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, 2010
Commission file number 0-52105
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State of Incorporation)
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94-3030279
(I.R.S. Employer
Identification No.) |
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27422 PORTOLA PARKWAY, SUITE 200,
FOOTHILL RANCH, CALIFORNIA
(Address of principal executive offices)
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92610-2831
(Zip Code) |
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 |
Common Stock, par value $0.01 per share
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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 þ No o
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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated Filer þ |
Accelerated Filer o |
Non-accelerated Filer o
(Do not check if a smaller reporting company) | Smaller
reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the 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, 2010) was approximately $0.5 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 February 16, 2011, there were 19,214,451 shares of common stock of the registrant
outstanding.
Documents Incorporated by Reference. Certain portions of the registrants definitive proxy
statement related to the registrants 2011 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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PART I |
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Item 1. |
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Business |
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1 |
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Item 1A. |
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Risk Factors |
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10 |
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Item 1B. |
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Unresolved Staff Comments |
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21 |
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Item 2. |
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Properties |
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22 |
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Item 3. |
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Legal Proceedings |
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22 |
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
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22 |
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PART II |
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Item 5. |
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Market for Registrants Common Equity and Related Stockholder Matters |
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23 |
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Item 6. |
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Selected Financial Data |
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25 |
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Item 7. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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29 |
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Item 7A. |
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Quantitative and Qualitative Disclosures About Market Risk |
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61 |
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Item 8. |
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Financial Statements and Supplementary Data |
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63 |
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Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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114 |
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Item 9A. |
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Controls and Procedures |
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114 |
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Item 9B. |
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Other Information |
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114 |
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PART III |
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Item 10. |
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Directors and Executive Officers of the Registrant |
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114 |
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Item 11. |
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Executive Compensation |
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114 |
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Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matter |
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114 |
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Item 13. |
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Certain Relationships and Related Transactions |
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114 |
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Item 14. |
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Principal Accountant Fees and Services |
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114 |
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PART IV |
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Item 15. |
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Exhibits and Financial Statement Schedules |
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115 |
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SIGNATURES |
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116 |
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INDEX OF EXHIBITS |
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117 |
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EXHIBITS |
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121 |
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PART I
Item 1. Business
Forward-Looking Statements
This Annual Report on Form 10-K (Report) 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 market segments 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
Founded in 1946, Kaiser Aluminum Corporations primary line of business is the production of
semi-fabricated specialty aluminum products. We also own a 49% interest in Anglesey Aluminium
Limited (Anglesey), which owns and operates a secondary aluminum remelt and casting facility in
Holyhead, Wales.
Our operations consist of one reportable segment in the aluminum industry, Fabricated
Products. In addition to the Fabricated Products segment, we also have three other business units,
which consist of Secondary Aluminum, Hedging, and Corporate and Other. The Secondary Aluminum
business unit sells value added products such as ingot and billet, produced from Anglesey, for
which we receive a portion of a premium over normal commodity market prices. Our Hedging business
unit conducts hedging activities primarily in respect of our exposure to metal-price risks related
to our firm price customer sales contracts. Our Corporate and Other business unit provides general
and administrative support for our operations. For purposes of segment reporting under United
States generally accepted accounting principles (GAAP), we treat the Fabricated Products segment
as its own reportable segment. We combine the three other business units, Secondary Aluminum,
Hedging and the Corporate and Other, into one category, which we refer to as All Other. All Other
is not considered a reportable segment (see Business Operations below).
At December 31, 2010, our Fabricated Products segment operated 10 focused production
facilities in the United States and one in Canada. Through these facilities we manufacture rolled,
extruded, and drawn aluminum products to strategically serve four end market segments: aerospace and high
strength products (which we refer to as Aero/HS products), general engineering products (which we
refer to as GE products), extrusions for automotive applications (which we refer to as Automotive
Extrusions), and other industrial products (which we refer to as Other products). See Business
Operations Fabricated Products Segment below for additional information. In 2010, we produced
and shipped approximately 514.2 million pounds of semi-fabricated aluminum products from these
facilities, which comprised effectively all of our consolidated net sales of approximately $1.1
billion.
We have long-standing relationships with our customers, which consist primarily of blue-chip
companies including leading aerospace companies, automotive suppliers and metal distributors. In
our served markets, we seek to be the supplier of choice by
1
pursuing Best in Class customer
satisfaction and offering a broad product portfolio. We have a culture of continuous improvement
that is facilitated by the Kaiser Production System (KPS), an integrated application of the tools
of Lean manufacturing, Six Sigma
and Total Productive Manufacturing. We believe KPS enables us to continuously reduce our own
manufacturing costs, eliminate waste throughout the value chain, and deliver Best in Class
customer service through consistent, on-time delivery of superior quality products on short lead
times. 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 2005, in order to capitalize on the significant growth in market demand for high quality
heat treat aluminum plate products for Aero/HS products, we began a major expansion at our
Trentwood facility in Spokane, Washington. This expansion project was completed in late 2008. With
a total capital investment of approximately $139 million, the Trentwood expansion significantly
increased our aluminum plate production capacity and enabled us to produce thicker gauge aluminum
plate.
In 2007, we commenced an investment program in our rod, bar and tube value stream consisting
primarily of a casting and extrusion facility in Kalamazoo, Michigan. This investment was
substantially complete by the end of 2010. The Kalamazoo, Michigan facility is equipped with two
extrusion presses and a remelt operation. Through this investment, we expect to significantly
improve the capabilities and efficiencies of our rod and bar operations, enhance the market
position of our rod and bar products. In addition, the investment provides capacity for future
growth in extrusion applications.
In 2008, we announced plans to close operations at our Tulsa, Oklahoma facility and curtail
operations at our Bellwood, Virginia facility due to deteriorating economic and market conditions.
Both facilities produced extruded rod and bar products sold principally to distributors for general
engineering applications. The Tulsa, Oklahoma facility was closed in December 2008. In May 2009, we
announced plans to further curtail operations at our Bellwood, Virginia facility to focus solely on
drive shaft and seamless tube products. We also reduced personnel in other locations during the
second quarter of 2009 to streamline costs. The restructuring efforts initiated in 2008 and early
2009 were substantially completed by the end of 2009.
In 2010, we pursued two strategic acquisitions to provide complementary products to our sheet,
plate, cold finish and drawn tube products, primarily for aerospace applications. On August 9,
2010, we acquired the Florence, Alabama manufacturing facility, and related assets of Nichols Wire,
Incorporated (Nichols), which manufactures bare mechanical alloy wire products, nails and
aluminum rod and expands our offerings of small diameter rod, bar and wire products to our core end
market segments for aerospace, general engineering and automotive applications. On October 12, 2010, we
entered into an agreement to purchase the manufacturing facility in Chandler, Arizona (the
Chandler, Arizona (Extrusion) facility), and related assets, of Alexco, L.L.C. (Alexco), which
manufactures hard alloy extrusions for the aerospace industry. The Chandler, Arizona (Extrusion)
facility is a well-established supplier of aerospace extrusions, and the acquisition positions us
in a significant market segment that provides a natural complement to our product offerings for
aerospace applications. The transaction closed effective on January 1, 2011.
Business Operations
Fabricated Products Segment
Overview
Our Fabricated Products segment produces rolled, extruded, and drawn aluminum products used
principally for aerospace and defense, automotive, consumer durables, electronics, electrical, and
machinery and equipment end market segment applications. As indicated above, the Fabricated Products
segment focuses on products that strategically serve four end market segments, more particularly Aero/HS
products, GE products, Automotive Extrusions and Other products. During 2010, 2009 and 2008, our
North American fabricated products manufacturing facilities produced and shipped approximately 514,
429 and 559 million pounds of fabricated aluminum products, respectively, which accounted for
approximately 100%, 91% and 89% of our total net sales for 2010, 2009 and 2008, respectively.
Types of Products Produced
We have strategically chosen end market segments that allow us to utilize our core metallurgical
capabilities to create value added products in markets that present opportunities for sales growth
and premium pricing of differentiated products. The market for aluminum fabricated mill products is
broadly defined to include flat-rolled, extruded, drawn, forged and cast aluminum products, used in
a variety of end market applications. We participate in certain portions of the markets for
flat-rolled, and extruded/drawn products, focusing on highly engineered products for aerospace/high
strength, general engineering, automotive and other industrial end market applications.
2
The table below provides shipment, sales and value added revenue information (in millions of
dollars except for shipment information) for our end market applications:
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Years Ended |
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December 31, |
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2010 |
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2009 |
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2008 |
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Shipments (mm lbs): |
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Aero/HS Products |
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158.9 |
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31 |
% |
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144.8 |
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34 |
% |
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157.7 |
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28 |
% |
GE Products |
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217.4 |
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42 |
% |
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189.0 |
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44 |
% |
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258.1 |
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46 |
% |
Automotive Extrusions |
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54.2 |
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11 |
% |
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36.2 |
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8 |
% |
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50.2 |
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9 |
% |
Other Products |
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83.7 |
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16 |
% |
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58.5 |
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14 |
% |
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92.5 |
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17 |
% |
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514.2 |
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100 |
% |
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428.5 |
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100 |
% |
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558.5 |
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100 |
% |
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Sales: |
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Aero/HS Products |
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$ |
467.6 |
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43 |
% |
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$ |
415.5 |
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46 |
% |
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$ |
510.3 |
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38 |
% |
GE Products |
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394.8 |
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37 |
% |
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327.1 |
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36 |
% |
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549.9 |
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41 |
% |
Automotive Extrusions |
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98.7 |
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9 |
% |
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65.8 |
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7 |
% |
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104.6 |
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8 |
% |
Other Products |
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117.7 |
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11 |
% |
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88.7 |
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11 |
% |
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172.0 |
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13 |
% |
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$ |
1,078.8 |
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100 |
% |
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$ |
897.1 |
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100 |
% |
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$ |
1,336.8 |
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100 |
% |
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Value added revenue: |
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Aero/HS Products |
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$ |
295.4 |
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53 |
% |
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$ |
278.0 |
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54 |
% |
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$ |
323.8 |
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48 |
% |
GE Products |
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174.0 |
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31 |
% |
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164.7 |
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32 |
% |
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248.9 |
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37 |
% |
Automotive Extrusions |
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45.6 |
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8 |
% |
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31.3 |
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6 |
% |
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41.6 |
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6 |
% |
Other Products |
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40.9 |
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8 |
% |
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39.4 |
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8 |
% |
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58.2 |
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9 |
% |
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$ |
555.9 |
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100 |
% |
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$ |
513.4 |
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100 |
% |
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$ |
672.5 |
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100 |
% |
Aero/HS Products. Our Aero/HS products include high quality heat treat plate and sheet, as
well as cold finish bar, seamless drawn tube, hard alloy extrusions, 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 industries 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 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 and skins.
GE 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, wire, 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 market segment applications where machining of plate, rod and bar is intensive. For example,
our products are used in the enhancement of military vehicles such as plating to protect ground
vehicles from explosive devices, 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
throughout the supply chain.
Automotive Extrusions. Auto products consist of extruded aluminum products for many North
American automotive applications. Examples of the variety of extruded products that we supply to
the automotive industry include extruded products for bumpers and anti-lock braking systems and
drawn tube for drive shafts. For some Automotive Extrusions, we perform limited fabrication,
including sawing and cutting to length. Demand growth and cyclicality for Automotive Extrusions
tend to mirror automotive build rates in North
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America. Additional growth for Automotive Extrusions
is driven by efforts by automotive manufacturers to reduce the weight of vehicles to improve fuel
efficiency by converting applications from steel to aluminum.
Other Products. Other products consist of extruded and drawn aluminum products for many North
American industrial end uses, including consumer durables, electrical/electronic, machinery and
equipment, light truck, heavy truck and truck trailer applications. Demand growth and cyclicality
for Other products tend to mirror broad economic patterns and industrial activity in North America,
with specific individual market segments such as heavy truck and truck trailer applications
tracking their respective build rates.
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, sheet and plate, beverage/food can, and other applications.
However, we have focused our efforts on heat treat products, which are distinguished from common
alloy products by higher strength and other desired product attributes. The primary end market segments of
heat treat flat-rolled sheet and plate are 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 cutting to length before being hardened in aging ovens. The largest
end market segments for extruded products are in the construction, general engineering and custom products.
Building and construction products represent the single largest end market segment for extrusions by a
significant amount. However, we have strategically chosen to focus on products for GE and
Automotive Extrusions utilizing our well-developed technical expertise, strong production
capability and high product quality to meet the requirements of these more demanding applications.
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. We primarily use drawing in connection with our
Aero/HS products.
A description of the manufacturing processes and category of products at each of our
production facilities at December 31, 2010 is shown below:
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Location |
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Manufacturing Process |
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Types of Products |
Chandler, Arizona (Tube)
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Extrusion/Drawing
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Aero/HS |
Florence, Alabama
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Drawing
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Aero/HS, GE, Other |
Jackson, Tennessee
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Extrusion/Drawing
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Aero/HS, GE |
Kalamazoo, Michigan
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Extrusion
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GE |
London, Ontario
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Extrusion
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Auto, GE |
Los Angeles, California
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Extrusion
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GE, Other |
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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GE |
Richmond (Bellwood), Virginia
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Extrusion/Drawing
|
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Auto, GE |
Sherman, Texas
|
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Extrusion
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GE, Other |
Spokane, Washington
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Flat Rolling
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Aero/HS, GE |
As reflected by the table above, many of our facilities employ the same basic manufacturing
process and produce the same type of products. We make a significant effort to tightly integrate
the management of our Fabricated Products business unit across multiple manufacturing locations,
product lines, and end market segments 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 better manage price, credit and other benefits. Our sales force
and the management thereof are also significantly integrated as many customers
4
purchase a number of
different products that are produced at different plant facilities. We believe that integration of
our operations allows us to capture efficiencies while allowing our facilities to remain highly
focused on their specific processes and end market segments.
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 2008 to 2010, has ranged between approximately $0.04 to $0.06 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 is 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 for production in lieu of purchasing such items from third-party
suppliers. For example, our Newark, Ohio facility supplies billet and log to the Jackson, Tennessee
and the Florence, Alabama facilities.
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. 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 metal 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 metal price risk to the customer. |
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|
Firm price. Some of our customers pay a firm price. We bear the metal price risk on
firm-price contracts, which we hedge with financial derivatives. For internal reporting
purposes, at the time our Fabricated Products segment enters into a firm price contract, it
also enters into an internal hedge with the Hedging business unit within All Other, so
that metal price risk resides in the Hedging business unit. Results from internal hedging
activities between the Fabricated Products segment and the Hedging business unit are
eliminated in consolidation. |
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, Europe, and China, and by independent sales agents in other regions of Asia, Mexico and the
Middle East. Our sales and marketing efforts are focused on the markets for Aero/HS products, GE
products, Automotive Extrusions, and Other products.
Aero/HS Products. Approximately 60% of our Aero/HS product shipments are sold to metal
distributors with the remainder sold directly to end market segment 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 and China. 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.
GE Products. A substantial majority of our GE products are sold to large metal distributors in
North America, with orders primarily consisting of standard catalog type 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.
Automotive Extrusions. Our Automotive Extrusions are sold primarily to first tier automotive
suppliers under annual or medium-term sales contracts. Almost all sales of Automotive Extrusions
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
5
North American light vehicle manufacturing and increased use of aluminum in vehicles in response to
increasingly strict governmental standards for fuel efficiency.
Other Products. Other products are primarily sold directly to industrial end users under
medium-term sales contracts. Almost all sales of these products occur through direct channels using
a North American direct sales force, often working closely with our technical sales organization.
Demand for industrial products is linked to the overall strength of the U.S. industrial economy.
Customers
In 2010, our Fabricated Products business unit had approximately 680 customers. The largest,
Reliance Steel & Aluminum (Reliance), and the five largest customers for fabricated products
accounted for approximately 23% and 45%, respectively, of our net sales in 2010. 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 casting unit is
also capable of casting full size billets and ingots for processing on the production extrusion
presses and rolling mills.
The combination of our research and development work and concurrent product and process
development within our production operations has resulted in the creation and delivery of value
added Kaiser Select® products.
All Other
All Other consists of our Secondary Aluminum, Hedging and Corporate and Other business units.
Secondary Aluminum. Anglesey operated as a primary aluminum smelter until September 30, 2009
when it fully curtailed its smelting operations due to the expiration of its long-term power
contract and its inability to find alternative affordable power to continue operating as a smelter.
In the fourth quarter of 2009, Anglesey commenced a remelt and casting operation, purchasing its
own material to produce value added secondary aluminum products such as ingot and billet and
selling 49% of its output to us. We in turn sell the secondary aluminum products to a third party
and receive a portion of a premium over normal commodity market prices. The transactions are
structured to largely eliminate our metal price and currency exchange rate risks with respect to
income and cash flow related to Anglesey. Because we in substance act as an agent in connection
with sales of secondary aluminum produced by Anglesey, our secondary aluminum sales are accounted
for net of cost of sales, and we reported zero net sales in 2010. Prior to the fourth quarter of
2009, we accounted for our primary aluminum sales from the smelting operations on a gross
basis and such sales represented approximately 9% and 11% of our total net sales for 2009 and 2008,
respectively.
While operating as a primary aluminum smelter, Anglesey produced approximately 260 million and
230 million pounds of primary aluminum in 2008 and the first nine months of 2009, respectively, in
the form of billet, rolling ingot and sow for the United Kingdom and European marketplace. We
supplied 49% of Angleseys alumina requirements and purchased 49% of Angleseys aluminum output,
which we resold to a single third party at market prices. The price received for sales of
production from Anglesey typically approximated the LME price plus a premium (historically up to
$0.17 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 purchased alumina under a contract that provided adequate alumina for
operations through September 2009.
At December 31, 2008, we fully impaired our investment in Anglesey, and in the first half of
2009 we recorded additional impairment charges to maintain our investment balance at zero. During
the third quarter of 2009, Anglesey incurred a significant net loss, primarily due to employee
redundancy costs incurred in connection with the cessation of its smelting operations. Commencing
in the quarter ended September 30, 2009 and continuing through December 31, 2010, we suspended the
use of the equity method of accounting with respect to our ownership in Anglesey as we are not
obligated to advance any funds to Anglesey, guarantee any obligations of Anglesey, or make any
commitments to provide financial support for Anglesey. Accordingly, we did not recognize our share
of Angleseys net loss for such periods. We will not resume the use of the equity method of
accounting with respect to our investment in Anglesey unless or until (i) our share of any future
net income of Anglesey equals or is greater than our share of net
6
losses not recognized during
periods for which the equity method was suspended and (ii) future dividends can be expected. We do
not anticipate the occurrence of such events during the next 12 months.
