar, and tube value stream investments (including
facility in Kalamazoo, Michigan) |
|
|
26.1 |
|
|
|
7.2 |
|
Other |
|
|
28.3 |
|
|
|
16.5 |
|
|
|
|
|
|
|
|
Total Construction in progress |
|
$ |
63.3 |
|
|
$ |
33.0 |
|
|
|
|
|
|
|
|
In 2008, the Company recorded an asset impairment charge of $4.3 in connection with the
restructuring plans to shut down the Tulsa, Oklahoma facility and curtail operations at the
Bellwood, Virginia location. The impairment charge is included in Cost of products sold
restructuring costs and other charges.
For 2008, 2007, the period from July 1, 2006 through December 31, 2006 and the period from
January 1, 2006 to July 1, 2006, the Company recorded depreciation expense of $14.6, $11.8, $5.2,
and $9.7, respectively, relating to
91
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Companys operating facilities in its Fabricated Products
segment. An immaterial amount of depreciation expense was also recorded in the Companys Corporate
segment for all periods.
7. Supplemental Balance Sheet Information
Trade Receivables. Trade receivables were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Billed trade receivables |
|
$ |
99.2 |
|
|
$ |
96.0 |
|
Unbilled trade receivables (Note 1) |
|
|
.1 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
99.3 |
|
|
|
97.9 |
|
Allowance for doubtful receivables |
|
|
(.8 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
$ |
98.5 |
|
|
$ |
96.5 |
|
|
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets. Prepaid expenses and other current assets were
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Current derivative assets (Note 13) |
|
$ |
32.2 |
|
|
$ |
1.5 |
|
Current deferred tax assets |
|
|
84.1 |
|
|
|
59.2 |
|
Option premiums paid |
|
|
5.3 |
|
|
|
|
|
Short term restricted cash |
|
|
1.4 |
|
|
|
1.5 |
|
Prepaid expenses |
|
|
5.4 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
Total |
|
$ |
128.4 |
|
|
$ |
66.0 |
|
|
|
|
|
|
|
|
Other Assets. Other assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Derivative assets (Note 13) |
|
$ |
5.2 |
|
|
$ |
24.5 |
|
Option premiums paid |
|
|
4.6 |
|
|
|
3.1 |
|
Restricted cash |
|
|
35.4 |
|
|
|
14.4 |
|
Long term income tax receivable |
|
|
4.4 |
|
|
|
|
|
Other |
|
|
.9 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
Total |
|
$ |
50.5 |
|
|
$ |
43.1 |
|
|
|
|
|
|
|
|
Other Accrued Liabilities. Other accrued liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Current derivative liabilities (Note 13) |
|
$ |
79.0 |
|
|
$ |
6.6 |
|
Current FIN 48 income tax liabilities |
|
|
11.8 |
|
|
|
|
|
Accrued income taxes and taxes payable |
|
|
1.8 |
|
|
|
2.2 |
|
Accrued book overdraft see below |
|
|
4.0 |
|
|
|
5.4 |
|
Dividend payable |
|
|
|
|
|
|
3.7 |
|
Accrued annual VEBA contribution |
|
|
4.9 |
|
|
|
8.8 |
|
Accrued Freight |
|
|
2.1 |
|
|
|
2.1 |
|
Environmental Accrual |
|
|
3.3 |
|
|
|
1.7 |
|
Other |
|
|
7.0 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
Total |
|
$ |
113.9 |
|
|
$ |
36.6 |
|
|
|
|
|
|
|
|
The accrued book overdraft balance at December 31, 2008 and 2007 represents uncleared cash
disbursements.
92
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term Liabilities. Long-term liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Long term FIN 48 income tax liabilities |
|
$ |
10.0 |
|
|
$ |
26.5 |
|
Workers compensation accruals |
|
|
15.9 |
|
|
|
17.2 |
|
Environmental accruals |
|
|
6.3 |
|
|
|
6.0 |
|
Derivative liabilities (Note 13) |
|
|
27.9 |
|
|
|
1.9 |
|
Asset retirement obligations |
|
|
3.3 |
|
|
|
3.0 |
|
Other long term liabilities |
|
|
1.9 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
65.3 |
|
|
$ |
57.0 |
|
|
|
|
|
|
|
|
8. Secured Revolving Credit Facility and Other Long Term Debt
Secured credit facility and long term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Revolving Credit Facility |
|
$ |
36.0 |
|
|
$ |
|
|
Note payable |
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
43.0 |
|
|
|
|
|
Less Current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
43.0 |
|
|
$ |
|
|
|
|
|
|
|
|
|
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 Companys option, plus a specified variable percentage determined by
reference to the then remaining borrowing availability under the Revolving Credit Facility. The
Revolving Credit Facility may, subject to certain conditions and the agreement of lenders
thereunder, be increased to up to $275.0 at the request of the Company. During the fourth quarter
of 2007, the 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 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 December 31, 2008, the Company was in compliance with all covenants contained in the
Revolving Credit Facility.