Hedging. Our pricing of fabricated aluminum products, 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 on to our customers. However, in certain instances we do enter into firm
price arrangements and incur price risk on our anticipated primary aluminum purchases in respect of
the customer orders. At the time our Fabricated Products segment enters into a firm price contract,
our Hedging business unit and Fabricated Products segment enter into an internal hedge so that
metal price risk resides in the Hedging business unit. Results from internal hedging activities
between Fabricated Products and Hedging eliminate in consolidation. The Hedging business unit uses
third-party hedging instruments to limit exposure to metal-price risks related to firm price
customer sales contracts. Total fabricated product shipments for which we were subject to price
risk were 97, 163 and 228 (in millions of pounds) during 2010, 2009 and 2008, respectively.
Through September 30, 2009, the Hedging business unit also conducted hedging activities in
respect of our exposure to British Pound Sterling exchange rates relating to Angleseys smelting
operations.
All hedging activities are managed centrally 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 (members of which include our chief executive officer and key financial
officers).
Corporate and Other. This business unit provides general and administrative support to our
operations. The expenses incurred in this business unit are not allocated to our other operations.
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 of this Report regarding our GAAP reporting
segment 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 and Alcan Engineered
Products. In the extrusion market, we compete with many regional participants as well as larger
companies with national reach such as SAPA, Norsk Hydro and Alcoa. 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 and automotive
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 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.
Barriers to entry are lower for extruded products, mostly due to the lower required investment
in equipment. However, the products that we produce are somewhat differentiated from the majority
of extruded products sold by competitors. We maintain a
7
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, 2010, we employed approximately 2,300 persons, of which approximately 2,240
were employed in our Fabricated Products segment and approximately 60 were employed in our
corporate group, most of whom are located in our offices in Foothill Ranch, California. Effective
January 1, 2011, we acquired the Chandler, Arizona (Extrusion) facility and related assets of
Alexco and, in connection therewith, hired approximately 170 personnel in our Fabricated Products
segment.
The table below shows each manufacturing and warehouse location, the primary union
affiliation, if any, and the expiration date for the current union contracts. As indicated 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), International Association of Machinists (IAM) and International Brotherhood of
Teamsters (Teamsters).
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Contract |
Location |
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Union |
|
Expiration Date |
Chandler, AZ (Tube) |
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USW |
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Mar 2012 |
Chandler, AZ (Extrusion) |
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Non-union |
|
|
Florence, AL |
|
USW |
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Mar 2014 |
Jackson, TN |
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Non-union |
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Kalamazoo, MI |
|
USW |
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Feb 2016 |
London, Ontario |
|
USW Canada |
|
Feb 2012 |
Los Angeles, CA |
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Teamsters |
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May 2012 |
Newark, OH |
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USW |
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Sept 2015 |
Richland, WA |
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Non-union |
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Richmond (Bellwood), VA |
|
USW/IAM |
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Nov 2011 |
Sherman, TX |
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IAM |
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Dec 2013 |
Spokane, WA |
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USW |
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Sept 2015 |
Plainfield, IL |
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Teamsters |
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Apr 2012 |
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 continuing operations and certain of our former operations 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 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.
Our environmental accruals represent our undiscounted estimate of costs reasonably expected to
be incurred based on presently enacted laws and regulations, existing requirements, currently
available facts, existing technology, and our assessment of the likely remediation actions to be
taken.
During the third quarter of 2010, we increased our environmental accruals in connection with
our submission of a draft feasibility study to the Washington State Department of Ecology
(Washington State Ecology) on September 8, 2010 (the Feasibility Study). The draft Feasibility
Study included recommendations for a range of alternative remediations to primarily address the
historical use of oils containing polychlorinated biphenyls, or PCBs, at our Trentwood facility in
Spokane, Washington which may be implemented over the next 30 years. The draft Feasibility Study
indicates a range of viable remedial approaches, but agreement has not yet been reached with the
Washington State Ecology on the final remediation approach. The draft Feasibility Study is still
subject to further
8
reviews, public comment and regulatory approvals before the final consent decree
is issued. We expect the consent decree to be issued in 2012.
Based on the recommended remediation alternatives in the draft Feasibility Study and other
existing historical environmental matters at the Trentwood facility and certain other locations
owned or operated by us, we increased our environmental accrual by $13.6 million during the third
quarter. Our environmental accrual represents the low end of the range of incremental cost
estimates based on proposed alternatives in the draft Feasibility Study, investigational studies
and other remediation activities occurring at certain locations owned or operated by us. We expect
that these remediation actions will be taken over the next 30 years and estimates that the
incremental direct costs attributable to the remediation activities to be charged to these
environmental accruals will be approximately $1.1 million in 2011, $0.9 million in 2012, $2.7
million in 2013, $0.7 million in 2014, and $14.8 million in 2015 and years thereafter through the
balance of the 30 year period.
As additional facts are developed, feasibility studies at various facilities are completed,
draft remediation plans are modified, necessary regulatory approval for the implementation of
remediation are obtained, alternative technologies are developed, and/or other factors may result
in revisions to managements estimates and actual costs exceeding the current environmental
accruals. In addition, new laws or regulations, or changes to existing laws and regulations, may be
enacted, and the amount that we would have to spend to comply with such new or amended laws and
regulations cannot be determined at this time and could have a material impact on our financial
position, results of operations and cash flows. We believe at this time that it is reasonably
possible that undiscounted costs associated with these environmental matters may exceed current
accruals by amounts that could be, in the aggregate, up to an estimated $21.3 million over the
next 30 years. It is reasonably possible that our recorded estimate of its obligation may change
in the next 12 months.
Legal 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: |
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Kaiser Aluminum Fabricated Products, LLC, a Delaware limited liability company
(KAFP), which directly holds the assets and liabilities associated with our
Fabricated Products business unit (excluding those assets and liabilities associated
with our London, Ontario and Chandler, Arizona (Extrusion) facilities and certain of
the assets and liabilities associated with our Fabricated Products business units
operations in the State of Washington) and owns 100% of the ownership interest of each
of: |
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Kaiser Aluminum Washington, LLC, a Delaware limited liability company, which
holds certain of the assets and liabilities associated with our Fabricated
Products business units operations in the State of Washington; and |
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Kaiser Aluminum Alexco, LLC, a Delaware limited liability company (formerly
known as Desert Fabco Acquisition, LLC), which holds the assets and liabilities
associated with our Chandler, Arizona (Extrusion) facility; |
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Kaiser Aluminum Canada Limited, an Ontario corporation, which holds the assets and
liabilities associated with our London, Ontario facility; |
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DCO Management, LLC (formerly known as 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; |
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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. |
9
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 material to our company. 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.
We have experienced and continue to experience the effects of unprecedented economic
uncertainty.
The U.S. and global economies have recently experienced and continue to experience a period of
substantial uncertainty with wide-ranging effects, including:
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disruption in global financial markets that has at times reduced the liquidity
available to us, our customers, our suppliers and the purchasers of products that
materially affect demand for our products, including commercial airlines; |
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a weakened banking and financial system that creates ongoing 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 that can 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 have reduced the demand for
applications that use our products, including commercial aircraft, automobiles, trucks and
trailers; |
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destocking of inventory levels throughout the supply chain for certain of our
products, which destocking has only recently started to show signs of abating; |
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reduced customer demand under existing contracts resulting in customers limiting
purchases to contractual minimum volumes, seeking relief from contractual obligations or
breaching those obligations; |
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our inability to achieve the level of growth or other benefits anticipated from our acquisitions and other
strategic investments, and the integration of acquired businesses; |
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increases in our costs, including the cost of energy, raw materials and freight costs, which we are unable to
pass through to our customers; |
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pressure to reduce defense spending, which reductions could affect demand for our
products used in defense applications, as the U.S. and foreign governments are 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 effects, any of which
could have a material adverse impact on our financial position, results of operations and cash
flows.
We operate in a highly competitive industry.
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 smelting 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 located in North America. To the extent that our competitors have or
develop production facilities located outside North America, they may be able to produce similar
products at a
10
lower cost or sell those products at a lower price during periods when the currency exchange
rates favor foreign competition or dump those products in violation of existing trade laws. 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.
We depend on a core group of significant customers.
In 2010, our largest fabricated products customer, Reliance, accounted for approximately 23%
of our fabricated products net sales, and our five largest customers accounted for approximately
45% 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 cause any one or more of them to limit purchases to
contractual minimum volumes, seek relief from contractual minimums or breach those obligations, all
of which 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. 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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new forms of emission controls and tax, commonly known as cap and trade; |
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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. |
The commercial aerospace industry is cyclical and downturns in the commercial aerospace industry,
including downturns resulting from acts of terrorism, could adversely affect our business.
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, the state of the U.S. and global economies and
numerous other factors, including the effects of terrorism. In recent years, a number of major
airlines have 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. Despite existing backlogs, continued financial
uncertainty in the industry, inadequate liquidity of certain airline companies, 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.
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 is significant pressure to reduce defense spending as
the U.S. and foreign governments are faced with competing national priorities. Reductions in
defense spending would reduce the demand for our products and could adversely affect our financial
position, results of operations and cash flows.
11
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.
Downturns in the automotive and heavy duty truck and trailer industries could adversely affect
our business.
The demand for our automotive extrusions and many of our general engineering and other
industrial products is dependent on the production of cars, 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. Production cuts by U.S. manufacturers may adversely affect the demand for our
products. Many North American automotive related manufacturers and first tier suppliers are also
burdened with substantial structural costs, including pension, healthcare and labor costs, that
have resulted in severe financial difficulty, including bankruptcy, for several of them. A
worsening of these companies financial condition or their bankruptcy could have further serious
effects on the conditions of the markets which directly affect the demand of our products.
Similarly, a prolonged decline in the demand for new cars, light trucks, SUVs, and heavy duty
vehicles and trailers, particularly in the U.S., 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.
Sensitivity to energy costs have resulted in shifts in consumer demand away from motor
vehicles that typically have a higher content of the products we have supplied, 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 continue to
aggressively 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.
Reductions in demand for our products may be more severe than, and may occur prior to reductions
in demand for, our customers products.
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 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 downturn 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
business.
The production of fabricated aluminum products and aluminum 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
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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 an 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 or access to additional financing, we could
be required to sell assets.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash
flow from our business to pay our debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance
our debt, including our cash convertible senior notes, depends on our future performance, which is
subject to economic, financial, competitive and other factors beyond our control. Our business may
not continue to generate cash flow from operations in the future sufficient to service our debt and
make necessary capital expenditures. If we are unable to generate such cash flow, we may be
required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining
additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance
our debt will depend on the capital markets and our financial condition at such time. We may not be
able to engage in any of these activities or engage in these activities on desirable terms, which
could result in a default on our debt obligations.
The conditional conversion features of our cash convertible senior notes, if triggered, may
adversely affect our financial condition and operating results.
In the event the conditional conversion features of our cash convertible senior notes are
triggered, holders of such notes will be entitled to convert such notes at any time during
specified periods at their option. If one or more holders elect to convert their notes, we would be
required to settle our conversion obligation through the payment of cash, which could adversely
affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be
required under applicable accounting rules to reclassify all or a portion of the outstanding
principal of our cash convertible senior notes as a current rather than long-term liability, which
would result in a material reduction of our net working capital.
The convertible note hedge and warrant transactions that we entered into in connection with
the issuance of our cash convertible senior notes may affect the market price of our common stock.
In connection with the issuance of our cash convertible senior notes, we entered into
privately negotiated convertible note hedge transactions and warrant transactions. Under the terms
of the convertible note hedge transactions, we purchased cash-settled call options relating to
shares of our common stock. Under the terms of the warrant transactions, we sold to the option
counterparties net-share-settled warrants relating to our common stock.
We have been informed that, in connection with establishing their initial hedge positions with
respect to the convertible note hedge transactions and the warrant transactions, the option
counterparties and/or their affiliates entered into various derivative transactions with respect to
our common stock concurrently with or shortly after the pricing of our cash convertible senior
notes and that the option counterparties and/or their affiliates may modify their hedge positions
by entering into or unwinding various derivatives with respect to our common stock and/or
purchasing or selling our common stock in secondary market transactions prior to the maturity of
our cash convertible senior notes (and are likely to do so during any settlement averaging period
related to a conversion of our cash convertible senior notes). The effect, if any, of these
transactions and activities on the market price of our common stock will depend in part on market
conditions and cannot be ascertained at this time, but any of these activities could adversely
affect the market price of our common stock.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
The option counterparties are financial institutions or affiliates of financial institutions,
and we will be subject to the risk that these option counterparties may default or otherwise fail
to perform, or may exercise certain rights to terminate their obligations, under the
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convertible note hedge transactions. Our exposure to the credit risk of the option counterparties
will not be secured by any collateral. Recent global economic conditions have resulted in the
actual or perceived failure or financial difficulties of many financial institutions, including a
bankruptcy filing by Lehman Brothers Holdings Inc. and its various affiliates. If one or more of
the option counterparties to one or more of our convertible note hedge transactions becomes subject
to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim
equal to our exposure at the time under those transactions. Our exposure will depend on many
factors but, generally, the increase in our exposure will be correlated to the increase in the
market price of our common stock and in volatility of our common stock. In addition, upon a default
or other failure to perform, or a termination of obligations, by one of the option counterparties,
we may suffer adverse tax consequences and dilution with respect to our common stock and we may be
prevented under our revolving credit facility (or any replacement credit facility) from paying the
cash amount due upon the conversion of our cash convertible senior notes. We can provide no
assurances as to the financial stability or viability of any of the option counterparties.
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 indebtedness
from time to time, 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 manufacturing, Total
Productive Manufacturing 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.
Our business 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, increases in raw material prices may cause some of our customers to substitute other
materials for our products over time, adversely affecting our financial position, results of
operations and cash flows due to a decrease in the sales of fabricated aluminum products.
The price volatility of energy costs may adversely affect our business.
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 and the potential regulation of greenhouse
gases. 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 and may otherwise affect our business.
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
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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 fail to
satisfy the covenants, or an event of default occurs under the terms of the underlying documents,
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.
We do not expect to recognize any future operating results of Anglesey, nor do we expect any
future distribution of dividends by Anglesey.
Anglesey operated as a primary aluminum smelter until fully curtailing smelting operations on
September 30, 2009 due to the expiration of its long-term power contract and its inability to find
alternative affordable power to continue operating as a smelter. Leading up to Angleseys
curtailment of smelting operations, we impaired our investment in Anglesey because we believed that
our investment in Anglesey would not be recoverable. Anglesey incurred a significant net loss upon
the curtailment of smelting operations in the third quarter of 2009. In consideration of that
significant net loss, we suspended the use of the equity method of accounting with respect to our
ownership in Anglesey during the third quarter of 2009 as we are not obligated to advance any funds
to Anglesey, guarantee any obligations of Anglesey, or make any commitments to provide any
financial support for Anglesey. Although Anglesey commenced a remelt and casting operation during
the fourth quarter 2009, we will not resume the equity method of accounting until we can determine
that current or future operating results from Anglesey will be recoverable, and there is no
assurance that such operating results will ever be recoverable. The inability to recognize such
operating results of Anglesey and the continued lack of dividends received from Anglesey will
adversely affect our results of operations and cash flows, relative to our past performance.
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 and Euro, 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, and we
design our compensation programs to attract and retain key personnel and facilitate our ability to
develop effective succession plans. The loss of any of these officers or other key personnel or
failure to attract key personnel could materially and adversely affect our succession planning and
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 failure to maintain satisfactory labor relations could adversely affect our business.
A significant number of our employees are represented by labor unions under labor contracts
with varying durations and expiration dates, including labor contracts with the USW, covering seven
of our manufacturing locations. Employees represented by labor unions under labor contracts
represented approximately 69% of our employees at December 31, 2010. In January 2010, we were
successful in renegotiating the terms of a labor contract with the USW covering employees at our
manufacturing locations in Newark, Ohio and Spokane, Washington and extending the term of such
contract to September 2015. Contracts at seven other manufacturing locations expire in 2011 through
2016. 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 participation in multi-employer union pension plans may have a material adverse effect on
our financial performance.
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We are required to make contributions to multi-employer pension plans in amounts established
under collective bargaining agreements. Pension expense for these plans is recognized as
contributions are funded. Benefits generally are based on a fixed amount for each year of
service. Based on the most recent information available to us, we believe a number of these
multi-employer plans are underfunded. As a result, we expect that contributions to these plans
may increase. Additionally, the benefit levels and related items will be issues in the
negotiation of our collective bargaining agreements. Under current law, an employer that
withdraws or partially withdraws from a multi-employer pension plan may incur withdrawal liability
to the plan, which represents the portion of the plans underfunding that is allocable to the
withdrawing employer under very complex actuarial and allocation rules. The failure of a
withdrawing employer to fund these obligations can impact remaining employers. The amount of any
increase or decrease in our required contributions to these multi-employer pension plans will
depend upon the outcome of collective bargaining, actions taken by trustees who manage the plans,
government regulations and the actual return on assets held in the plans, among other factors.
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 business.
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.
Environmental compliance, clean up and damage claims may decrease our cash flow and adversely
affect our business.
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 continuing operations and certain of our former operations 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 be enacted, including
government mandated green initiatives and limitations on carbon emissions, that increase the cost
or complexity of compliance. Difference in actual costs, the timing of payments for previously
accrued costs and the impact of new or amended laws and regulations may have a material adverse
effect on our financial position, results of operations and cash flows.
New governmental regulation relating to greenhouse gas emissions may subject us to significant new
costs and restrictions on our operations.
Climate change is receiving increasing attention worldwide. Many scientists, legislators and
others attribute climate change to increased levels of greenhouse gases, including carbon dioxide,
which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.
There are bills pending in Congress that would regulate greenhouse gas emissions through a
cap-and-trade system under which emitters would be required to buy allowances to offset emissions
of greenhouse gas. In addition, several states, including states where we have manufacturing
plants, are considering various greenhouse gas registration and reduction programs. Certain of our
manufacturing plants use significant amounts of energy, including electricity and natural gas, and
certain of our plants emit amounts of greenhouse gas above certain minimum thresholds that are
likely to be imposed by existing proposals. Greenhouse gas regulation could increase the price of
the electricity we purchase, increase costs for our use of natural gas, potentially restrict access
to or the use of natural gas, require us to purchase allowances to offset our own emissions or
result in an overall increase in our costs of raw materials, any one of which could significantly
increase our costs, reduce our competitiveness in a global economy or otherwise negatively affect
our business, operations or financial results. While future emission regulation appears likely, it
is too early to predict how this regulation will affect our business, operations or financial
results.
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Other legal proceedings or investigations or changes in the laws and regulations to which we are
subject may adversely affect our business.
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 business.
We are sometimes exposed to warranty and product liability claims. While we generally maintain
insurance against many product liability risks, a successful claim that is not insured, exceeds our
available insurance coverage, or 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 investment and other expansion projects may not be completed or start up as scheduled.
We are currently engaged in, and have recently completed, various investment and expansion
projects. Our ability to complete such 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 technical or mechanical problems, economic conditions and permitting.
Additionally, the start up of operations after such projects have been completed can be complicated
and costly. If we are unable to fully complete these projects, if the actual costs for these
projects exceed our current expectations, or if the start up phase after completion is more
complicated than anticipated, 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
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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 further audits may commence in the future.
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, 2010, 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 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, or we may be unable to obtain license
agreements on acceptable terms, either of 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). 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, federal and state 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 and
state 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.
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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, 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, an ownership change, as determined under the Code.
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
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 results may fail to meet investor expectations and the trading price of our stock may decline
due to a variety of factors beyond our control.
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 factors
beyond our control, including, among others:
|
|
|
volatility in the spot market for primary aluminum and energy costs; |
|
|
|
|
cyclical aspects impacting demand for our products; |
|
|
|
|
changes in the volume, price and mix of the products we sell; |
|
|
|
|
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; |
|
|
|
|
unanticipated interruptions of our operations including variations in the maintenance
needs for our facilities; |
|
|
|
|
unanticipated changes in our labor relations and recent changes in employee benefits
and healthcare regulations; |
|
|
|
|
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, and,
collectively with the Union VEBA, the VEBAs); and |
|
|
|
|
U.S. and global economic conditions. |
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.
19
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. In connection with the renegotiation and entry of a labor agreement with the USW,
we agreed to extend our obligation to make annual payments to the Union VEBA to September 30, 2017.
Although our obligation to make annual payments to the Union VEBA terminates for periods beginning
after September 30, 2017, 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 approximately 18% of our outstanding common stock as of February 16, 2011.
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 agreements between the Company and the USW, the USW has the right to nominate
candidates which, if elected, would constitute 40% of our Board of Directors through September 30,
2015 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 2015.
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. 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 financial and operating results, financial
condition, anticipated cash requirements and ability to satisfy conditions reflected in our
revolving credit facility. We can give no assurance that dividends will be declared and paid in the
future. Our revolving credit facility, as amended and restated on March 23, 2010, restricts our
ability to pay dividends and repurchase our common shares. Under our revolving credit facility, we
may pay cash dividends and/or repurchase shares only if we maintain certain borrowing availability
and are not in default. In addition, if there is any outstanding loan under our revolving credit
facility, the amount of cash dividends we pay during any fiscal year is limited based on our
borrowing availability.
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 with the Union
VEBA 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 bylaws 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. Additionally, provisions of our certificate of incorporation
and bylaws impose various procedural and
20
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 without the consent of
our Board of Directors. 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.
21
Item 2. Properties
As of December 31, 2010, the locations of the principal plants and other materially important
physical properties relating to our Fabricated Products segment are below:
|
|
|
|
|
|
|
|
|
Location |
|
Square footage |
|
Owned or Leased |
Chandler, Arizona (Tube) |
|
|
93,000 |
|
|
Leased |
(1) |
Florence, Alabama |
|
|
252,000 |
|
|
Owned |
|
Jackson, Tennessee |
|
|
310,000 |
|
|
Owned |
Kalamazoo, Michigan |
|
|
465,000 |
|
|
Leased |
(2) |
London, Ontario (Canada) |
|
|
265,000 |
|
|
Owned |
|
Los Angeles, California |
|
|
183,000 |
|
|
Owned |
|
Newark, Ohio |
|
|
1,293,000 |
|
|
Owned |
|
Richland, Washington |
|
|
45,000 |
|
|
Leased |
(3) |
Richmond (Bellwood), Virginia |
|
|
430,000 |
|
|
Owned |
|
Plainfield, Illinois |
|
|
80,000 |
|
|
Leased |
(4) |
Sherman, Texas |
|
|
313,000 |
|
|
Owned |
|
Spokane, Washington |
|
|
2,866,000 |
|
|
Owned/Leased |
(5) |
|
|
|
|
|
|
|
|
|
Total |
|
|
6,595,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Chandler, Arizona (Tube) facility is subject to a land lease with a primary lease term
that expires in 2033. We have certain extension rights in respect of the Chandler, Arizona
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 December 2011 expiration date,
subject to certain extension rights held by us. |
|
(4) |
|
The Plainfield, Illinois facility is subject to a lease with a March 2011 expiration date. |
|
(5) |
|
The Spokane, Washington facility consists of 2,745,000 square feet which is owned and 121,000
square feet, which is subject to a lease with a 2015 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 25,000 square feet at December 31, 2010, with an expiration date of June 2016.
In connection with the acquisition of the manufacturing facility and related assets of Alexco,
we acquired an additional 81,000 square feet of property which is subject to a land lease with an
initial term that expires in 2023 and a renewal option subject to certain terms and conditions.
Item 3. Legal Proceedings
None.
Item 4. [Removed and Reserved].
22
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
2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Fiscal 2010 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
44.40 |
|
|
$ |
32.83 |
|
Second quarter |
|
$ |
41.63 |
|
|
$ |
32.91 |
|
Third quarter |
|
$ |
43.23 |
|
|
$ |
33.90 |
|
Fourth quarter |
|
$ |
52.00 |
|
|
$ |
42.07 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
29.24 |
|
|
$ |
16.36 |
|
Second quarter |
|
$ |
37.41 |
|
|
$ |
22.19 |
|
Third quarter |
|
$ |
41.65 |
|
|
$ |
29.76 |
|
Fourth quarter |
|
$ |
43.59 |
|
|
$ |
33.15 |
|
Holders
As of February 16, 2011, there were approximately 731 holders of record of our common stock.
Dividends
Commencing June 2007, our Board of Directors initiated the declaration of regular quarterly
cash dividends to holders of our common stock, including the holders of restricted stock. Such
dividend declarations also resulted in the payment of dividend equivalents to the holders of
certain restricted stock units and the holders of performance shares with respect to one half of
the performance shares issued under our equity and performance incentive plan. Total cash dividends
(and dividend equivalents) paid in 2010, 2009 and 2008 were $0.96 per share (or $19.0 million),
$0.96 per share (or $19.6 million) and $0.84 per common share (or $17.2 million), respectively.
In January 2011, our Board of Director declared another quarterly cash dividend of $0.24 per
common share, or $4.7 million, to holders of record at the close of business on January 24, 2011,
which was paid on or about February 15, 2011.
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. Our revolving credit facility, as amended and restated on March
23, 2010, places certain limitations on our ability to pay dividends.
Stock Performance Graph
The following graph compares the cumulative total shareholder return on the Companys common
stock with: (i) the Russell 2000 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.
23
|
|
|
|
|
$100 invested on 7/7/06 in stock or index, including reinvestment of dividends. Fiscal year
ending December 31. |
|
|
|
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights
reserved. |
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 index, of which we became a
component in 2010.
Issuer Repurchases of Equity Securities
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. As of December 31, 2010, $46.9 million remained available for repurchases under the
existing authorization.
During the first quarter of 2010, in connection with our issuance of $175 million principal
amount of, 4.5% Cash Convertible Senior Notes due April 2015 (the Notes), and pursuant to a
separate authorization from our Board of Directors, we repurchased $44.2 million, or approximately
1.2 million shares of our outstanding common stock, in a privately negotiated, off-market
transactions (see Liquidity and Capital Resources Debt in Part II. Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations of this Report).
24
Item 6. Selected Financial Data
All financial statement information before July 1, 2006 relates to periods before our
emergence from Chapter 11 bankruptcy. 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. For example, earnings (loss) per share and share information for periods
before emergence from Chapter 11 bankruptcy may not be meaningful because, pursuant to our plan of
reorganization, the equity interests in the Companys existing stockholders were cancelled without
consideration.
In connection with our emergence from Chapter 11 bankruptcy, we also made some changes to our
accounting policies and procedures, including those made 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. 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
Year |
|
Year |
|
Year |
|
Year |
|
1-Jul-06 |
|
|
|
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
|
through |
|
|
1-Jan-06 |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
December 31, |
|
December 31, |
|
|
to |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|
1-Jul-06 |
|
|
|
|
|
|
|
|
(In millions of dollars, except shipments, average sales price and per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,079.1 |
|
|
$ |
987.0 |
|
|
$ |
1,508.2 |
|
|
$ |
1,504.5 |
|
|
$ |
667.5 |
|
|
|
$ |
689.8 |
|
Income (loss) from continuing operations |
|
|
14.1 |
|
|
|
70.5 |
|
|
|
(68.5 |
) |
|
|
101.0 |
|
|
|
26.2 |
|
|
|
|
3,136.9 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
Net income (loss) |
|
$ |
14.1 |
|
|
$ |
70.5 |
|
|
$ |
(68.5 |
) |
|
$ |
101.0 |
|
|
$ |
26.2 |
|
|
|
$ |
3,141.2 |
|
Basic income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.72 |
|
|
$ |
3.51 |
|
|
$ |
(3.45 |
) |
|
$ |
4.91 |
|
|
$ |
1.31 |
|
|
|
$ |
39.37 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.05 |
|
Net income (loss) per share |
|
$ |
0.72 |
|
|
$ |
3.51 |
|
|
$ |
(3.45 |
) |
|
$ |
4.91 |
|
|
$ |
1.31 |
|
|
|
$ |
39.42 |
|
Diluted income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.72 |
|
|
$ |
3.51 |
|
|
$ |
(3.45 |
) |
|
$ |
4.91 |
|
|
$ |
1.30 |
|
|
|
$ |
39.37 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.05 |
|
Net income (loss) per share |
|
$ |
0.72 |
|
|
$ |
3.51 |
|
|
$ |
(3.45 |
) |
|
$ |
4.91 |
|
|
$ |
1.30 |
|
|
|
$ |
39.42 |
|
Shipments (mm lbs) |
|
|
514.6 |
|
|
|
542.4 |
|
|
|
691.6 |
|
|
|
705.0 |
|
|
|
326.9 |
|
|
|
|
350.6 |
|
Average realized third party sales price (per lb) |
|
$ |
2.10 |
|
|
$ |
1.82 |
|
|
$ |
2.18 |
|
|
$ |
2.13 |
|
|
$ |
2.04 |
|
|
|
$ |
1.97 |
|
Cash dividends declared per common share |
|
$ |
0.96 |
|
|
$ |
0.96 |
|
|
$ |
0.66 |
|
|
$ |
0.54 |
|
|
$ |
|
|
|
|
$ |
|
|
Capital expenditures, net of accounts payable |
|
$ |
38.9 |
|
|
$ |
59.2 |
|
|
$ |
93.2 |
|
|
$ |
61.8 |
|
|
$ |
30.0 |
|
|
|
$ |
28.1 |
|
Depreciation and amortization expense |
|
$ |
19.8 |
|
|
$ |
16.4 |
|
|
$ |
14.7 |
|
|
$ |
11.9 |
|
|
$ |
5.5 |
|
|
|
$ |
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
Total assets |
|
$ |
1,342.4 |
|
|
$ |
1,085.5 |
|
|
$ |
1,145.4 |
|
|
$ |
1,165.2 |
|
|
$ |
655.4 |
|
Long-term borrowings, including amounts due within
one year |
|
|
188.0 |
|
|
|
7.0 |
|
|
|
43.0 |
|
|
|
|
|
|
|
50.0 |
|
25
In addition to the operational results discussed in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations, significant items that impacted the
financial results included, but were not limited to, the following:
2010:
|
|
|
To enhance our liquidity and financial strength and flexibility, in March 2010 we
implemented a new financing structure, comprised of: |
|
|
|
A $200 million revolving credit facility maturing in March 2014, secured
by substantially all of the accounts receivable and inventory of our domestic
operating subsidiaries and certain other assets and proceeds relating thereto; |
|
|
|
|
The issuance of Notes in the aggregate principal amount of $175 million; |
|
|
|
|
The purchase of call options indexed to our own stock to hedge the cash
obligations upon potential conversion of the Notes; |
|
|
|
|
The issuance of warrants to effectively increase the conversion price of
the Notes from $48.32 per share to $61.36 per share; and |
|
|
|
|
The repurchase of approximately 1.2 million shares of our common stock,
using $44.2 million of the net proceeds from the Notes offering. |
|
|
|
We recorded $11.3 million of interest expense relating to amortization of non-cash
debt discount and debt issuance cost as well as cash interest expense in connection with
the Notes. |
|
|
|
|
We increased our environmental reserve by $13.9 million, of which $13.4 million was
in connection with our submission of a draft feasibility study to the State of Washington
on September 8, 2010 to address the historical use of oils containing polychlorinated
biphenyls, or PCBs, at our Trentwood facility in Spokane, Washington facility and to
reflect plans for remediation for the next 30 years. |
|
|
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|
We completed the strategic acquisition of the manufacturing facility in Florence,
Alabama, and related assets, of Nichols, which manufactures bare mechanical alloy wire
products, nails and aluminum rod and expands our offerings of small diameter rod, bar and
wire products to our core end market segments for aerospace, general engineering and automotive
applications. Consideration for the acquisition was $15.7 million, consisting of a $9.0
million cash payment and a promissory note of $6.7 million, as well as the assumption of
certain liabilities totaling approximately $2.1 million. |
|
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|
We received $4.8 million of cash and recorded a $1.9 million asset impairment charge
in connection with the sale of our Greenwood, South Carolina facility. |
|
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|
We recorded a $2.7 million asset impairment charge in regard to certain property,
plant and equipment. |
|
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|
We generated $66.3 million of cash from operations. |
|
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We paid dividends and dividend equivalents totaling $19.0 million in 2010. |
|
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|
The Union VEBA sold 1,321,485 shares of our common stock at a weighted-average price
of $39.39 per share thereby increasing VEBA assets by $52.1 million and reducing
Stockholders equity by $32.5 million (net of tax). |
2009:
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|
We recorded $80.5 million of non-cash, pre-tax, unrealized mark to market gains on
our derivative positions. |
|
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|
|
We generated $127.7 million of cash from operations, repaid $36 million borrowed in
2008 under our revolving credit facility, and had no borrowings and $161.9 million of
borrowing capacity (net of capacity used for letters of credit) under our revolving credit
facility as of December 31, 2009. |
|
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|
We paid dividends and dividend equivalents totaling $19.6 million in 2009. |
26
|
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|
We recorded a $9.3 million lower of cost or market inventory adjustment in the first
quarter of 2009 due to a decline in metal prices following December 31, 2008. |
|
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|
We continued to fully impair our investment in Anglesey during the first half of
2009, resulting in impairment charges of $1.8 million. Anglesey fully curtailed its
smelting operations at the end of September 30, 2009 and commenced remelt and casting
operations in the fourth quarter of 2009. Due principally to a significant loss incurred
by Anglesey during the third quarter of 2009, relating primarily to charges recorded for
employee redundancy costs in connection with the cessation of its smelting operations, we
suspended the use of the equity method of accounting commencing in the third quarter of
2009. |
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|
In the first quarter of 2009, we incurred restructuring costs and other charges in
connection with the closure of our Tulsa, Oklahoma facility. Such costs consisted
principally of contract termination and facility shut-down costs. In the second quarter of
2009, we curtailed operations at our Bellwood, Virginia facility to focus solely on drive
shaft and seamless tube products and shut down the Bellwood, Virginia facility temporarily
during the month of July 2009, in response to planned shutdowns in the automotive industry
and continued weak economic and market conditions. In addition, we reduced our personnel
in certain other locations in the second quarter in an effort to streamline costs. In
connection with these plans, we recorded restructuring costs and other charges of $5.4
million, principally related to involuntary employee termination and other personnel
costs. |
2008:
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|
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. |
|
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|
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. |
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|
In December 2008, we announced plans to close operations at our Tulsa, Oklahoma
facility and curtail operations at our Bellwood, Virginia facility due to deteriorating
economic and market conditions. These actions resulted in a restructuring charge of $8.8
million in the fourth quarter of 2008 related to employee termination benefits and asset
impairment. |
|
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|
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 did not expect to be able to
recover our investment in Anglesey, based on the expectation that Anglesey would fully
curtail its smelting operations at the end of September 2009, when its power contract
expired. As a result, we recorded an impairment charge of $37.8 million and a
corresponding decrease to Investment in and advances to unconsolidated affiliate. |
|
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|
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 (approximately 14.0 million British Pounds Sterling) 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. |
|
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|
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. |
|
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|
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. |
|
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We paid dividends and dividend equivalents totaling $17.2 million in 2008. |
2007:
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During the fourth quarter, we repaid our $50 million term loan. |
|
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|
In June 2007, our Board of Directors initiated a regular quarterly dividend of $0.18
per share. We paid total dividends of $7.4 million in 2007. |
27
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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:
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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 of approximately $3.1 billion. |
28
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 market segments 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 reporting and concluded that such control was effective as of December 31,
2010. 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 Report.
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 the following sections:
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Overview; |
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Management Review of 2010 and Outlook for the Future; |
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Results of Operations; |
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Liquidity and Capital Resources; |
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Contractual Obligations, Commercial Commitments, and Off-Balance-Sheet and Other
Arrangements; |
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Critical Accounting Estimates and Policies; |
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New Accounting Pronouncements; and |
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Available Information. |
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.
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, (i) are 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 North American manufacturer of semi-fabricated specialty aluminum products
for aerospace / high strength, general engineering, automotive, and other industrial applications.
We also own a 49% interest in Anglesey Aluminium Limited (Anglesey), which owns and operates a
secondary aluminum remelt and casting facility in Holyhead, Wales.
At December 31, 2010, we operated 10 focused production facilities in the United States and
one facility in Canada that produce rolled, extruded, and drawn aluminum products used principally
for aerospace and defense, automotive, consumer durables, electronics, electrical, and machinery
and equipment end market segment applications. Through these facilities, we produced and shipped
29
approximately 514.2 million pounds of semi-fabricated aluminum products which comprised
effectively all of our total consolidated net sales of approximately $1,079.1 million during the
year ended December 31, 2010.
We have long-standing relationships with our customers, which consist primarily of blue-chip
companies including leading aerospace companies, automotive suppliers and metal distributors.
In our served markets, we believe we are the supplier of choice to many of our customers,
providing Best in Class customer satisfaction and offering a broad product portfolio. We have a
culture of continuous improvement that is facilitated by the Kaiser Production System (KPS), an
integrated application of the tools of Lean manufacturing, Six Sigma and Total Productive
Manufacturing. We believe KPS enables us to continuously reduce our own manufacturing costs,
eliminate waste throughout the value chain, and deliver Best in Class customer service through
consistent, on-time delivery of superior quality products on short lead times. We strive to tightly
integrate the management of our operations across multiple production facilities, product lines and
our served markets in order to maximize the efficiency of product flow to our customers.
A fundamental part of our business model is to mitigate the impact of aluminum price
volatility on our cash flow. We manage the risk of fluctuations in the price of primary aluminum
through either (i) pricing policies that allow us to pass the underlying cost of metal onto
customers, or (ii) hedging by purchasing financial derivatives to shield us from exposure related
to firm price sales contracts that specify the underlying metal price plus a conversion price.