During the third quarter of 2008, the Company began utilizing the credit line under the
Revolving Credit Facility. At December 31, 2008, the Company had $218.0 available for borrowing and
letters of credit under the Revolving Credit Facility, of which $36.0 of borrowings and $10.0 of
letters of credit were outstanding, leaving $172.0 available for additional borrowing and letters
of credit. The average interest rate applicable to borrowings under Revolving Credit Facility was
3.1% at December 31, 2008.
93
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to the non-cash charges and resulting net income impact in the fourth quarter of
2008, the Companys revolving credit agreement would have precluded payment of its normal quarterly dividend
due to a limitation based on net earnings. As a result, on January 9, 2009, the Company and certain
of subsidiaries of the Company entered into an amendment pursuant to which the lenders agreed to
permit the Company, among other things, to declare and pay dividends ratably with respect to its common
shares in an aggregate amount not to exceed $25 during any fiscal year,
provided that no such dividend may be paid unless at the time of such payment and after giving
effect thereto, (i) no default is continuing or would result therefrom and (ii) the borrowing
availability under the revolving credit facility is at least $100. As part of the
amendment, the Company agreed to, among other things, an increase of the non-use commitment fee
rate from 0.20% to 0.50% and an increase of the applicable interest rate margin. The borrowings
under the revolving credit facility bear interest at a rate equal to a base rate or LIBOR, at the Companys option, plus a specified variable percentage determined by reference to the then-remaining
borrowing availability under the revolving credit facility. The amendment increases the specified
variable percentages. The amendment also prohibits the Company from repurchasing its own common
shares.
On December 19, 2008, the Company executed a promissory note (the Note) in the amount of
$7.0 in connection with the purchase of real property of the Los Angeles, California facility.
Interest is payable on the unpaid principal balance of this Note monthly in arrears on the
outstanding principal balance at the prime rate, as defined in the Note, plus 1.5%, in no event to
exceeding 10% per annum, on the first day of each month commencing on February 1, 2009. A principal
payment of $3.5 will be due on February 1, 2012 and the remaining $3.5 will be due on February 1,
2013. The Note is secured by the deed of trust
of the property. For the twelve months ended December 31, 2008, the Company incurred an immaterial amount of
interest expense relating to this Note. The interest rate applicable to borrowings under the Note
was 4.8% at December 31, 2008.
9. Income Tax Matters
Tax Attributes. Although the Company had approximately $981 of tax attributes, including the
NOL carry-forwards 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. The process included extensive review of both
positive and negative evidence including the Companys earnings history; existing contracts and
backlog; future earnings; adverse recent occurrences; carry forward periods; an assessment of the
industry; loss contingencies; and the impact of timing differences. 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 recorded 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.
At December 31, 2008, the Company had $878.6 of NOL carryforwards available to reduce future
cash payments for income taxes in the United States. Of the $878.6 of NOL carryforwards at December
31, 2008, $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 $32.1 of other tax attributes
including $31.7 of alternative minimum tax (AMT) credit carryforwards with an indefinite life,
available to offset regular federal income tax requirements. The remaining tax attributes are
general business credits that will expire periodically through 2011.
Pursuant to the Plan, to preserve the NOL carryforwards that may be available to the Company
after emergence, on the Effective Date, the Companys certificate of incorporation was amended and
restated to, among other things,
94
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
include certain restrictions on the transfer of common stock and
the Company and the Union VEBA, the Companys largest stockholder, entered into a stock transfer
restriction agreement.