Primary aluminum prices fell significantly in the last half of 2008, reaching a low point during
the first quarter of 2009. Since the first quarter of 2009, primary aluminum prices have generally
increased, except for a slight decline in the second quarter of 2010, followed by a pricing rebound
during the last half of 2010. The average London Metal Exchange (LME) transaction price per pound
of primary aluminum for 2010, 2009 and 2008 were $0.99, $0.76 and $1.17, respectively. At February
16, 2011, the LME transaction price per pound was $1.12.
Our highly engineered products are manufactured to meet demanding requirements of aerospace
and defense, general engineering, automotive and other industrial applications. We have focused our
business on select end market segment applications where we believe we have sustainable competitive
advantages and opportunities for long-term profitable growth. We believe that we differentiate
ourselves with a broad product offering, Best in Class customer satisfaction and the ability to
provide superior products through our Kaiser Select® product
line. Our Kaiser Select® products are
manufactured to deliver enhanced product characteristics with improved consistency which results in better performance,
lower waste, and, in many cases, lower cost for our customers.
In the commercial aerospace sector, we believe that global economic growth and development
will continue to drive growth in airline passenger miles. In addition, trends such as longer routes
and larger payloads, and a focus on fuel efficiency have increased the demand for new and larger
aircraft. We believe that the long-term demand drivers, including growing build rates, larger
airframes and increased use of monolithic design throughout the industry will continue to increase
demand for our high strength aerospace plate. Monolithic design and construction utilizes aluminum
plate that is heavily machined to form the desired part from a single piece of metal as opposed to
using aluminum sheet, extrusions or forgings that are affixed to one another using rivets, bolts or
welds.
Our products are also sold into defense end market segments. Ongoing requirements of active military
engagements continue to drive demand for armor plates. Longer term, we expect the production of the
F-35, or Joint Strike Fighter, to also drive demand for our high strength products.
Commercial aerospace and defense applications have demanding customer requirements for quality
and consistency. As a result, there are a very limited number of suppliers worldwide who are
qualified to serve these market segments. We believe barriers to entry include significant capital
requirements, technological expertise and a rigorous qualification process for safety-critical
applications.
Our general engineering products serve the North American industrial market segments, and
demand for these products generally tracks the broader economic environment. We expect a gradual
recovery in demand throughout the supply chain as the economy continues to improve.
We expect the 2011 North American automotive sector build rates to increase approximately 14%
over 2010. Our automotive products typically have specific performance attributes in terms of
machinability and mechanical properties for specific applications across a broad mix of North
American original equipment manufacturers (OEMs) and automotive platforms. We believe that these
attributes are not easily replicated by our competitors and are important to our customers, who are
typically first tier automotive suppliers. Additionally, we believe that in North America, from
2001 to 2008, the aluminum extrusion content per vehicle grew at a compound annual growth rate of
5%, as automotive OEMs and their suppliers find opportunities to decrease weight without
sacrificing structural integrity and safety performance. We also believe the United States
Corporate Average Fuel Economy (CAFE) regulations, which increase fuel efficiency standards on an
annual basis, will continue to drive growth in demand for aluminum extruded components in passenger
vehicles as a replacement for the heavier weight of steel components.
For purposes of segment reporting under United States generally accepted accounting principles
(GAAP), we treat our Fabricated Products segment as its own reportable segment. We combine our
three other business units, Secondary Aluminum, Hedging and the Corporate and Other into one
category, which we refer to as All Other. All Other is not considered a reportable
30
segment (see Note 16 of Notes to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data of this Report).
Management Review of 2010 and Outlook for the Future
Overall Fabricated Products shipment volumes in 2010 increased significantly as compared to
2009, reflecting improved economic conditions and significantly stronger demand for general
engineering and automotive applications, as distributor destocking that was prevalent in 2009
abated in 2010 and automotive build rates improved over the prior year. Shipments of aerospace and
high strength products were moderately higher in 2010, reflecting improved end market segment demand
mitigated by continued destocking of aerospace plate products by aircraft manufacturers.
Our 2010 results reflected a 20% increase in Fabricated Products shipment volume and a
moderate decrease in Fabricated Products realized prices. The decrease in prices in our Fabricated
Products segment reflects primarily lower value-added revenue per pound as compared to 2009,
largely offset by the pass-through to customers of higher underlying hedged, alloyed metal prices.
The decline in value-added revenue per pound was due to a shift in mix toward lower margin products
and slightly lower pricing during the year.
Our focus in 2010 was to (i) launch production at our world class Kalamazoo, Michigan casting
and extrusion facility, (ii) continue to improve manufacturing efficiencies to achieve further cost
improvements over our 2009 performance, (iii) expand our product offering of Kaiser
Select® products to meet the needs and specifications of our customers, (iv) continue to
strengthen our platform for growth through the strategic acquisitions and continued investment in
our business, and (v) strengthen our financial position and diversify our funding sources through
the refinancing of our revolving credit facility and the issuance of cash convertible senior notes.
Looking ahead, we expect incremental sales from the acquisition of the assets of Alexco and
Nichols along with increased demand for our aerospace and high strength products in 2011 compared
to 2010. Longer-term, we expect robust growth in overall demand for our aerospace and high strength
products as we move into 2012, driven by growing commercial aircraft build rates, larger aircrafts
and higher use of aluminum plate as aircraft manufacturers more broadly utilize monolithic design
in the production process. In addition, we expect aerospace supply chain inventories to reach
equilibrium within the next two to three years, although specific timing of such remains uncertain.
We expect demand for general engineering products to steadily improve during 2011 with the gradual
recovery of North American industrial production. Automotive demand is expected to improve
approximately 14% relative to 2010, tracking anticipated higher North American automotive build
rates compared to 2010. Our focus in 2011 will be:
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achieving full-scale production at our world class Kalamazoo, Michigan casting and
extrusion facility during 2011; |
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integrating fully the manufacturing facility in Chandler, Arizona, and other assets of
Alexco L.L.C. (Alexco), which manufactures hard alloy extrusions for aerospace
applications, into the operations of our Fabricated Products segment; |
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continuing to invest in our facilities to support growth and further enhance operating
efficiencies; |
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continuing to differentiate ourselves with additional Kaiser Select®
products, Best In Class customer satisfaction, strong delivery performance, expanded
product breadth, and broader geographic marketing presence; and |
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continuing to improve the manufacturing efficiencies of our facilities to generate
additional cost improvements over our performance in 2010. |
Results of Operations
Fiscal 2010 Summary
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Net sales for 2010 increased to $1,079.1 million compared to $987.0 million for 2009. The
increase included higher Fabricated Products segment shipment volume, reflecting improved
economic conditions and stronger demand for products across our end market segments. Partially
offsetting the increase in Fabricated Products sales was a decrease of $89.5 million in All
Other sales reflecting a decrease in shipment volume of primary aluminum products due to the
cessation of Angleseys smelting operation on September 30, 2009. |
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Our operating income for 2010 was $44.4 million compared to operating income of $118.7
million for 2009. Operating income for 2010 included items that we consider to be
non-run-rate, which totaled to a charge of $20.7 million, primarily related to an
environmental expense of $13.9 million and a non-cash impairment charge of $4.6 million in
regard to certain assets relating to Property, plant and equipment. Operating income for 2009
included significant non-run-rate items totaling
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31
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to a benefit of $55.8 million. These items
included primarily $80.5 million of non-cash mark to market gains on our
derivative positions, $9.3 million of lower of cost or market inventory write-downs and $5.4
million of restructuring costs related primarily to employee termination costs (see further
discussion of our operating income before non-run-rate in Segment and Business Unit
Information below). |
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Net income for 2010 was $14.1 million as compared to $70.5 million of net income for 2009.
The net income for 2010 and 2009 included all of the non-run-rate items discussed above. |
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Our effective tax provision rate was 50.4% for 2010 (see discussion in Income Tax
Provision (Benefit)). |
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In March 2010, we implemented a new financing structure to enhance our liquidity and
financial strength and flexibility. The financing was comprised of: |
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A $200 million revolving credit facility maturing in March 2014, secured by
substantially all of the accounts receivable and inventory of our domestic operating
subsidiaries and certain other assets and proceeds relating thereto; |
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The issuance of Notes in the aggregate principal amount of $175 million; |
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The purchase of call options indexed to our own stock to hedge the cash
obligations upon potential conversion of the Notes; |
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The issuance of warrants to effectively increase the conversion price of the
Notes from $48.32 per share to $61.36 per share; and |
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The repurchase of approximately 1.2 million shares of our common stock, using
$44.2 million of the net proceeds from the issuance of the Notes. |
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We had no borrowings and $168.9 million of borrowing availability (net of letters of
credit) under the Revolving Credit Facility as of December 31, 2010. |
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On August 9, 2010, we completed the strategic acquisition of the manufacturing facility in
Florence, Alabama and related assets of Nichols, which manufactures bare mechanical alloy
wire products, nails and aluminum rod and expands our offerings of small diameter rod, bar
and wire products to our core end market segments for aerospace, automotive and general engineering
applications. Consideration for the acquisition was $15.7 million, consisting of a $9.0
million cash payment and a promissory note of $6.7 million, as well as the assumption of
certain liabilities totaling approximately $2.1 million. |
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On October 12, 2010, we entered into an agreement to purchase the manufacturing facility in
Chandler, Arizona and related assets of Alexco, which manufactures hard alloy extrusions for
the aerospace industry. The transaction closed effective on January 1, 2011. Net cash
consideration for the purchase was $83.3 million (net of $4.9 million of cash received in the
acquisition), and assumed certain liabilities totaling $1.0 million. |
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In 2010, we paid a total of approximately $19.0 million, or $0.96 per common share, in cash
dividends to stockholders, including holders of restricted stock, and in dividend equivalents
to the holders of certain restricted stock units and the holders of performance shares with
respect to the target number of performance shares, which is approximately one-half of all
outstanding performance shares. |
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In 2010, our largest shareholder, a voluntary employees beneficiary association, or VEBA,
that provides benefits for certain eligible retirees represented by certain unions and their
spouses and eligible dependents (the Union VEVA), sold 1,321,485 shares of our common stock
at a weighted average price of $39.39 per share thereby increasing VEBA assets by $52.1
million and reducing Stockholders equity by $32.5 million (net of tax). |
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) for 2010, 2009 and 2008.
32
The following data should be read in conjunction with our consolidated financial statements
and the notes thereto included in Item 8. Financial Statements and Supplementary Data of this
Report. See Note 16 of Notes to Consolidated Financial Statements included in Item 8. Financial
Statements and Supplementary Data of this Report for further information regarding segments.
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Years Ended |
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December 31, |
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2010 |
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2009 |
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2008 |
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(In millions of dollars, except shipments and average sales price) |
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Shipments (mm lbs): |
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|
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|
|
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Fabricated Products |
|
|
514.2 |
|
|
|
428.5 |
|
|
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558.5 |
|
All Other1 |
|
|
0.4 |
|
|
|
113.9 |
|
|
|
133.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
514.6 |
|
|
|
542.4 |
|
|
|
691.6 |
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Average Realized Third-Party Sales Price (per
pound): |
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Fabricated Products2 |
|
$ |
2.10 |
|
|
$ |
2.09 |
|
|
$ |
2.39 |
|
All Other3 |
|
$ |
0.92 |
|
|
$ |
0.79 |
|
|
$ |
1.29 |
|
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Net Sales: |
|
|
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|
|
|
|
|
|
|
|
|
Fabricated Products |
|
$ |
1,078.8 |
|
|
$ |
897.1 |
|
|
$ |
1,336.8 |
|
All Other |
|
|
0.3 |
|
|
|
89.9 |
|
|
|
171.4 |
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|
|
|
|
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Total Net Sales |
|
$ |
1,079.1 |
|
|
$ |
987.0 |
|
|
$ |
1,508.2 |
|
|
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|
|
|
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Segment Operating Income (Loss):4 |
|
|
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Fabricated Products5 6 |
|
$ |
78.6 |
|
|
$ |
73.6 |
|
|
$ |
47.9 |
|
All Other7 |
|
|
(34.2 |
) |
|
|
45.1 |
|
|
|
(138.9 |
) |
|
|
|
|
|
|
|
|
|
|
Total Operating Income (Loss) |
|
$ |
44.4 |
|
|
$ |
118.7 |
|
|
$ |
(91.0 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit |
|
$ |
(14.3 |
) |
|
$ |
(48.1 |
) |
|
$ |
22.8 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
14.1 |
|
|
$ |
70.5 |
|
|
$ |
(68.5 |
) |
|
|
|
|
|
|
|
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|
Capital Expenditures, net of Accounts payable |
|
$ |
38.9 |
|
|
$ |
59.2 |
|
|
$ |
93.2 |
|
|
|
|
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1 |
|
Shipments in All Other represent shipments of primary aluminum products produced by
Angleseys smelting operations. As a result of the cessation of the smelting operation on
September 30, 2009, shipments in 2009 decreased as compared to 2008, and Anglesey did not
produce any primary aluminum in 2010 (see further discussion in Segment and Business Unit
Information below). |
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2 |
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Average realized prices for our Fabricated Products segment 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. |
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3 |
|
Average realized prices for All Other reflect average realized prices on sales of
primary aluminum product produced by Anglesey and are subject to fluctuations in the LME price
of metal. |
|
4 |
|
We periodically reassess the methodologies used to allocate costs among our business
units to assess segment profitability. In 2010, we modified the allocation of incentive
compensation expense relating to both our long-term incentive plans and certain short-term
incentive plans to our business units. All prior period results have been retrospectively
adjusted for consistency with cost allocation in 2010. These reclassifications have no impact
on our segment or consolidated Net sales, or our consolidated operating income. Based upon our
methodology to allocate incentive costs among our business units in 2010, an additional $4.6
million and $5.6 million of charges relating to our long-term incentive plans and certain
short-term employee incentive plans have been included in the operating results of the
Fabricated Products segment in 2009 and 2008, respectively. |
33
|
|
|
5 |
|
Fabricated Products segment includes non-cash mark-to-market (losses) gains on natural
gas and foreign currency hedging activities totaling $(4.3) million, $4.9 million and $(5.7)
million for the year ended December 31, 2010, 2009 and 2008, respectively. For further
discussion regarding mark-to-market matters, see Note 14 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data of this Report. |
|
6 |
|
Fabricated Products segment operating results for the year ended December 31, 2010,
2009 and 2008 include non-cash last-in, first-out (LIFO) inventory (charges) benefits of
$(16.5) million, $(8.7) million and $7.5 million, respectively, and metal gains (losses) of
approximately $15.9 million, $5.5 million and $(11.4) million, respectively. Also included in
the Fabricated Products segment operating results for the year ended December 31, 2009 and
2008 were $9.3 million and $65.5 million, respectively, of lower of cost or market inventory
write-downs and $5.4 million and $8.8 million, respectively, of restructuring charges relating
to the restructuring plans involving our Tulsa, Oklahoma and Bellwood, Virginia facilities.
Restructuring charges in 2010 were not material. Also included in the Fabricated Products
segment operating results for the year ended December 31, 2010, 2009 and 2008 were $13.6
million, $0.7 million and $5.0 million, respectively, of environmental expense. Fabricated
Products segment operating results for 2010 also included $3.9 million of asset impairment
charge relating to certain Property, plant and equipment. |
|
7 |
|
The changes in operating income in All Other were primarily driven by the Hedging
business unit operating results. For the year ended December 31, 2010, 2009 and 2008, non-cash
mark-to-market gains (losses) on primary aluminum hedging
activities were $3.6 million, $61.2
million and $(67.2) million, respectively. The non-cash mark-to-market gains (losses) of
foreign currency derivatives for the year ended December 31, 2010, 2009 and 2008, were $0
million, $14.4 million and $(14.2) million, respectively. For further discussion regarding
mark-to-market matters, see Note 14 of Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary Data of this Report. |
|
|
|
Also included in the operating income of All Other were $1.8 million and $37.8 million of
impairment charges in 2009 and 2008, respectively, relating to our investment in Anglesey. |
Summary. We reported net income (loss) of $14.1 million for 2010 compared $70.5 million for
2009 and $(68.5) million for 2008. All periods include a number of non-run-rate items that are more
fully explained below.
Net Sales. We reported Net sales for 2010 of $1,079.1 million compared to $987.0 million for
2009 and $1,508.2 million for 2008. As more fully discussed below, the increase in Net sales during
the 2010 was primarily due to an increase in Fabricated Products segment shipments, partially
offset by lower sales in All Other related to Angleseys remelt operations reported on a net
revenue recognition basis commencing in the fourth quarter of 2009. Realized prices per pound for
the Fabricated Products segment declined slightly in 2010 compared to the prior year, with little
impact to Net sales, as higher underlying metal prices largely offset lower value added revenue.
Fluctuation in underlying primary aluminum market prices does not necessarily directly impact
profitability because (i) a substantial portion of the business conducted by the Fabricated
Products segment passes primary aluminum price changes directly onto customers and (ii) our hedging
activities in support of Fabricated Products segment firm price sales agreements limit our losses
as well as gains from primary metal price changes.
Cost of Products Sold Excluding Depreciation, Amortization and Other Items. Cost of products
sold, excluding depreciation, amortization and other items for 2010 totaled $946.8 million, or 88%
of Net Sales, compared to $766.4 million, or 78% of Net sales, in 2009. Included in Cost of
products sold, excluding depreciation, amortization and other items were $(0.8) million and $80.5
million unrealized mark-to-market (losses) gains on our derivative positions for the 2010 and 2009,
respectively. See Segment and Business Unit Information below for a detailed discussion of the
comparative results of operations for 2010 and 2009.
Cost of products sold, excluding depreciation, amortization and other items for 2009 totaled
$766.4 million, or 78% of Net Sales, compared to $1,400.7 million, or 93% of Net sales, in 2008.
Included in Cost of products sold, excluding depreciation, amortization and other items were $80.5
million and $(87.1) million of unrealized mark-to-market gains (losses) on our derivative positions
for 2009 and 2008, respectively. See Segment and Business Unit Information below for a detailed
discussion of the comparative results of operations for 2009 and 2008.
Lower of Cost or Market Inventory Write-down. We recorded lower of cost or market inventory
write-downs of $9.3 million and $65.5 million in 2009 and 2008, respectively, as a result of
declining metal prices. There were no lower of cost or market inventory write-downs in 2010.
Impairment of Investment in Anglesey. In 2008, we recorded a $37.8 million charge to fully
impair our investment in Anglesey, and we recorded additional impairment charges totaling $1.8
million in 2009. Based on our assessment of the facts and circumstances, we suspended the equity
method of accounting for our investment in Anglesey commencing in the third quarter of 2009 and
continuing through December 31, 2010.