Tax benefit (Provision). (Loss) income before income taxes and minority interests by
geographic area (excluding discontinued operations and cumulative effect of change in accounting
principle) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Domestic |
|
$ |
(105.9 |
) |
|
$ |
127.9 |
|
|
$ |
27.0 |
|
|
$ |
3,082.6 |
|
Foreign |
|
|
14.6 |
|
|
|
54.5 |
|
|
|
22.9 |
|
|
|
60.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(91.3 |
) |
|
$ |
182.4 |
|
|
$ |
49.9 |
|
|
$ |
3,143.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes are classified as either domestic or foreign, based on whether payment is made or
due to the United States or a foreign country. Certain income classified as foreign is also subject
to domestic income taxes.
The benefit (provision) for income taxes on (loss) income before income taxes and minority
interests (excluding discontinued operations and cumulative effect of change in accounting
principle) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
Foreign |
|
|
State |
|
|
Total |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
(0.8 |
) |
|
$ |
.5 |
|
|
$ |
(1.3 |
) |
|
$ |
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
64.3 |
|
|
|
(.2 |
) |
|
|
5.5 |
|
|
|
69.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit applied to
(increase)/decrease Additional
capital/Other comprehensive income |
|
|
(33.4 |
) |
|
|
(6.9 |
) |
|
|
(4.9 |
) |
|
|
(45.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30.1 |
|
|
$ |
(6.6 |
) |
|
$ |
(0.7 |
) |
|
$ |
22.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
(22.1 |
) |
|
$ |
(.4 |
) |
|
$ |
(22.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
(.5 |
) |
|
|
|
|
|
|
(.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit applied to
(increase)/decrease Additional
capital/Other comprehensive income |
|
|
(55.8 |
) |
|
|
3.9 |
|
|
|
(6.5 |
) |
|
|
(58.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(55.8 |
) |
|
$ |
(18.7 |
) |
|
$ |
(6.9 |
) |
|
$ |
(81.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 through December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
(9.4 |
) |
|
$ |
(.5 |
) |
|
$ |
(9.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit applied to reduce intangible
assets and increase Additional
capital |
|
|
(14.1 |
) |
|
|
|
|
|
|
(1.3 |
) |
|
|
(15.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
1.6 |
|
|
|
|
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(14.1 |
) |
|
$ |
(7.8 |
) |
|
$ |
(1.8 |
) |
|
$ |
(23.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
January 1, 2006 to July 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
.9 |
|
|
$ |
(7.9 |
) |
|
$ |
(.1 |
) |
|
$ |
(7.1 |
) |
Deferred |
|
|
|
|
|
|
.9 |
|
|
|
|
|
|
|
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
.9 |
|
|
$ |
(7.0 |
) |
|
$ |
(.1 |
) |
|
$ |
(6.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
95
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation between the (provision) benefit for income taxes and the amount computed by
applying the federal statutory income tax rate to income (loss) before income taxes and minority
interests (excluding discontinued operations and cumulative effect of change in accounting
principle) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
Predecessor |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
January 1, 2006 |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
to |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
July 1, 2006 |
|
Amount of federal income tax benefit
(expense) based on the statutory rate |
|
$ |
32.0 |
|
|
$ |
(63.8 |
) |
|
$ |
(17.5 |
) |
|
$ |
(1,100.1 |
) |
Decrease (increase) in valuation
allowances(1) |
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
1,099.3 |
|
Non-deductible Expense |
|
|
(0.3 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit |
|
|
(0.5 |
) |
|
|
(4.5 |
) |
|
|
(1.2 |
) |
|
|
|
|
Foreign income taxes |
|
|
(4.7 |
) |
|
|
(11.5 |
) |
|
|
(4.7 |
) |
|
|
(.5 |
) |
Other |
|
|
0.2 |
|
|
|
|
|
|
|
(.3 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
22.8 |
|
|
$ |
(81.4 |
) |
|
$ |
(23.7 |
) |
|
$ |
(6.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2008 the valuation allowance was $29.5 compared to
$24.8 at December 31, 2007. The entire change in the valuation was
recorded as a charge to income tax provision. |
The table above reflects a full statutory U.S. tax provision despite the fact that the Company
is only paying AMT in the U.S. in some years. See Tax Attributes above.