34
Restructuring Costs and Other Charges. In December 2008, we announced plans to close our
Tulsa, Oklahoma facility and curtail operations at our Bellwood, Virginia facility due to
deteriorating economic and market conditions. In connection with these plans, we recorded $8.8
million of restructuring costs and other charges in 2008 and $0.8 million of additional charges in
2009. In connection with plans announced in 2009 to further curtail operations at our Bellwood,
Virginia facility we recorded in 2009 an additional $4.6 million of restructuring costs and other
charges. We recorded an immaterial amount of restructuring benefits in 2010 primarily related to
$1.0 million of revisions of estimated employee termination costs, offset by an additional
restructuring charge of $0.7 million in regard to the impairment of certain assets relating to
Construction in progress in connection with the above-referenced restructuring
efforts. See Note 17 of Notes to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data of this Report for further information regarding our
2008 and 2009 restructuring plans.
Depreciation and Amortization. Depreciation and amortization for 2010 was $19.8 million
compared to $16.4 million for 2009 and $14.7 million for 2008. Depreciation expense increased in
2010 compared to 2009 and 2008 primarily as the result of bringing on-line certain production
equipment relating to investment in our Kalamazoo, Michigan facility and our Trentwood facility in
Spokane, Washington. Depreciation and amortization in 2010 also included $0.3 million of
amortization expense relating to intangible assets acquired in connection with the acquisition of
the Florence, Alabama facility in August 2010.
Selling, Administrative, Research and Development, and General. Selling, administrative,
research and development, and general expense totaled $64.4 million in 2010 compared to $69.9
million in 2009 and $73.1 million in 2008. The decreases were primarily due to lower non-cash stock
compensation expense relating to our long-term incentive programs.
Other Operating Charges (Benefits). Other operating charges for 2010 primarily consisted of
$1.9 million of impairment charge in connection with the sale of our Greenwood, South Carolina
facility, and $2.0 million of impairment charge in regard to certain assets relating to
Construction in progress. Other operating benefits for 2009 and 2008 of $0.9 million and $1.4
million, respectively, reflected primarily recovery of a pre-Chapter 11 emergence obligation owed
to us, for which we had previously established a full reserve.
Interest Expense. Interest expense of $11.8 million for 2010 was primarily related to cash and
non-cash interest expense incurred on our Notes which were issued on March 29, 2010. Interest
expense was zero in 2009 compared with $1.0 million in 2008. The change in expense from 2008 to
2009 is primarily due to $2.7 million of interest capitalization on Construction in progress,
reducing interest expense in 2009 to zero.
Other (Expense) Income, Net. Other (expense) income, net was $(4.2) million for 2010, compared
to $(0.1) million for 2009 and $0.7 million for 2008. Other income (expense), net for 2010 was
primarily related to a net unrealized mark-to-market loss of $4.9 million on the derivative
instruments relating to our Notes. The decrease from 2008 to 2009 was primarily due to lower
interest income as the result of lower market interest rates.
Income Tax Provision. The income tax provision for 2010 was $14.3 million, or an effective tax
rate of 50.4%. The difference between the effective tax rate and the projected blended statutory
tax rate for 2010 was primarily due to (i) an increase in the valuation allowance for certain
federal and state net operating losses, which resulted in an increase to the income tax provision
of $2.1 million and an increase to the blended statutory tax provision rate of 7.5%; (ii) a
decrease in state net operating losses related to lower state apportionment in various states of
$2.3 million which increased the blended statutory rate by 8.0%, (iii) unrecognized tax benefits,
including interest and penalties, which decreased the income tax provision by $1.1 million and the
blended statutory tax provision rate by approximately 3.9%; (iv) the impact of a non-deductible
compensation expense, which resulted in an increase to the income tax provision of $0.6 million,
and increased the blended statutory tax provision rate by approximately 2.1% and (v) the foreign
currency impact on unrecognized tax benefits, interest and penalties, which resulted in a $0.6
million currency translation adjustment that was recorded in Accumulated other comprehensive
income.
The effective tax rate for 2009 was approximately 40.5%. The difference between the effective
tax rate and the projected blended statutory tax rate for 2009 was primarily due to (i) the impact
of a non-deductible compensation expense, which resulted in an increase to the income tax provision
of $4.7 million, and increased the blended statutory tax provision rate by approximately 3.9%; (ii)
a decrease in the valuation allowance for certain federal and state net operating losses, state tax
rate adjustments and federal general business tax credits, which resulted in a decrease to the
income tax provision of $2.9 million and a decrease to the blended statutory tax provision rate of
2.4%; (iii) unrecognized tax benefits, including interest and penalties, which increased the income
tax provision by $1.3 million and the blended statutory tax provision rate by approximately 1.1%;
and (iv) the foreign currency impact on unrecognized tax benefits, interest and penalties, which
resulted in a $2.7 million currency translation adjustment that was recorded in Accumulated other
comprehensive income.
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 for 2008 was primarily due to
the following factors: (i) an increase in the valuation allowance for certain federal and state net
operating losses, state tax rate adjustments and the impairment related to Anglesey, which resulted
in $7.1 million being included in the income tax provision, decreasing the blended statutory tax
benefit rate by approximately 7.7%, (ii) the treatment of our equity in income before income taxes
of Anglesey as a
35
reduction (increase) in Cost of products sold excluding depreciation and the
inclusion of the income tax effects of our equity in income in the tax provision, which resulted in
$3.5 million being included in the income tax provision, decreasing the blended statutory tax
benefit rate by approximately 3.8%, (iii) unrecognized tax benefits, including interest and
penalties, which decreased the income tax benefit by $2.4 million and the blended statutory tax
benefit rate by approximately 2.7%, and (iv) the foreign currency impact on unrecognized tax
benefits, interest and penalties, which resulted in a $5.2 million currency translation adjustment
that was recorded in Accumulated other comprehensive income.
Derivatives
From time-to-time, we enter into derivative transactions, including forward contracts and
options, to limit our economic (i.e., cash) exposure resulting from (i) metal price risk related to
our sale of fabricated aluminum products and the purchase of metal used as raw material for our
fabrication operations, (ii) 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.
In March 2010, in connection with the issuance of the Notes, we purchased cash-settled call
options (the Call Options) relating to our common stock to limit our exposure to the cash
conversion feature of the Notes (see Note 7 of Notes to Consolidated Financial Statements included
in Item 8. Financial Statements and Supplementary Data of this Report). We may modify the terms
of our derivative contracts based on operational needs or financing objectives. 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
transactions occur. However, due to mark-to-market accounting, during the term of the derivative
contracts, significant unrealized, non-cash gains and losses may be recorded in the income
statement. We may also be exposed to margin calls placed on derivative contracts, which we try to
minimize or offset through the management of counterparty credit lines and/or the utilization of
options as part of our hedging activities. We regularly review the creditworthiness of our
derivative counterparties and do not expect to incur a significant loss from the failure of any
counterparties to perform under any agreements.
The fair value of our derivatives recorded on the Consolidated Balance Sheets at December 31,
2010 and December 31, 2009 was $0.7 million and $16.5 million, respectively. The decrease in the
net position was primarily due to the addition of two new derivatives in connection with the
issuance of the Notes. The changes in market value of derivative contracts resulted in the
recognition of a $5.6 million unrealized mark-to-market loss on derivatives, which we consider to
be a non-run-rate item (see Note 14 of Notes to Consolidated Financial Statements included in Item
8. Financial Statements and Supplementary Data of this Report).
Fair Value Measurement
We apply the provisions of Accounting Standard Codification (ASC) Topic 820, Fair Value
Measurements and Disclosures, in measuring the fair value of our derivative contracts and the fair
value of our Canadian pension plan assets and the plan assets of the Union VEBA and another VEBA
that provides for certain other eligible retires and their spouses and eligible dependents (the
Salaried VEBA and, collectively with the Union VEBA, the VEBAs).
Commodity, Foreign Currency and Energy Hedges The fair values of a majority of these
derivative contracts are based upon trades in liquid markets. Valuation model inputs can generally
be verified and valuation techniques do not involve significant judgment. The fair values of such
financial instruments are generally classified within Level 2 of the fair value hierarchy (see Note
1 of Notes to Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data of this Report). We, however, have some derivative contracts that do not have
observable market quotes. For these financial instruments, we use 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.
Cash Conversion Feature of the Notes and Call Options The value of the cash conversion
feature of the Notes is measured as the difference between the estimated fair value of the Notes
and the estimated fair value of the Notes without the cash conversion feature. The Notes were
valued based on the trading price of the Notes on December 31, 2010. The fair value of the Notes
without the cash conversion feature is the present value of the series of fixed income cash flows
under the Notes with a mandatory redemption in 2015. The Call Options are valued using a binomial
lattice valuation model. Significant inputs to the model include our stock price, risk-free rate,
credit spread, dividend yield, expected volatility of our stock price, and probability of certain
corporate events, all of which are observable inputs by market participants. The fluctuations in
the fair values of the Call Options and the Notes are primarily due to the changes in our stock
price. See Note 14 of Notes to Consolidated Financial Statements included in Item 8. Financial
Statements and Supplementary Data of this Report for significant assumptions used in these
valuations.
Employee Benefit Plan Assets In determining the fair value of employee benefit plan assets,
we utilize primarily the results of valuations supplied by the investment advisors responsible for
managing the assets of each plan. Certain plan assets are valued based
36
upon unadjusted quoted
market prices in active markets that are accessible at the measurement date for identical,
unrestricted assets (e.g., liquid securities listed on an exchange). Such assets are classified
within Level 1 of the fair value hierarchy. Valuation of other invested plan assets is based on
significant observable inputs (e.g., net asset values of registered investment companies,
valuations derived from actual market transactions, broker-dealer supplied valuations, or
correlations between a given U.S. market and a non-U.S. security). Valuation model inputs can
generally be verified and valuation techniques do not involve significant judgment. The fair values
of such financial instruments are classified within Level 2 of the fair value hierarchy. Our
Canadian pension plan assets and the plan assets of the VEBAs are measured annually on December 31.
Restructuring Activities
In December 2008, we announced plans to close our Tulsa, Oklahoma facility and curtail
operations at our Bellwood, Virginia facility due to deteriorating economic and market conditions.
Both facilities produced extruded rod and bar products sold principally to distributors for general
engineering applications. Approximately 45 employees at the Tulsa, Oklahoma facility and 125
employees at the Bellwood, Virginia facility were affected. The restructuring efforts initiated
during the fourth quarter of 2008 were substantially completed by the end of 2009.
In May 2009, we announced plans to further curtail operations at our Bellwood, Virginia
facility to focus solely on drive shaft and seamless tube products. We also reduced personnel in
certain other locations in the second quarter of 2009 to streamline costs. Approximately 85
employees were affected by the reduction in force, principally at the Bellwood, Virginia facility.
The restructuring efforts initiated during the second quarter of 2009 were substantially completed
by the end of 2009.
In connection with the above restructuring efforts, we incurred restructuring costs and other
charges of $8.8 million in 2008, of which $4.5 million were related to involuntary employee
terminations and $4.3 million were related to asset impairments.
In 2009, we recorded restructuring costs and other charges of $5.4 million, of which $4.3
million were related to involuntary employee terminations and other personnel costs, and the
remaining $1.1 million were principally related to contract termination costs, facility shut-down
costs and a non-cash asset impairment charge. Of the personnel-related costs, non-cash expenses of
approximately $0.8 million related to accelerated vesting of previously granted stock-based
payments.
In 2010, we recorded a net restructuring benefit of $0.3 million in connection with the above
restructuring efforts, consisting of (i) a benefit of $1.0 million representing revisions of
previously estimated employee termination costs due to extension of unemployment benefits from the
Commonwealth of Virginia and (ii) a non-cash impairment charge of $0.7 million relating to certain
Property, plant and equipment at the previously closed Tulsa, Oklahoma facility.
Cash restructuring obligation relating to employee termination costs was $0.4 million at
December 31, 2010 which we expect to pay in 2011.
These restructuring activities reduced excess capacity in our manufacturing system in response
to reduced demand in the general engineering and ground transportation end market segments in late 2008 and
2009. As a result, we avoided costs related to maintaining this excess capacity during 2009 and
2010, while continuing to maintain adequate capacity throughout our operations to enable us to meet
anticipated customer needs and to serve anticipated demand in our core markets.
Segment and Business Unit Information
For the purposes of segment reporting under GAAP, we have one reportable segment, Fabricated
Products. We also have three other business units which we combine into All Other. The Fabricated
Products segment sells value added products such as heat treat sheet and plate and extruded rod,
bar, wire, and tube products, which are primarily used in aerospace, defense, high strength,
general engineering, automotive and other industrial end market segment applications. All Other consists of
Secondary Aluminum, Hedging and Corporate and Other business units. The Secondary Aluminum business
unit sells value added products such as ingot and billet produced by Anglesey, and receives a
portion of a premium over normal commodity market prices. Our Hedging business unit conducts
hedging activities in respect of our exposure to primary aluminum prices and through September 30,
2009, conducted hedging activities in respect of British Pound Sterling exchange rate risk relating
to Angleseys smelting operations. Our Corporate and Other business unit provides general and
administrative support for our operations. All Other is not considered a reportable segment. The
accounting policies of the segment and business units are the same as those described in Note 1 of
Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data
of this Report. Segment results are evaluated internally before interest expense, other expense
(income) and income taxes.
37
Fabricated Products
The table below provides selected operational and financial information (in millions of
dollars except shipments and average realized sales price) for our Fabricated Products segment for
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Shipments (mm lbs) |
|
|
514.2 |
|
|
|
428.5 |
|
|
|
558.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of average realized third-party sales price (per pound): |
|
|
|
|
|
|
|
|
|
|
|
|
Hedged cost of alloyed metal |
|
$ |
1.02 |
|
|
$ |
0.89 |
|
|
$ |
1.19 |
|
Average realized third-party value added revenue |
|
$ |
1.08 |
|
|
$ |
1.20 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
Average realized third-party sales price |
|
$ |
2.10 |
|
|
$ |
2.09 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,078.8 |
|
|
$ |
897.1 |
|
|
$ |
1,336.8 |
|
Segment Operating Income |
|
$ |
78.6 |
|
|
$ |
73.6 |
|
|
$ |
47.9 |
|
The table below provides shipment and value added revenue information (in millions of dollars
except shipments and value added revenue per pound) for our end market segment applications for 2010, 2009
and 2008 for our Fabricated Products segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Shipments (mm lbs): |
|
|
|
|
|
|
|
|
|
|
|
|
Aero/HS Products |
|
|
158.9 |
|
|
|
144.8 |
|
|
|
157.7 |
|
GE Products |
|
|
217.4 |
|
|
|
189.0 |
|
|
|
258.1 |
|
Automotive Extrusions |
|
|
54.2 |
|
|
|
36.2 |
|
|
|
50.2 |
|
Other Products |
|
|
83.7 |
|
|
|
58.5 |
|
|
|
92.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
514.2 |
|
|
|
428.5 |
|
|
|
558.5 |
|
Value added revenue:1 |
|
|
|
|
|
|
|
|
|
|
|
|
Aero/HS Products |
|
$ |
295.4 |
|
|
$ |
278.0 |
|
|
$ |
323.8 |
|
GE Products |
|
|
174.0 |
|
|
|
164.7 |
|
|
|
248.9 |
|
Automotive Extrusions |
|
|
45.6 |
|
|
|
31.3 |
|
|
|
41.6 |
|
Other Products |
|
|
40.9 |
|
|
|
39.4 |
|
|
|
58.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
555.9 |
|
|
$ |
513.4 |
|
|
$ |
672.5 |
|
Value added revenue per pound: |
|
|
|
|
|
|
|
|
|
|
|
|
Aero/HS Products |
|
$ |
1.86 |
|
|
$ |
1.92 |
|
|
$ |
2.05 |
|
GE Products |
|
|
0.80 |
|
|
|
0.87 |
|
|
|
0.96 |
|
Automotive Extrusions |
|
|
0.84 |
|
|
|
0.86 |
|
|
|
0.83 |
|
Other Products |
|
|
0.49 |
|
|
|
0.67 |
|
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.08 |
|
|
$ |
1.20 |
|
|
$ |
1.20 |
|
|
|
|
1 |
|
Value added revenue represents net sales less hedged cost of alloyed metal. |
For 2010, Net sales of fabricated products increased by 20% to $1,078.8 million, as compared
to 2009, due primarily to a 20% increase in shipments reflecting improved economic conditions and
significantly stronger demand for GE products and Automotive Extrusions, as destocking by our
distributor customers that was prevalent in 2009 abated in 2010 and automotive build rates improved
over the prior year. Shipments of Aero/HS products were moderately higher in 2010, reflecting
improved demand mitigated by continued destocking of aerospace plate products. Average
realized third-party sales price increased slightly reflecting
38
higher underlying hedged, alloyed
metal prices passed through to customers, largely offset by lower value-added revenue per pound as
compared to 2009. The decline in value-added revenue per pound was due to a shift in mix toward
lower margin products and slightly lower pricing during the year.
For 2009, net sales of fabricated products decreased by 33% to $897.1 million, as compared to
2008, due primarily to a 23% decrease in shipments and a 13% decrease in average realized prices.
Shipments of Aero/HS products in 2009 were 8% lower as compared to 2008 due to inventory destocking
of products for aerospace and high strength end market segment applications throughout the supply chain,
which was largely offset by higher contractual aerospace plate shipments. Shipments of GE products
and Automotive Extrusions in 2009 declined 33% as compared to 2008, reflecting weak economic and market conditions for these applications, exacerbated by significant inventory destocking by
our distributor customers and throughout the value chain. The year-over-year reduction in average
realized prices reflected the pass through to customers of 25% lower underlying hedged alloyed
metal prices. Value-added revenue per pound was unchanged from 2008 at $1.20 per pound.
Operating income in the Fabricated Products segment for 2010, 2009 and 2008 included several
large non-run-rate items. These items are listed below (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
78.6 |
|
|
$ |
73.6 |
|
|
$ |
47.9 |
|
Impact to operating income of non-run-rate items: |
|
|
|
|
|
|
|
|
|
|
|
|
Metal gains (losses) (before considering LIFO) |
|
|
15.9 |
|
|
|
5.5 |
|
|
|
(11.4 |
) |
Non-cash LIFO (charges) benefits |
|
|
(16.5 |
) |
|
|
(8.7 |
) |
|
|
7.5 |
|
Non-cash lower of cost or market inventory write-down |
|
|
|
|
|
|
(9.3 |
) |
|
|
(65.5 |
) |
Mark-to-market (losses) gains on derivative instruments |
|
|
(4.3 |
) |
|
|
4.9 |
|
|
|
(5.7 |
) |
Restructuring benefits (charges) |
|
|
0.3 |
|
|
|
(5.4 |
) |
|
|
(8.8 |
) |
Asset impairment charges |
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
Environmental expenses |
|
|
(13.6 |
) |
|
|
(0.7 |
) |
|
|
(5.0 |
) |
|
|
|
|
|
|
|
|
|
|
Total non-run-rate items |
|
|
(22.1 |
) |
|
|
(13.7 |
) |
|
|
(88.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income excluding non-run-rate items |
|
$ |
100.7 |
|
|
$ |
87.3 |
|
|
$ |
136.8 |
|
|
|
|
|
|
|
|
|
|
|
As noted above, operating income excluding identified non-run-rate items for 2010 was $13.4
million higher than for 2009. Operating income for 2009 was $49.5 million lower than for 2008.
Operating income excluding non-run-rate items for 2010 as compared to 2009 and for 2009 compared to
2008 reflects the following impacts:
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009 |
|
|
2009 vs. 2008 |
|
|
|
Favorable/(Unfavorable) |
|
|
Favorable/(Unfavorable) |
|
Sales impact |
|
$ |
10.0 |
|
|
$ |
(94.0 |
) |
Manufacturing efficiency improvements |
|
|
9.0 |
|
|
|
13.6 |
|
Energy costs |
|
|
7.8 |
|
|
|
18.5 |
|
Planned major maintenance |
|
|
(2.7 |
) |
|
|
6.9 |
|
Freight costs |
|
|
(3.4 |
) |
|
|
6.7 |
|
Depreciation expense |
|
|
(3.2 |
) |
|
|
(1.6 |
) |
Currency exchange related |
|
|
(2.8 |
) |
|
|
3.0 |
|
Other |
|
|
(1.3 |
) |
|
|
(2.6 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
13.4 |
|
|
$ |
(49.5 |
) |
|
|
|
|
|
|
|
Segment operating results for 2010, 2009 and 2008 include (losses) gains on intercompany
hedging activities with the Hedging business unit totaling $(0.1) million, $(42.8) million and
$16.9 million, respectively. These intercompany amounts eliminate in consolidation.
39
As described in Note 17 of Notes to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data of this Report, we completed the sale of our
manufacturing facility in Greenwood, South Carolina in July 2010. We received approximately $4.8
million of cash consideration and recognized an impairment loss of $1.9 million.
On August 9, 2010, we acquired the Florence, Alabama facility, and related assets, of Nichols,
which manufactures bare mechanical alloy wire products, nails and aluminum rod for aerospace,
general engineering, and automotive applications. Consideration consisted of (i) $9.0 million in
cash, (ii) a promissory note in the amount of $6.7 million, payable to Nichols, and (iii) the
assumption of certain liabilities totaling approximately $2.1 million. The transaction generated
approximately $3.1 million of goodwill and $4.0 million of intangible assets relating primarily to
customer relationships. The intangible assets are expected to be amortized over an estimated
weighted-average useful life of approximately 18 years.
On October 12, 2010, we entered into an agreement to purchase the Chandler, Arizona facility
(the Chandler, Arizona (Extrusion) facility), and related assets, of Alexco, which manufactures
hard alloy extrusions for the aerospace industry. The Chandler, Arizona (Extrusion) facility is a
well-established supplier of aerospace extrusions, and the acquisition positions us in a
significant market segment that provides a natural complement to our offerings of sheet, plate,
cold finish and drawn tube products for aerospace applications. The transaction closed effective on
January 1, 2011. We paid net cash consideration of $83.3 million (net of $4.9 million cash received
in the acquisition), and assumed certain liabilities totaling approximately $1.0 million. The
transaction generated approximately $34.2 million of goodwill and $35.4 million of intangible
assets relating primarily to customer relationships. The intangible assets are expected to be
amortized over an estimated weighted-average useful life of approximately 25 years, which will
increase amortization expense by approximately $1.7 million in 2011.
Outlook
We continue to be very optimistic about the long-term prospects for aerospace and high
strength applications and the opportunities that lie ahead in 2011. We expect real demand for our
products in 2011 and beyond to be driven by increasing build rates, larger aircraft and continuing
conversions to monolithic design. In addition, the Nichols and Alexco acquisitions will further contribute to stronger year over year results. Longer term, we anticipate that
aerospace plate supply chain inventories will reach equilibrium within the next two to three years
although such timing remains uncertain.
The outlook for our general engineering, automotive and other applications is also positive as
we expect to benefit from slowly improving underlying demand, continuing growth in new aluminum
extrusion automotive programs, recent acquisitions and the launch of our new Kalamazoo, Michigan
extrusion facility. Longer term, we expect automotive and industrial demand growth will further
benefit from restocking throughout the supply chain and the drive for more fuel efficient vehicles
to meet CAFE regulations.
Overall, we anticipate a seasonally strong first half as shipments and value added revenue
across our end market segments exceed first half 2010 levels. We are well positioned in attractive, growing
market segments, and we anticipate that our strategic investments will further enhance our ability to
drive profitable growth and efficiently produce highly engineered products to meet the needs of our
customers.
40
All Other
All Other consists of Secondary Aluminum, Hedging and Corporate and Other business units. The
Secondary Aluminum business unit sells value added products such as ingot and billet produced by
Anglesey, for which we receive a portion of a premium over normal commodity market prices. Our
Hedging business unit conducts hedging activities in respect of our exposure to primary aluminum
prices and conducted British Pound Sterling exchange rate risk relating to Angleseys smelting
operations through September 30, 2009. Our Corporate and Other business unit provides general and
administrative support for our operations. All Other is not considered a reportable segment.
Secondary Aluminum. Anglesey operated as a primary aluminum smelter until September 30, 2009
when it fully curtailed its smelting operations due to the expiration of its long-term power
contract and its inability to find alternative affordable power to continue operating as a smelter.
In the fourth quarter of 2009, Anglesey commenced a remelt and casting operation, purchasing its
own material to produce value added secondary aluminum products such as ingot and billet and
selling 49% of its output to us. We in turn sell the secondary aluminum products to a third party
and receive a portion of a premium over normal commodity market prices. The transactions are
structured to largely eliminate our metal price and currency exchange rate risks with respect to
income and cash flow related to Anglesey. See Note 3 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and Supplementary Data of this Report for additional
information regarding the operations of Anglesey.
At December 31, 2008, we fully impaired our investment in Anglesey, and in the first half of
2009, we recorded additional impairment charges such that our investment balance in Anglesey
remained at zero. During the third quarter of 2009, Anglesey incurred a significant net loss,
primarily due to employee redundancy costs incurred in connection with the cessation of its
smelting operations. Commencing in the quarter ended September 30, 2009, and continuing through
December 31, 2010, we suspended the use of the equity method of accounting with respect to our
ownership in Anglesey as we are not obligated to advance any funds to Anglesey, guarantee any
obligations of Anglesey, or make any commitments to provide any financial support for Anglesey.
Accordingly, we did not recognize our share of Angleseys operating results for such periods,
pursuant to ASC Topic 323, Investments Equity Method and Joint Ventures. We will not resume the
use of the equity method of accounting with respect to our investment in Anglesey unless and until
(i) our share of any future net income of Anglesey equals or is greater than our share of net
losses not recognized during periods for which the equity method was suspended and (ii) future
dividends can be expected. We do not anticipate the occurrence of such events during the next 12
months.
The table below provides selected operational and financial information (in millions of
dollars except shipments and prices) for Anglesey-related primary and secondary aluminum
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
December 31, |
|
|
2010 |
|
2009 |
|
2008 |
Shipments (mm lbs) |
|
|
0.4 |
|
|
|
113.9 |
|
|
|
133.1 |
|
Average realized third-party sales price (per pound) |
|
$ |
0.92 |
|
|
$ |
0.79 |
|
|
$ |
1.29 |
|
Net sales |
|
$ |
0.3 |
|
|
$ |
89.9 |
|
|
$ |
171.4 |
|
Operating Income (Loss) |
|
$ |
0.1 |
|
|
$ |
8.4 |
|
|
$ |
(14.8 |
) |
In the fourth quarter of 2009, we in substance began to act as an agent in connection with
sales of secondary aluminum produced by Anglesey and, consequently, our secondary aluminum sales
are accounted for net of the cost of sales. Prior to the cessation of Angleseys smelting
operations as of September 30, 2009, our sales of primary aluminum produced by Anglesey were
recorded on a gross basis when title, ownership and risk of loss were passed to the buyer and
collectability was reasonably assured.
The following table recaps the major components of the operating results from Anglesey-
related primary and secondary aluminum activities for 2010, 2009 and 2008 (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Profit on metal sales from smelting
operations (net of alumina sales)1 |
|
$ |
0.1 |
|
|
$ |
10.2 |
|
|
$ |
15.5 |
|
Anglesey2 |
|
|
|
|
|
|
|
|
|
|
7.5 |
|
Impairment of investment in Anglesey |
|
|
|
|
|
|
(1.8 |
) |
|
|
(37.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.1 |
|
|
$ |
8.4 |
|
|
$ |
(14.8 |
) |
|
|
|
|
|
|
|
|
|
|
41
|
|
|
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 while it operated as a
smelter. Such earnings were 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 under the smelting operations and
foreign currency transaction gains (losses) relating to our settlement of trade payables to
Anglesey denominated in British Pounds Sterling. |
Hedging Activities. 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 to our customers. However, in certain instances we enter into firm price
arrangements with our customers and incur price risk on our anticipated primary aluminum purchases
in respect of such customer orders. At the time our Fabricated Products segment enters into a firm
price customer contract, our Hedging business unit and Fabricated Products segment enter into an
internal hedge so that metal price risk resides in our Hedging business unit under All Other.
Results from internal hedging activities between our Fabricated Products segment and Hedging
business unit eliminate in consolidation. The Hedging business unit uses third party hedging
instruments to limit exposure to metal-price risks related to firm price customer sales contracts.
These transactions are reflected on our balance sheet and recorded at fair value.
Additionally, through September 30, 2009, the Hedging business unit used third-party hedging
instruments to limit our exposure to the British Pound Sterling exchange rate relating to
Angleseys smelting operations.
All hedging activities are managed centrally to minimize transaction costs, monitor
consolidated net exposures and allow for increased responsiveness to changes in market factors.
The table below provides a detail of operating income (loss) (in millions of dollars) from our
Hedging business unit for 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Internal hedging with Fabricated Products1 |
|
$ |
0.1 |
|
|
$ |
42.8 |
|
|
$ |
(16.9 |
) |
Derivative settlements Pound Sterling2 |
|
|
|
|
|
|
(12.2 |
) |
|
|
(2.9 |
) |
Derivative settlements External metal hedging 2 |
|
|
(0.6 |
) |
|
|
(29.2 |
) |
|
|
16.4 |
|
Market-to-market on derivative instruments2 |
|
|
3.6 |
|
|
|
75.6 |
|
|
|
(81.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.1 |
|
|
$ |
77.0 |
|
|
$ |
(84.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Eliminates in consolidation. |
|
2 |
|
Impacted by positions and market prices. |
Corporate and Other Activities. Operating expenses within the Corporate and Other business unit
represent general and administrative expenses that are not allocated to other business units or
segments. The table below presents non-run-rate items within the Corporate and Other business unit,
operating expense and operating expense excluding non-run-rate items (in millions of dollars) for
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Operating expense |
|
$ |
(37.4 |
) |
|
$ |
(40.3 |
) |
|
$ |
(39.3 |
) |
Impact to operating expense of non-run-rate items: |
|
|
|
|
|
|
|
|
|
|
|
|
VEBA net periodic (expense) benefit income |
|
|
(1.8 |
) |
|
|
(5.3 |
) |
|
|
0.6 |
|
Environmental expense |
|
|
(0.3 |
) |
|
|
(1.7 |
) |
|
|
(0.5 |
) |
Other operating (charges) benefits |
|
|
(0.1 |
) |
|
|
0.9 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
Total non-run-rate items |
|
|
(2.2 |
) |
|
|
(6.1 |
) |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense excluding non-run-rate items |
|
$ |
(35.2 |
) |
|
$ |
(34.2 |
) |
|
$ |
(40.8 |
) |
|
|
|
|
|
|
|
|
|
|
42
Corporate operating expenses excluding non-run-rate items for 2010 were $1.0 million higher
than such expenses for the comparable period in 2009. The increase primarily reflects (i) a $1.6
million increase in employee compensation expense relating to our short-term incentive program and
other benefit programs and (ii) a $2.0 million increase in workers compensation expense relating
to historical workers compensation cases due to changes in estimated incurred but not reported
expenses, partially offset by a $2.3 million decrease in non-cash stock compensation expense due to
timing of vesting and changes in vesting assumptions relating to performance shares in connection
with our long-term incentive programs.
Corporate operating expenses excluding non-run-rate items for 2009 were $6.6 million lower
than such expenses for 2008. The decrease reflects primarily (i) a $1.3 million decrease in
short-term incentive compensation accrual, (ii) a $3.6 million decrease in professional fees
primarily related to audit fees and (iii) a $1.3 million decrease in non-cash stock compensation
expense due to timing of vesting and changes in vesting assumptions relating to performance shares
in connection with our long-term incentive programs.
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 (i) the aggregate value of our outstanding
common shares immediately prior to the ownership change and (ii) 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, 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 have a stock transfer restriction agreement with the Union VEBA, which is 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. Under our stock transfer restriction
agreement, 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 Trust may sell shares of our
common stock without the prior consent of our board of directors is March 23, 2011.
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. We estimate that we can currently issue approximately 33.6 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
43
In March 2010, we implemented a new financing structure, the primary objectives of which were
to improve liquidity, extend debt maturity dates, provide more flexible terms and conditions, and
more efficiently utilize our assets to collateralize existing and future financing requirements. As
part of the new structure, the maturity date of the Revolving Credit Facility was extended to March
2014 with an improved covenant structure, and secured solely by our accounts receivables, inventory
and proceeds related thereto. Additionally, we issued Notes in the aggregate principal amount of
$175 million that mature on April 1, 2015. As a result, we believe we have enhanced our liquidity
and financial flexibility to continue to support our ongoing business needs and longer term
strategic growth objectives.
In connection with the issuance of the Notes, we paid $31.4 million to several financial
institutions (the Option Counterparties) to purchase the Call Options, which relate to our own
stock, and received $14.3 million for issuing to the Option Counterparties net-share-settled
Warrants relating to approximately 3.6 million shares of our common stock. Concurrent with the
issuance of the Notes, we also purchased approximately 1.2 million shares of our common stock for
$44.2 million. (see Cash Flows below for further detail regarding our cash flows for 2010, 2009 and
2008 by segment).
Cash and cash equivalents were $135.6 million at December 31, 2010, up from $30.3 million at
December 31, 2009. The increase in cash is primarily driven by the financing transactions that
occurred in March 2010, which provided a $107.9 million net increase in cash (see Sources of
Liquidity below). Approximately $83.3 million of cash on hand at December 31, 2010 was utilized to
fund the purchase of the Chandler, Arizona (Extrusion) facility and related assets of Alexco
effective on January 1, 2011, net of $4.9 million of cash acquired in the acquisition. Cash
equivalents consist primarily of money market accounts, investments with an original maturity of
three months or less when purchased, and other highly liquid investments. We place our cash in bank
deposits and money market funds with high credit quality financial institutions which invest
primarily in commercial paper and time deposits of prime quality, short-term repurchase agreements,
and U.S. government agency notes. We have not experienced losses on our temporary cash investments.
In addition to our unrestricted cash and cash equivalents described above, we have restricted
cash that is pledged as collateral in connection with workers compensation requirements and
certain agreements. Short-term restricted cash, which was included in Prepaid expenses and other
current assets, totaled $0.9 million at both December 31, 2010 and December 31, 2009. Long-term
restricted cash, which was included in Other Assets, was $16.3 million at December 31, 2010 and
$17.4 million at December 31, 2009.
There were no borrowings under our Revolving Credit Facility at both December 31, 2010 and
December 31, 2009.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing
activities for 2010, 2009 and 2008 (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
December 31, |
|
|
2010 |
|
2009 |
|
2008 |
Total cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products |
|
$ |
100.1 |
|
|
$ |
149.5 |
|
|
$ |
77.3 |
|
All Other |
|
|
(33.8 |
) |
|
|
(21.8 |
) |
|
|
(30.4 |
) |
|
|
|
|
|
$ |
66.3 |
|
|
$ |
127.7 |
|
|
$ |
46.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products |
|
$ |
(42.2 |
) |
|
$ |
(59.2 |
) |
|
$ |
(91.6 |
) |
All Other |
|
|
(4.2 |
) |
|
|
18.5 |
|
|
|
(20.9 |
) |
|
|
|
|
|
$ |
(46.4 |
) |
|
$ |
(40.7 |
) |
|
$ |
(112.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
$ |
85.4 |
|
|
$ |
(56.9 |
) |
|
$ |
(2.9 |
) |
|
|
|
|
|
$ |
85.4 |
|
|
$ |
(56.9 |
) |
|
$ |
(2.9 |
) |
|
|
|
Operating Activities
44
Fabricated Products In 2010, Fabricated Products segment operating activities provided
$100.1 million of cash. Cash provided in 2010 was primarily related to operating income excluding
non-run-rate items of $100.7 million, an increase in accounts payables and other accrued
liabilities of $11.4 million and cash flows from significant changes in long-term assets and
liabilities of $22.9 million (which represents cash received during the period from customers in
advance of periods for which performance is completed and an increase in environmental accrual).
The foregoing cash inflows were partially offset by an increase in inventory of $40.4 million.
In 2009, Fabricated Products operating activities provided $149.5 million of cash. Cash
provided in 2009 was primarily related to operating income excluding non-run-rate items of $87.3
million and significant cash flows from changes in current assets and liabilities, including a
decrease in accounts receivables of $16.3 million, a decrease in inventory of $34.6 million, and an
increase of $11.3 million in deferred revenues related primarily to cash received during the year from
customers in advance of periods for which (i) production capacity is reserved, (ii) customer
commitments have been deferred or reduced or (iii) performance is completed.
In 2008, Fabricated Products operating activities provided $77.3 million of cash. Cash
provided in 2008 was primarily related to operating income excluding non-run-rate items of $136.8
million and significant cash outflows from changes in current assets and liabilities, including an
increase in inventories of $34.1 million, an increase in accounts receivables of $10.1 million and
a decrease in accounts payables of $17.7 million.
All Other Cash used in operations in All Other is comprised of (i) cash provided (used)
from Anglesey-related operating activities, (ii) cash provided by (used in) hedging activities and
(iii) cash used in corporate and other activities.
Anglesey-related activities provided $8.5 million of cash in 2010, while Anglesey-related
activities used $6.0 million of cash in 2009 and provided $37.3 million of cash in 2008. Operating
cash flow for 2010 was related to changes in working capital. Operating cash flows 2009 and 2008
were comprised of operating income from Anglesey-related activities and changes in working capital.