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 amounts used for income tax purposes. The components of the Companys net deferred income tax
assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Loss and credit carryforwards |
|
$ |
390.3 |
|
|
$ |
398.1 |
|
Pension benefits |
|
|
1.9 |
|
|
|
3.3 |
|
Other assets |
|
|
52.1 |
|
|
|
15.3 |
|
Inventories and other |
|
|
22.1 |
|
|
|
13.6 |
|
Valuation allowances |
|
|
(29.5 |
) |
|
|
(24.8 |
) |
|
|
|
|
|
|
|
Total deferred income tax assets net |
|
|
436.9 |
|
|
|
405.5 |
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant, and equipment |
|
|
(23.3 |
) |
|
|
(14.7 |
) |
VEBA |
|
|
(16.2 |
) |
|
|
(50.8 |
) |
Other |
|
|
|
|
|
|
(12.2 |
) |
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
(39.5 |
) |
|
|
(77.7 |
) |
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities) |
|
$ |
397.4 |
(1) |
|
$ |
327.8 |
(2) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the total net deferred income tax assets of $397.4, $84.1 was
included in Prepaid expenses and other current assets and $313.3 was
presented as Deferred tax assets, net on the Consolidated Balance
Sheet as of December 31, 2008. |
|
(2) |
|
Of the total net deferred income tax assets of $327.8, $59.2 was
included in Prepaid expenses and other current assets and $268.6 was
presented as Deferred tax assets, net on the Consolidated Balance
Sheet as of December 31, 2007. |
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
96
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2008, due to uncertainties surrounding the realization of some of the Companys
deferred tax assets including state NOLs sustained during the prior years and expiring tax
benefits, the Company has a valuation allowance of $29.5 against its deferred tax assets. When
recognized, the tax benefits relating to any reversal of the valuation allowance will be recorded
as a reduction of income tax expense pursuant to SFAS No.141R.
Other. The Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states and foreign jurisdictions. The audit of the Companys federal
income tax return for the 2004 tax year was completed in April 2008. The results of the audit did
not have a material effect on the Companys 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. If the
outcome of the Notice of Objection is in favor of the Company, an
expected payment of approximately $7 will be paid in the third
quarter of 2009, otherwise approximately $11.8 may be required to be paid. The 2002 to 2004 tax years are
currently under audit by the Canada Revenue Agency. The Company does not expect 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 U.S. federal or state liability has been recorded for the undistributed earnings of the
Companys Canadian subsidiary at December 31, 2008. These undistributed earnings are considered to
be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or
foreign withholding taxes has been provided on such undistributed earnings. Determination of the
potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes
is not practicable because of the complexities associated with its hypothetical calculation.
In accordance with the requirements of SOP 90-7, the Company adopted the provisions of FIN 48
on July 1, 2006. The Company had gross unrecognized tax benefits of $15.8 and $19.7 at December 31,
2008 and December 31, 2007, respectively. The change during the twelve months ended December 31,
2008 was primarily due to currency fluctuations and change in tax positions. The change during the year ended December 31, 2007 was primarily due to currency fluctuations and
$3.0 of additional unrecognized tax benefits that were offset by net
operating losses. The
Company recognizes interest and penalties related to these unrecognized tax benefits in the income
tax provision. The Company had $9.4 and $10.7 accrued at December 31, 2008 and December 31, 2007,
respectively, for interest and penalties which were included in Long-term liabilities in the
Consolidated Balance Sheets. Of the $9.4 of total interest and penalties at December 31, 2008, $5.2
is included in current liabilities in the Consolidated Balance Sheet.
During the year
ended December 31, 2008 and 2007, the Company recognized $(1.3)
and $5.1 in interest and penalties, respectively. During
the year ended December 31, 2008, the foreign currency impact on gross unrecognized tax
benefits, interest and penalties resulted in a $5.2 currency translation adjustment that was
recorded in Accumulated other comprehensive income (loss), of which
$2.9 related to gross
unrecognized tax benefits and $2.3 related to accrued interest and
penalties. In 2007, the foreign currency impact on gross unrecognized
tax benefits, interest and penalties resulted in a $3.8 currency
translation adjustment that was recorded in Accumulated other
comprehensive income, of which $2.7 related to gross unrecognized tax
benefits and $1.1 related to accrued interest and penalties. During
the year ended December 31, 2008, the Company also reduced unrecognized tax benefits and the related
interest and penalties by $.8 and $1.0, respectively, relating to a Canadian pre-emergence
exposure. In accordance with fresh start accounting, the Company recorded the amount in Additional
capital rather than in income tax provision. The Company expects its gross unrecognized tax
benefits to be reduced by $2.7 within the next twelve months.