Hedging-related activities provided (used) $3.7 million, $18.8 million and $(23.3) million of
cash during 2010, 2009 and 2008, respectively. Cash flows in our Hedging business unit are related
to realized hedging gains and losses on our derivative positions and are affected by the timing of
settlement of such positions.
Corporate and other operating activities used $46.0 million, $34.6 million and $44.4 million
of cash during 2010, 2009 and 2008, respectively. Cash outflow from Corporate and other operating
activities in 2010 consisted primarily of payments in respect of cash general and administrative
costs of $31.8 million, $4.0 million of interest payment relating to the Notes, $2.8 million of
annual VEBA contribution and $2.1 million of environmental costs. Cash outflow from Corporate and
Other operating activities in 2009 consisted primarily of payments in respect of cash general and
administrative costs of $29.0 million and annual VEBA contribution of $4.9 million. In 2008, cash
outflow consisted primarily of payments in respect of cash general and administrative costs of
$33.0 million and annual VEBA contribution of $8.5 million.
Investing Activities
Fabricated Products Cash used in investing activities for Fabricated Products was $42.2
million in 2010, compared to $59.2 million of cash used in 2009 and $91.6 million of cash used in
2008. Cash used in investing activities in 2010, 2009 and 2008 was primarily related to our capital
expenditures. See Capital Expenditures below for additional information.
All Other Investing activities in All Other is generally related to activities in
restricted cash and capital expenditures within the Corporate and Other business unit. We have
restricted cash on deposit as financial assurance for certain environmental obligations and
workers compensation claims from the State of Washington. Cash used in investing activities in
2010 is comprised primarily of the purchase of $4.4 million of available for sale securities in
connection with our deferred compensation plan, a return of $1.1 million of restricted cash to us
relating to workers compensation deposit, partially offset by $0.9 million of capital
expenditures. Cash used in investing activities in All Other was $20.9 million in 2008,
representing transfers of margin call deposits to our counterparties relating to our derivative
positions at December 31, 2008 and cash deposits required relating to workers compensation with
the State of Washington. Cash generated from investing activities in All Other in 2009 included the
return of a portion the 2008 deposits.
Financing Activities
All Other Cash provided by financing activities in 2010 was $85.4 million. The cash inflow
was primarily related to the issuance of the Notes and related transactions. We received $169.2
million of net proceeds from the Notes offering after deducting the initial purchasers discounts
and transaction fees and fees and expenses of $5.8 million. In connection with the issuance of the
Notes, we paid $31.4 million to Option Counterparties to purchase the Call Options and received
$14.3 million for issuing the Warrants. In addition, we used $44.2 million of the net proceeds from
the Notes transaction to repurchase approximately 1.2 million shares of our common stock. In
addition to the financing transactions relating to the Notes, we also paid $19.0 million in cash
dividends to our
45
stockholders and holders of restricted stock and dividend equivalents to holders
of restricted stock units and performance shares in 2010.
Cash used in financing activities in the 2009 was $56.9 million. The cash outflow was
primarily related to the repayment of net borrowings under our revolving credit facility of $36.0
million and $19.6 million in cash dividends and dividend equivalents. Cash used in financing
activities in the 2008 was $2.9 million. The cash outflow was primarily related to $28.1 million
used in share repurchases and $17.2 million in cash dividends and dividend equivalents, partially
offset by $36.0 million of net borrowings under our revolving credit facility and $7.0 million of
borrowing under a promissory note from the sellers of the Los Angeles facility (see Debt below).
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 that 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 our cash requirements, including those
associated with our strategic investments and existing expansion plans, for at least the next 12
months. We also used these sources of liquidity to fund the purchase of the Chandler, Arizona
(Extrusion) facility and related assets in January 2011. However, there can be no assurance 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.
On March 23, 2010, we and certain of our subsidiaries entered into the Revolving Credit
Facility with a group of lenders. The Revolving Credit Facility provides for up to $200.0 million
of borrowing base, of which up to a maximum of $60.0 million may be utilized for letters of credit.
The Revolving Credit Facility amended and restated our previously existing revolving credit
facility, which had an expiration date in July 2011. The Revolving Credit Facility is secured by a
first priority lien on substantially all of the accounts receivable, inventory and certain other
related assets and proceeds of us and our domestic operating subsidiaries. Under the Revolving
Credit Facility, we are able to borrow from time to time an aggregate amount equal to the lesser of
$200.0 million or a borrowing base comprised of approximately 85% of eligible accounts receivable
and approximately 65% of eligible inventory, reduced by certain reserves, all as specified in the
Revolving Credit Facility.
The Revolving Credit Facility matures in March 2014, at which time all outstanding amounts
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, in each case, 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 $250.0 million.
Amounts owed under the Revolving Credit Facility may be accelerated upon the occurrence of
various events of default, including, without limitation, the failure to make principal or interest
payments when due and breaches of covenants, representations and warranties set forth in the
Revolving Credit Facility. The Revolving Credit Facility places limitations on the ability of us
and certain of our subsidiaries to, among other things, grant liens, engage in mergers, sell
assets, incur debt, make investments, undertake transactions with affiliates, pay dividends and
repurchase shares. In addition, we are required to maintain a fixed charge coverage ratio on a
consolidated basis at or above 1.1 to 1.0 if borrowing availability under the Revolving Credit
Facility is less than $30 million.
At December 31, 2010, based on the borrowing base determination in effect as of that date, we
had $178.8 million available under the Revolving Credit Facility, of which $9.9 million was being
used to support outstanding letters of credit, leaving $168.9 million of availability. There were
no borrowings under the Revolving Credit Facility at December 31, 2010. The interest rate
applicable to any borrowings under the Revolving Credit Facility would have been 5.25% at December
31, 2010 for overnight borrowings.
Based on the borrowing base determination as of the date of filing of this Report, we had
$193.7 million available under the Revolving Credit Facility, of which $9.8 million was used to
support outstanding letters of credit, leaving $183.9 million of availability for additional
borrowing and letters of credit. No borrowings were outstanding as of February 16, 2011 under the
Revolving Credit Facility.
At December 31, 2010, we were in compliance with all covenants contained in the Revolving
Credit Facility. We do not believe that the covenants are reasonably likely to limit our ability
to raise additional financing that may be necessary for our operations. The covenants also do not
limit our ability to undertake equity financing. Additionally, because of the significant amount
of our borrowing availability under the Revolving Credit Facility, we believe it is unlikely that
we will trigger the liquidity threshold requiring measurement of the fixed charge coverage ratio.
Debt
46
On March 29, 2010, we issued Notes in the aggregate principal amount of $175.0 million. Net
proceeds from the sale of the Notes were approximately $169.2 million, after deducting the initial
purchasers discounts and transaction fees and expenses. The Notes bear stated interest at a rate
of 4.50% per annum. Interest is payable semi-annually in arrears on April 1 and October 1 of each
year, beginning on October 1, 2010. The Notes will mature on April 1, 2015, subject to earlier
repurchase or conversion upon the occurrence of certain events.
The Notes are not convertible into shares of our common stock or into any other securities
under any circumstances. Instead, upon the conversion of the Notes, we will pay an amount of cash
based on the market value of our common stock at that time and an initial conversion rate equal to
20.6949 shares of our common stock per $1,000 principal amount of the Notes (which is equal to a
conversion price of approximately $48.32 per share, representing a 26% conversion premium over the
closing price of $38.35 per share of our common stock on March 23, 2010), subject to adjustment,
based on the occurrence of certain events, including, but not limited to, (i) the issuance of
certain dividends on our common stock, (ii) the issuance of certain rights, options or warrants,
(iii) the effectuation of share splits or combinations, (iv) certain distributions of property, and
(v) certain issuer tender or exchange offers as described in the indenture governing the Notes.
Holders may convert their Notes into cash before January 1, 2015, only in certain circumstances
determined by (i) the market price of our common stock, (ii) the trading price of the Notes or
(iii) the occurrence of specified corporate events. The Notes can be converted by the holders at
any time on or after January 1, 2015 until the close of business on the second scheduled trading
day immediately preceding the maturity date of the Notes. The Notes are subject to
repurchase by us at the option of the holders following a fundamental change, as defined in
the indenture governing the Notes, including, but not limited to, (i) certain ownership changes,
(ii) certain recapitalizations, mergers and dispositions, (iii) approval of any plan or proposal
for the liquidation, or dissolution of our company and (iv) our common stock ceasing to be listed
on any of the New York Stock Exchange, the NASDAQ Global Select Market or the NASDAQ Global Market,
at a price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest up
to the fundamental change repurchase date. We may not redeem the Notes.
The indenture governing the Notes contains customary terms and covenants, including that upon
certain events of default occurring and continuing, either the trustee or the holders of at least
25% in aggregate principal amount of the Notes then outstanding may declare the entire principal
amount of all Notes, and the interest accrued on such Notes, to be immediately due and payable.
To reduce the risk associated with the cash conversion feature of the Notes, on March 23 and
March 26, 2010, we entered into convertible note hedge transactions to purchase the Call Options
from the Option Counterparties. The Call Options have an exercise price equal to the conversion
price of the Notes, subject to anti-dilution adjustments substantially similar to the anti-dilution
adjustments for the Notes. The Call Options will expire upon the maturity of the Notes. The
convertible note hedge transactions are expected to generally reduce our exposure to potential cash
payments in excess of the principal amount of the Notes that we may be required to make upon the
conversion of the Notes. Upon the exercise of the Call Options, the Company will be entitled to
receive from the Option Counterparties amounts of cash generally based on the amount by which the
market price per share of the Companys common stock, as measured under the terms of the Call
Options, is greater than the exercise price of the Call Options (which is initially equal to the
initial conversion price of the Notes of $48.32 per share of our common stock during the relevant
valuation period under the Call Options).
On March 23 and March 26, 2010, we also entered into warrant transactions to sell the Option
Counterparties the Warrants. The Warrants will expire on July 1, 2015. The Option Counterparties
paid an aggregate amount of approximately $14.3 million to us for the Warrants. If the market price
per share of our common stock, as measured under the terms of the Warrants, exceeds the strike
price of the Warrants (which is initially equal to $61.36 per share of common stock, which is 160%
of the closing price of $38.35 per share of our common stock on March 23, 2010), we will issue the
Option Counterparties shares of our common stock having a value equal to such excess, as measured
under the terms of the Warrants.
The Call Options and the Warrants are separate transactions, are not part of the terms of the
Notes and do not change a holders rights under the Notes.
In connection with our acquisition of the manufacturing facility, and related assets, of
Nichols on August 9, 2010, a promissory note in the amount of $6.7 million (Nichols Promissory
Note) was issued to Nichols as a part of the consideration paid. The Nichols Promissory Note bears
interest at a rate of 7.5% per annum. Accrued but unpaid interest is due quarterly through maturity
of the Nichols Promissory Note on August 9, 2015, with the first two such payments having been made
on September 30, 2010 and December 31, 2010. We have the option to repay all or a portion of the
Nichols Promissory Note at any time prior to the maturity date. Principal payments on the Nichols
Promissory Note are due in equal quarterly installments, with the first two payments having been
made on September 30, 2010 and December 31, 2010. The Nichols Promissory Note is secured by certain
real property and equipment included in the assets acquired from Nichols in the acquisition. At
December 31, 2010, the outstanding principal balance under the Nichols Promissory Note was $6.0
million, of which $1.3 million was payable within 12 months. For the year ended December 31, 2010,
we recorded $0.2 million of interest expense related to the Nichols Promissory Note.
47
As of December 31, 2010, we also had a $7.0 million outstanding promissory note (the LA
Promissory Note) in connection with our purchase of the previously leased land and buildings
associated with our Los Angeles, California facility in December 2008. Interest is payable on the
unpaid principal balance of the LA Promissory Note monthly in arrears at the prime rate, as defined
in the LA Promissory Note, plus 1.5%, in no event exceeding 10% per annum. A principal payment of
$3.5 million will be due on January 1, 2012, and the remaining $3.5 million will be due on January
1, 2013. The LA Promissory Note is secured by a deed of trust on the property. For the years ended
December 31, 2010 and 2009, we recorded $0.3 million and $0.4 million of interest expense relating
to the LA Promissory Note, respectively. The interest rate applicable to the LA Promissory Note
was 4.75% at December 31, 2010.
Capital Expenditures and Investments
A component of our long-term strategy is our capital expenditure program including our organic
growth initiatives. The following table presents our capital expenditures for 2010, 2009 and 2008
(in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Kalamazoo, Michigan facility1 |
|
$ |
25.6 |
|
|
$ |
47.1 |
|
|
$ |
20.1 |
|
Spokane, Washington facility |
|
|
5.8 |
|
|
|
5.4 |
|
|
|
36.2 |
|
Other 2 |
|
|
3.9 |
|
|
|
5.8 |
|
|
|
38.1 |
|
Change in accounts payable associated with capital expenditures
|
|
|
3.6 |
|
|
|
0.9 |
|
|
|
(1.2 |
) |
|
|
|
|
|
|
Total capital expenditures, net of change in accounts payable |
|
$ |
38.9 |
|
|
$ |
59.2 |
|
|
$ |
93.2 |
|
|
|
|
|
|
|
|
|
|
1 |
|
The Kalamazoo, Michigan facility is equipped with two extrusion presses and a remelt
operation. We expect that it will significantly improve the capabilities and efficiencies of
our rod and bar operations, enhance the market position of such products, and build a platform
for future growth for extrusion applications. This investment program was substantially
completed in late 2010. |
|
2 |
|
Other capital spending was spread among most of our manufacturing locations on
projects expected to reduce operating costs, improve product quality, increase capacity or
enhance operational security. |
Total capital expenditures and investments for Fabricated Products are currently expected to
be in the $35 million to $45 million range for all of 2011 and are expected to be funded using cash
generated from operations, available cash and cash equivalents, or borrowings under the Revolving
Credit Facility or other third-party financing arrangements.
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.
Investments. On August 9, 2010, we acquired the Florence, Alabama facility, and related
assets, of Nichols, which manufactures bare mechanical alloy wire products, nails and aluminum rod
for aerospace, general engineering, and automotive applications. The acquired assets have been
integrated into and complement the existing assets of our Fabricated Products segment.
Consideration for the purchase consisted of (i) $9.0 million in cash, (ii) a promissory note in the
amount of $6.7 million, payable to Nichols, and (iii) the assumption of certain liabilities
totaling approximately $2.1 million.
On October 12, 2010, we entered into an agreement to purchase the Chandler, Arizona
(Extrusion) facility and related assets of Alexco, which manufacturers hard alloy extrusions for
the aerospace industry. The transaction closed effective on January 1, 2011. We paid net cash
consideration of $83.3 million (net of $4.9 million cash received in the acquisition) with existing
cash on hand, and assumed certain liabilities totaling approximately $1.0 million. The acquisition
positions us in a significant end market segment that provides a natural complement to our offerings of
sheet, plate, cold finish and drawn tube products for aerospace applications in our Fabricated
Products segment.
Dividends
48
During 2010, 2009 and 2008, we paid a total of $19.0 million, $19.6 million and $17.2 million,
or $0.96, $0.96 and $0.84 per common share, respectively, in cash dividends to our stockholders,
including the holders of restricted stock, and dividend equivalents to the holders of restricted
stock units and the holders of performance shares with respect to half of the performance shares.
On January 12, 2011, our Board of Directors approved the declaration of a quarterly cash
dividend of $0.24 per common share, or $4.7 million (including dividend equivalents), which was
paid on or about February 15, 2011 to stockholders of record at the close of business on January
24, 2011.
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 financial and operating
results, financial condition, anticipated cash requirements and ability to satisfy conditions
contained in our Revolving Credit Facility. We can give no assurance that dividends will be
declared and paid in the future.
Stock Repurchase Plan
During the second quarter of 2008, our Board of Directors authorized the repurchase of up to
$75.0 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. As of December 31, 2010, $46.9 million remained available for
repurchases under the existing repurchase authorization.
During the first quarter of 2010, in connection with the issuance of the Notes and pursuant to
a separate authorization from our Board of Directors, we repurchased $44.2 million, or
approximately 1.2 million shares of our outstanding common stock, in privately negotiated,
off-market transactions.
Under our Amended and Restated 2006 Equity and Performance Incentive Plan, we allow
participants to elect to have us withhold common shares to satisfy minimum statutory tax
withholding obligations arising from the recognition of income and the vesting of restricted stock
or restricted stock units. When we withhold these shares, we are to remit to the appropriate taxing
authorities the market price of the shares withheld, which could be deemed a purchase of the common
shares by us on the date of withholding. During 2010, we withheld 11,729 shares of common stock to
satisfy tax withholding obligations. All such shares were withheld and cancelled by us on the
applicable vesting dates or dates on which income was recognized, and the number of shares withheld
was determined based on the closing price per common share as reported by the Nasdaq Stock Market,
LLC on such dates.
Restrictions Related to Equity Capital
As discussed in Note 11 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. Additionally, our Revolving Credit Facility places
limitations on our ability to repurchase our common stock and to pay dividends.
Environmental Commitments and Contingencies
We are subject to a number of environmental laws and regulations, fines or penalties assessed
for alleged breaches of the environmental laws and regulations, and claims and litigation based
upon such laws and regulations. We have established procedures for regularly evaluating
environmental loss contingencies, including those arising from environmental reviews and
investigations and any other environmental remediation or compliance matters. Our environmental
accruals represent our undiscounted estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, existing requirements, currently available facts, existing
technology, and our assessment of the likely remediation actions to be taken.
During the third quarter of 2010, we increased our environmental accruals in connection with
our submission of a draft feasibility study to the Washington State Department of Ecology on
September 8, 2010. The draft Feasibility Study included recommendations for a range of alternative
remediations to primarily address the historical use of oils containing polychlorinated biphenyls,
or PCBs, at our Trentwood facility in Spokane, Washington which may be implemented over the next 30
years. The draft Feasibility Study indicates a range of viable remedial approaches, but agreement
has not yet been reached with the Washington State Ecology on the final remediation approach. The
draft Feasibility Study is still subject to further reviews, public comment and regulatory
approvals before the final consent decree is issued. We expect the consent decree to be issued in
2012.
Based on the recommended remediation alternatives in the draft Feasibility Study and other
existing historical environmental matters at the Trentwood facility and certain other locations
owned or operated by us, we increased our environmental accrual by $13.6 million during the third
quarter. Our environmental accrual represents the low end of the range of incremental cost
estimates
49
based on proposed alternatives in the draft Feasibility Study, investigational studies
and other remediation activities occurring at certain locations owned or operated by us. We expect
that these remediation actions will be taken over the next 30 years and estimates that the
incremental direct costs attributable to the remediation activities to be charged to these
environmental accruals will be approximately $1.1 million in 2011, $0.9 million in 2012, $2.7
million in 2013, $0.7 million in 2014, and $14.8 million in 2015 and years thereafter through the
balance of the 30 year period.