A reconciliation of changes in the gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008 |
|
|
December 31,
2007 |
|
Gross unrecognized tax benefits at beginning of period |
|
$ |
19.7 |
|
|
$ |
14.6 |
|
Gross increases for tax positions of prior years |
|
|
1.9 |
|
|
|
2.5 |
|
Gross decreases for tax positions of prior years |
|
|
(3.2 |
) |
|
|
|
|
Gross increases for tax positions of current years |
|
|
0.3 |
|
|
|
.2 |
|
Settlements |
|
|
|
|
|
|
(.3 |
) |
Foreign currency translation |
|
|
(2.9 |
) |
|
|
2.7 |
|
|
|
|
|
|
|
|
Gross unrecognized
tax benefits at end of period |
|
$ |
15.8 |
(1) |
|
$ |
19.7 |
(2) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the $15.8, $14.1 is recorded as a FIN 48 liability on the
Consolidated Balance Sheets and $1.7 is offset by net operating losses
and indirect tax benefits at December 31, 2008. If and when the $15.8 ultimately is
recognized, $15.2 will go through the Companys income tax provision
and thus affect the effective tax rate in future periods. |
|
(2) |
|
Of the $19.7 at December 31, 2007, $15.8 is recorded as a
FIN 48 liability on the Consolidated Balance Sheets in Long-term liabilities and
$3.9 is offset by net operating losses and indirect tax benefits. If
and when the $19.7 ultimately is recognized, $15.8 will go through
the Companys income tax provision and thus affecting the
effective tax rate in future periods. |
97
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the sale of the Companys interests in and related to Queensland Alumina
Limited (QAL), the Company made payments totaling approximately $8.5 for AMT in the United States
(approximately $8.0 of federal AMT and approximately $.5 of state AMT). Such payments were made in
the fourth quarter of 2005. Upon completion of the Companys 2005 federal income tax return, the
Company determined that approximately $1.0 of AMT was overpaid and was refundable. The Company
applied for the refund in the 2005 federal income tax return filed in September 2006 and received
the refund in October 2006. The Company believed that the remainder of the United States AMT
amounts paid in respect of the sale of its QAL interests should, in accordance with the
Intercompany Settlement Agreement entered into in connection with the Companys chapter 11
bankruptcy, be reimbursed to the Company from the funds held by the liquidating trustee for the
plan of liquidation of two former
subsidiaries of the Company (Kaiser Alumina Australia Corporation and Kaiser Finance
Corporation). A claim for reimbursement of $7.2 was made in January 2007. In May 2007, the
liquidating trust approved the claim and the Company received the $7.2 reimbursement, which amount
was recorded as a benefit in Other operating benefits (charges), net in the second quarter of 2007
(see Note 14).
Income tax matters of the Predecessor are discussed in Note 23.
10. Employee Benefits
Pension and Similar Plans. Pensions and similar plans include:
|
|
|
Monthly contributions of one dollar per hour worked by each bargaining unit employee to
the appropriate multi-employer pension plans sponsored by the United Steelworkers and
International Association of Machinists and certain other unions at six of our production
facilities. This obligation came into existence in December 2006 for four of our production
facilities upon the termination of four defined benefit plans. The arrangement for the other
two locations came into existence during the first quarter of 2005. The Company currently
estimates that contributions will range from $2 to $4 per year. |
|
|
|
|
A defined contribution 401(k) savings plan for hourly bargaining unit employees at five
of the Companys production facilities. The Company is required to make contributions to
this plan for active bargaining unit employees at these production facilities ranging from
$800 to $2,400 per employee per year, depending on the employees age and/or service. This
arrangement came into existence in December 2004 for two production facilities upon the
termination of one defined benefit plan. The arrangement for the other three locations came
into existence during December 2006. The Company currently estimates that contributions to
such plans will range from $1 to $3 per year. |
|
|
|
|
A defined benefit plan for our salaried employees at the Companys facility in London,
Ontario with annual contributions based on each salaried employees age and years of
service. At December 31, 2008, approximately 53% of the plan assets are invested in equity
securities, 40% of plan assets are invested in debt securities and the remaining plans
assets are invested in short term securities. The Companys investment committee reviews and
evaluates the investments portfolio. The asset mix target allocation on
the long term is approximately 60% in equity securities and 36% in debt securities with the
remaining assets in short term securities (see Part II Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, of this Report for discussion on
long tern rate of return assumption). |
|
|
|
|
A defined contribution savings plan for salaried and non-bargaining unit hourly providing
for a match of certain contributions made by employees plus a contribution of between 2% and
10% of their compensation depending on their age and years of service. All new hires after
January 1, 2004 receive a fixed 2% contribution. The Company currently estimates that
contributions to such plans will range from $4 to $6 per year. |
|
|
|
|
A non-qualified defined contribution plan for key employees who would otherwise suffer a
loss of benefits under the Companys defined contribution plan as a result of the
limitations by the Bankruptcy Code. |
Postretirement Medical Obligations. As a part of the Companys reorganization efforts, the
Companys postretirement medical plan was terminated in 2004. Participants were given the option of
coverage under the
98
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), with the
Companys filing of its plan of reorganization as the qualifying event, or participation in the
applicable VEBA (the Union VEBA or the VEBA that provides benefits for certain other eligible
retirees and their surviving spouse and eligible dependents (the Salaried VEBA)). Qualifying
bargaining unit employees who did not, or were not eligible to, elect COBRA coverage are covered by
the Union VEBA. The Salaried VEBA covers all other retirees including employees who retired prior
to the 2004 termination of the prior plan or who retire with the required age and service
requirements so long as their employment commenced prior to February 2002. The benefits paid by the
VEBAs are at the sole discretion of the respective VEBA trustees and are outside the Companys
control.
At emergence, the Salaried VEBA received rights to 1,940,100 shares of the Companys newly
issued common stock. However, prior to the Companys emergence, the Salaried VEBA sold its rights
to approximately 940,200
shares and received net proceeds of approximately $31. The remaining approximately 999,900
shares of the Companys common stock held by the Salaried VEBA at July 1, 2006 were unrestricted.
The Salaried VEBA sold its remaining shares during the second half of 2006.
At emergence, the Union VEBA had rights to receive 11,439,900 common shares upon the Companys
emergence from chapter 11 bankruptcy. However, prior to the Companys emergence, the Union VEBA
sold its rights to approximately 2,630,000 shares and received net proceeds of approximately $81.
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. 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 Companys approval under an agreement restricting the Union VEBAs ability to sell
or otherwise transfer its common shares. However, during the first quarter of 2007, the Union VEBA
received approval from the Company 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 upon the
Board of Directors approval. 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 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
24.2% of the outstanding common stock as of December 31, 2008.
As of the date of filing of this Report, the Companys only obligation to the Union VEBA and
the Salaried VEBA is an annual variable cash contribution which, with respect to the Union VEBA
terminates for periods beginning after December 31, 2012. The amount to be contributed to the VEBAs
through 2012 is 10% of the first $20.0 of annual cash flow (as defined; in general terms, the
principal elements of cash flow are earnings before interest expense, provision for income taxes,
and depreciation and amortization less cash payments for, among other things, interest, income
taxes and capital expenditures), plus 20% of annual cash flow, as defined, in excess of $20.0. Such
annual payments may not exceed $20.0 and are also limited (with no carryover to future years) to
the extent that the payments would cause the Companys liquidity to be less than $50.0. Such
amounts are determined on an annual basis and payable within 120 days following the end of 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 (the SEC) (or, if no such report is required to
be filed, within 15 days of the delivery of the independent auditors opinion of the Companys
annual financial statements), whichever is earlier. At December 31, 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 Companys Consolidated Balance Sheets and a corresponding
increase in Net assets in respect of VEBAs. In March 2008, $8.5 was paid to the VEBAs based on the
final calculation of the amount owed under the agreement and the remaining $.3 of the accrual at
the end of December 31, 2007 was released with a corresponding reduction in Net assets in respect
of VEBAs. At December 31, 2008, the Company owed the VEBAs
99
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$4.9 under this arrangement which has
been recorded in Other accrued liabilities in the Companys Consolidated Balance Sheets and a
corresponding increase in net assets in respect of the VEBAs.
For accounting purposes, after discussions with the staff of the SEC, the Company treats the
postretirement medical benefits to be paid by the VEBAs and the Companys related annual variable
contribution obligations as defined benefit postretirement plans with the current VEBA assets and
future variable contributions described above, and earnings thereon, operating as a cap on the
benefits to be paid. While the Companys only obligation to the VEBAs is to pay the annual variable
contribution amount and the Company has no control over the plan assets, the Company nonetheless
accounts for net periodic postretirement benefit costs in accordance with Statement of Financial
Accounting Standards No. 106, Employers Accounting for Postretirement Benefits other than Pensions
and records any difference between the assets of each VEBA and its accumulated postretirement
benefit obligation in the Companys financial statements. Such information must be obtained from
the Salaried VEBA and Union
VEBA on a periodic basis. In general, as more fully described below, given the significance of
the assets currently available and expected to be available to the VEBAs in the future and the
current level of benefits, the cap does not impact the computation of the accumulated
postretirement benefit obligation (APBO). However, should the benefit formulas being used by the
VEBAs increase and/or if the assets were to substantially decrease, it is possible that existing
assets may be insufficient alone to fund such benefits and that the benefits to be paid in future
periods could be reduced to the amount of annual variable contributions reasonably expected to be
paid by the Company in those years. Any such limitations would also have to consider any remaining
amount of excess pre-emergence VEBA contributions made.
Key assumptions made in computing the net obligation of each VEBA and in total at the December
31, 2008 and 2007 include:
With respect to VEBA assets:
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The 4,845,465 shares of the Companys common stock held by the Union VEBA that were not
transferable have been excluded from assets used to compute the net asset or liability of
the Union VEBA, and will continue to be excluded until the restrictions lapse. Such shares
are being accounted for similar to treasury stock in the interim (see Note 1). |
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At December 31, 2008 and 2007, neither VEBA held any unrestricted shares of the Companys
common stock. |
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Based on the information received from the VEBAs at December 31, 2008 and 2007, both the
Salaried VEBA and Union VEBA assets were invested in various managed proprietary funds. |
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The Company assumed that the Salaried VEBA would achieve a long term rate of return of
approximately 4.50% and 5.50% on its assets as of December 31, 2008 and 2007, respectively.
The Company assumed that the Union VEBA would achieve a long term rate of return of
approximately 5.00% and 5.50% on its assets as of December 31, 2008 and 2007, respectively.
The long-term rate of return assumption is based on the Companys expectation of the
investment strategies to be utilized by the VEBAs trustees. |
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The annual variable payment obligation is being treated as a funding/contribution policy
and not counted as a VEBA asset at December 31, 2008 for actuarial purposes. However, the
amount owed under the funding obligation in relation to the results for the year ended
December 31, 2008 has been accrued and is included within Other accrued liabilities and Net
assets in respect of VEBAs. |
With respect to VEBA obligations:
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The APBO for each VEBA has been computed based on the level of benefits being provided by
each VEBA at December 31, 2008 and 2007. |
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The present value of APBO for each VEBA was computed using a discount rate of return of
6.00% at both December 31, 2008 and 2007. |
100
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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Since the Salaried VEBA was paying a fixed annual amount to its constituents at both
December 31, 2008 and 2007, no future cost trend rate increase has been assumed in computing
the APBO for the Salaried VEBA. |
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|
For the Union VEBA, which is currently paying certain prescription drug benefits, an
initial cost trend rate of 12% has been assumed and the trend rate is assumed to decline to
5% by 2013 at both December 31, 2008 and 2007. The trend rate used by the Company was based
on information provided by the Union VEBA and industry data from the Companys actuaries. |
The following recaps the net assets of each VEBA as of December 31, 2008 and 2007 (such
information is also included in the tables required under US GAAP below which roll forward the
assets and obligations):
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December 31, 2008 |
|
|
December 31, 2007 |
|
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|
Union VEBA |
|
|
Salaried VEBA |
|
|
Total |
|
|
Union VEBA |
|
|
Salaried VEBA |
|
|
Total |
|
APBO |
|
$ |
(250.5 |
) |
|
$ |
(70.8 |
) |
|
$ |
(321.3 |
) |
|
$ |
(232.0 |
) |
|
$ |
(62.7 |
) |
|
$ |
(294.7 |
) |
Plan assets |
|
|
306.7 |
|
|
|
56.8 |
|
|
|
363.5 |
|
|
|
353.6 |
|
|
|
76.0 |
|
|
|
429.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability) |
|
$ |
56.2 |
|
|
$ |
(14.0 |
) |
|
$ |
42.2 |
|
|
$ |
121.6 |
|
|
$ |
13.3 |
|
|
$ |
134.9 |
|
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The Companys results of operations included the following impacts associated with the VEBAs:
(a) charges for service rendered by employees; (b) a charge for accretion of interest; (c) a
benefit for the return on plan assets; and (d) amortization of net gains or losses on assets, prior
service costs associated with plan amendments and actuarial differences. The VEBA-related amounts
included in the results of operations are shown in the tables below.
Financial Data.