As additional facts are developed, feasibility studies at various facilities are completed,
draft remediation plans are modified, necessary regulatory approval for the implementation of
remediation are obtained, alternative technologies are developed, and/or other factors may result
in revisions to managements estimates and actual costs exceeding the current environmental
accruals. We believe at this time that it is reasonably possible that undiscounted costs associated
with these environmental matters may exceed current accruals by amounts that could be, in the
aggregate, up to an estimated $21.3 million over the next 30 years. It is reasonably possible that
our recorded estimate of its obligation may change in the next 12 months.
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 our Statements of Consolidated Cash Flows included in Item 8. Financial Statements and
Supplemental Data in order to provide a better understanding of the nature of the obligations and
to provide a basis for comparison to historical information.
The following table provides a summary of our significant contractual obligations at December
31, 2010 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and |
|
|
|
Total |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations 1 |
|
$ |
267.9 |
|
|
$ |
257.6 |
|
|
$ |
1.4 |
|
|
$ |
1.4 |
|
|
$ |
1.4 |
|
|
$ |
6.1 |
|
Operating leases1 |
|
|
56.9 |
|
|
|
6.9 |
|
|
|
6.4 |
|
|
|
5.5 |
|
|
|
3.0 |
|
|
|
35.1 |
|
Environmental liability1 |
|
|
20.2 |
|
|
|
1.1 |
|
|
|
0.9 |
|
|
|
2.7 |
|
|
|
0.7 |
|
|
|
14.8 |
|
Deferred revenue arrangement1 |
|
|
24.0 |
|
|
|
10.8 |
|
|
|
9.8 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital equipment2 |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes3,4 |
|
|
175.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175.0 |
|
Nichols note payable3 |
|
|
6.0 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
0.8 |
|
LA Note payable3 |
|
|
7.0 |
|
|
|
|
|
|
|
3.5 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit5 |
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax liabilities6 |
|
|
14.0 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
liability7 |
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations8 |
|
$ |
582.5 |
|
|
$ |
279.5 |
|
|
$ |
23.3 |
|
|
$ |
17.8 |
|
|
$ |
6.4 |
|
|
$ |
231.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
1 |
|
See Obligations for Operating Activities below. |
|
2 |
|
See Obligations for Investing Activities below. |
|
3 |
|
See Obligations for Financing Activities below. |
|
4 |
|
The timing of the principal payment with respect to the Notes is based on the assumption no early conversion occurs. |
|
5 |
|
Of the $10.8 million of standby letters of credit, $9.8 million represents letters of credit under the Revolving Credit Facility. |
50
|
|
|
|
|
This amount represents the total amount committed under standby letters of credit, substantially all of which expire within
approximately 12 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. |
|
6 |
|
At December 31, 2010, we had uncertain tax positions which ultimately could result in tax payments. As the amount of ultimate tax
payments beyond 2011 is contingent on the tax authorities assessment, it is not practical to present annual payment information. |
|
7 |
|
The amount represents liability relating to our deferred compensation plan for certain key employees. As the distribution amount
is contingent upon
contingent upon vesting and other eligibility requirements, it is not practical to present annual payment information. |
|
8 |
|
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 primary aluminum, other raw materials and electricity, and payment obligations under 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 based
primarily on the underlying metal price at that time. Amounts included in the table are based on
minimum quantities at the metal price at December 31, 2010. We believe the minimum quantities are
lower than our current requirements for aluminum. Actual quantities 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.
Environmental liability represents the environmental accrual at December 31, 2010.
Deferred revenue arrangements relate to 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.
Obligations for Investing Activities
Capital project spending included in the preceding table represents non-cancelable capital
commitments as of December 31, 2010. 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 principal obligations under long-term
debt. As of December 31, 2010, we had Notes in the aggregate principal amount of $175.0 million,
$6.0 million under the Nichols Promissory Note and $7.0 million under the LA Promissory Note
outstanding. We had zero borrowings outstanding under our Revolving Credit Facility.
Off-Balance Sheet and Other Arrangements
Our employee benefit plans include the following:
|
|
|
Monthly contributions of $1.00 per hour worked by each bargaining unit employee to the
appropriate multi-employer pension plans sponsored by the USW and International Association
of Machinists and certain other unions at certain of our production facilities, except that
the monthly contributions per hour worked by each bargaining unit employee to a pension plan
sponsored by the USW at our Newark, Ohio and Spokane, Washington facilities increased to
$1.25 starting July 2010 and will increase to $1.50 in July 2015, and monthly contributions
to a pension plan sponsored by the USW at our newly acquired Florence, Alabama facility are
$1.25 per hour worked by each bargaining unit employee. We currently estimate that
contributions will range from $2.0 million to $4.0 million per year through 2013. |
51
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|
|
A defined contribution 401(k) savings plan for hourly bargaining unit employees at five
of the our production facilities. We are required to make contributions to this plan for
active bargaining unit employees at four of these production facilities ranging from $800 to
$2,400 per employee per year, depending on the employees age. We currently estimate that
contributions to such plans will range from $1.0 million to $3.0 million per year. |
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|
A defined benefit plan for salaried employees at our facility in London, Ontario with
annual contributions based on each salaried employees age and years of service. At December
31, 2010 and 2009, approximately 62% and 55% of the plan assets were invested in equity
securities, respectively, and 36% and 40% of plan assets were invested in debt securities,
respectively. The remaining plan assets were invested in short-term securities in both
years. Our investment committee reviews and evaluates the investment portfolio. The asset
mix target allocation on the long-term investments is approximately 60% in equity securities
and 36% in debt securities with the remaining assets in short-term securities. |
|
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|
A defined contribution 401(k) savings plan for salaried and certain hourly employees
providing for a concurrent match of up to 4% of certain contributions 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
annually. We currently estimate that contributions to such plan will range from $4.0 million
to $6.0 million per year. |
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|
A non-qualified, unfunded, unsecured plan of deferred compensation for key employees who
would otherwise suffer a loss of benefits under our defined contribution plan, as a result
of the limitations imposed by the Internal Revenue Code. Despite the plan being an unfunded
plan, We make an annual contribution to a rabbi trust to fulfill future funding obligations,
as contemplated by the terms of the plan. The assets in the trust are at all times subject
to the claims of the our general creditors, and no participant has a claim to any assets of
the trust. Plan participants are eligible to receive distributions from the trust subject to
vesting and other eligibility requirements. Assets in the rabbi trust relating to the
deferred compensation plan are accounted for as available for sale securities and are
included as Other assets on the Consolidated Balance Sheets. Liabilities relating to the
deferred compensation plan are included on the Consolidated Balance Sheets as Long-term
liabilities. See Note 6 of Notes to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data of the Report for further discussion. |
|
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An employment agreement with our chief executive officer which was renewed in November
2010 and extends through July 6, 2015. We also provide certain members of senior management,
including each of our named executive officers, with benefits related to terminations of
employment in specified circumstances, including in connection with a change in control, by
us without cause and by the named executive officer with good reason. |
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|
We have an annual variable cash contribution to the Salaried VEBA and Union VEBA
pursuant to various agreements with the VEBAs. 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
(EBITDA) 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. In
connection with the renegotiation and entry of a labor agreement with the USW in regard to
employees of our Newark, Ohio and Spokane, Washington facilities on January 20, 2010, we
agreed to extend our obligation to make annual variable cash contributions to the Union
VEBA to September 30, 2017. Under these agreements the aggregate annual 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, 2010, an annual contribution of $2.1 million was
accrued and is payable in the first quarter of 2011. |
|
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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 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. |
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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 |
|
|
|
|
|
52
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|
Cash Payments for |
|
|
Capital Expenditures, Income Taxes, |
|
|
Interest Expense, etc. |
EBITDA |
|
$25.0 |
|
$50.0 |
|
$75.0 |
|
$100.0 |
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 and 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. |
|
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|
On July 6, 2006, the 2006 Equity and Performance Incentive Plan (as amended, the
Equity Incentive Plan) became effective. Under the Equity Incentive Plan, awards are
granted for certain members of management, our directors, and directors emeritus, as more
fully discussed in Note 12 of Notes to Consolidated Financial Statements included in Item
8. Financial Statements and Supplementary Data of this Report. Awards have been made in
each calendar year, since inception of the Equity Incentive Plan, and additional awards
are expected to be made in 2011 and future years. |
|
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|
In March 2010, we issued the Notes and the Warrants, and purchased the Call Options
(see Note 7 of Notes to Consolidated Financial Statements included in Item 8. Financial
Statements and Supplementary Data of this Report). As of December 31, 2010, the Notes
were not convertible. We do not expect the Notes to be converted by investors until close
to their maturity date, if at all. It is possible to have the Notes converted prior to
their maturity date if, for example, a holder perceives (and market data validates the
perception) the market for the Notes to be weaker than the market for our common stock.
Upon an investors election to convert, we are required to pay the conversion value in
cash. We expect that any payment above the principal amount would be effectively offset by
payments we would be entitled to receive from exercise of the Call Options. |
|
|
|
|
We have outstanding letters of credit totaling $9.8 million under our Revolving
Credit Facility as of December 31, 2010. |
Critical Accounting Estimates and Policies
Our consolidated financial statements are prepared in accordance with 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 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 of this Report.
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 |
Our judgments and estimates
with respect to commitments
and contingencies. |
|
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|
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|
|
Valuation of legal and other
contingent claims is subject
to a great deal of judgment
and substantial uncertainty.
Under GAAP, companies are
required to accrue for loss
contingencies in their
financial statements only if
both (i) the potential loss
is probable and (ii)
|
|
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, 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 |
53
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|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
the amount (or a range) of
probable loss can be
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 or
estimatable 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.
|
|
|
|
reserves, our future results from
operations could be materially affected. |
|
|
|
|
|
Our judgments and estimates
in respect of defined benefit
plans. |
|
|
|
|
|
|
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|
|
At December 31, 2010, we had
two defined benefit
postretirement medical plans
(i.e. the postretirement
medical plans maintained by
the VEBAs which we are
required to reflect on our
financial statements despite
our limited obligations to
the VEBAs in regard to those
plans) 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.
In addition to the above
assumptions used in the
actuarial valuation,
|
|
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 $0.2 million, $1.0 million
and $7.0 million in relation to the
Canadian pension plan, the Salaried VEBA
and the Union VEBA, respectively, and
impact 2011 expense by $0.7 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 expense by
approximately $0.1 million and $1.1
million in 2011 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 $6.8 million
and increase 2011 expense by $1.2
million. Conversely, a decrease in the
health care trend rate of 1/4 of 1% would
decrease accumulated benefit obligations
of the Union VEBA by |
54
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
changes in plan provisions
could also have a material
impact on the net funded
status of the VEBAs. Our only
obligation to the VEBAs is to
pay the annual variable
contribution amount and we
have no control over the plan
provisions. We rely on
information provided to us by
the VEBA administrators with
respect to specific plan
provisions such as annual
benefits paid.
See Note 11 of Notes to
Consolidated Financial
Statements included in Item
8. Financial Statements and
Supplementary Data of this
Report for additional
information in respect of the
benefit plans.
|
|
A change in plan provisions would
cause the estimate obligations to
change. An increase in annual paid
benefits would increase the estimated
present value of the obligations and
conversely, a decrease in annual paid
benefits would decrease the present
value of the obligations.
|
|
approximately $6.5 million and decrease
2011 expense by $1.1 million. |
|
|
|
|
|
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 13 of Notes to
Consolidated Financial
Statements included in Item
8. Financial Statements and
Supplementary Data of this
Report for additional
information in respect of
environmental contingencies.
|
|
Making estimates of possible
incremental 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. |
|
|
|
|
|
Our judgments and estimates
in respect of conditional
asset retirement obligations. |
|
|
|
|
|
|
|
|
|
We recognize conditional asset
|
|
The estimation of CAROs is subject to a
|
|
Although we believe that the judgments and |
55
|
|
|
|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
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 our older
facilities if such facilities
were to undergo major
renovation or be demolished.
There are currently plans for
such renovation or demolition
at one facility and
managements current
assessment is that certain
immaterial CAROs may be
triggered during the next
four years. For locations
where there are no current
plans for renovations or
demolitions, the most
probable scenario is such
CAROs would not 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 4 of Notes to
Consolidated Financial
Statements included in Item
8. Financial Statements and
Supplementary Data of this
Report for additional
information in respect of
renovation and demolition
contingencies.
|
|
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.
|
|
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. |
|
|
|
|
|
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-
|
|
Our impairment loss calculations
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.
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 |
56
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|
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|
|
|
|
|
|
Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
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) to the assets
carrying value. 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.
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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. |
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Income Tax Provision. |
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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.
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 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.
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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
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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
$0.3 million to net income for the year
ended December 31, 2010. |
57
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Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
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Differ From Assumptions |
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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 10 of Notes to Consolidated
Financial Statements included in Item
8. Financial Statements and
Supplementary Data of this Report for
additional discussion of these
matters. |
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Tax Contingencies. |
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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. 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 tax 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. See Note 10 of
Notes to Consolidated
Financial Statements included
in Item 8. Financial
Statements and Supplementary
Data of this Report for
additional information in
respect of the recognition of
tax attributes.
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Our reserve for contingent tax
liabilities reflects 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.
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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.
Our liability related to uncertain tax
positions at December 31, 2010 was $14.0
million. |
58
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Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Inventory Valuation |
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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.
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 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.
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Our estimate of market value of our
inventories contains uncertainties
because management is required to make
assumptions and to apply judgment to
estimate the 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.
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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. |
59
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Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Notes and Call Options |
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The cash conversion
feature of the Notes
and the Call Options
are accounted for as
derivative instruments.
We measure the value of
the cash conversion
feature as the
difference between the
estimated fair value of
the Notes and the
estimated fair value of
the Notes without the
cash conversion
feature. We value the
Notes based on the
trading price of the
Notes and we value the
Notes without the cash
conversion feature
based on the present
value of the series of
fixed income cash flows
under the Notes, with a
mandatory redemption in
2015. We value the Call
Options using a
binomial lattice
valuation model.
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Significant inputs to
the model include our
stock price,
risk-free rate,
credit spread,
dividend yield,
expected volatility
of our stock price,
and probability of
certain corporate
events, all of which
are observable inputs
by market
participants. Our
estimates of fair
value of the cash
conversion feature of
the Notes and the
Call Options contain
uncertainties given
the difficulty in
predicting factors
such as the expected
volatility of our
stock price and the
probability of
certain corporate
events. The primary
driver of fair values
of both the Call
Option and the cash
conversion feature of
the Notes is our
stock price.
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An increase or
decrease of $10 in
our stock price would
cause the net
estimated fair values
of the cash
conversion feature
and the Call Options
to increase or
decrease by
approximately $3
million. We do not
expect the net change
in the fair value of
these derivatives to
have a material
impact to our
financial statements,
over time. |
60
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Potential Effect if Actual Results |
Description |
|
Judgments and Uncertainties |
|
Differ From Assumptions |
Acquisition, Goodwill
and Intangible Assets |
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We accounted for
acquisitions using
the purchase method
of accounting, which
requires that the
assets acquired and
liabilities assumed
to be recorded at the
date of acquisition
at their respective
estimated fair
values.
We recognize goodwill
as of the acquisition
date, as a residual
over the fair values
of the identifiable
net assets acquired.
Goodwill is tested
for impairment at
least on an annual
basis, as well as on
an interim basis as
warranted, at the
time of events and
changes in
circumstances.
Definite-lived
intangible assets
acquired will be
amortized over the
estimated useful
lives of the
respective assets, to
reflect the pattern
in which the economic
benefits of the
intangible assets are
consumed. In the
event the pattern
cannot be reliably
determined, we use a
straight-line
amortization method.
Whenever events or
changes in
circumstances
indicate that the
carrying amount of
the intangible assets
may not be
recoverable, the
intangible assets
will be reviewed for
impairment.
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The judgments made in
determining the
estimated fair value
assigned to each
class of assets
acquired and
liabilities assumed,
as well as asset
lives, can
significantly impact
our results of
operations. Fair
values and useful
lives are determined
based on, among other
factors, the expected
future period of
benefit of the asset,
the various
characteristics of
the asset and
projected cash flows.
As the determination
of an assets fair
value and useful life
involves management
making certain
estimates and because
these estimates form
the basis for the
determination of
whether or not an
impairment charge
should be recorded,
these estimates are
considered to be
critical accounting
estimates.
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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 goodwill
and intangible
assets. However, if
actual results are
not consistent with
our estimates and
assumptions used in
estimating future
cash flows and fair
values assigned to
each class of assets
acquired and
liabilities assumed,
we may be exposed to
losses from
impairment charges
that could be
material. |
New Accounting Pronouncements
For a discussion of all recently adopted and recently issued but not yet 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.
Available Information
Our website is located at www.kaiseraluminum.com. The website includes a section for
investor relations under which we provide notifications of news or announcements regarding our
financial performance, including SEC filings, investor events, and press and earnings releases. In
addition, all Kaiser Aluminum Corporation filings submitted to the SEC, including our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and Proxy
Statements for our annual meeting of stockholders, as well as other Kaiser Aluminum Corporation
reports and statements, are available on the SECs web site at www.sec.gov. Such filings
are also available for download free of charge on our website. In addition, we provide and archive
on our website webcasts of our quarterly earnings calls and certain events in which management participates or hosts with
members of the investment community, and related investor presentations. The contents of the
website is not intended to be incorporated by reference into this Report or in any other report or
document filed by us and any reference to the websites are intended to be inactive textual
references only.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our operating results are sensitive to changes in the prices of 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 14 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and Supplementary Data of this Report, we have
historically 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 energy prices and foreign currency exchange rates.
61
Sensitivity
Primary/Secondary Aluminum. As a result of the full curtailment of Angleseys smelting
operations at September 30, 2009 and the commencement of secondary aluminum remelt and casting
operations discussed in Part II, Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations (see Results of Operations Segment and Business Unit
Information All Other) of this Report, we believe our exposure to primary aluminum price risk,
with respect to our income and cash flow related to our share of Anglesey production, has largely
been eliminated.
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
to our customers. However, in certain instances we enter into firm price arrangements with our
customers and incur price risk on our anticipated primary aluminum purchases in respect of such
customer orders. At the time our Fabricated Products segment enters into a firm price customer
contract, our Hedging business unit and Fabricated Products segment enter into an internal hedge
so that metal price risk resides in our Hedging business unit under All Other. Results from
internal hedging activities between our Fabricated Products segment and Hedging business unit
eliminate in consolidation. The Hedging business unit uses third-party hedging instruments to
limit exposure to metal-price risks related to firm price customer sales contracts and such
transactions may have an adverse effect on our financial position, results of operations and cash
flows.
Total fabricated products shipments during 2010, 2009 and 2008 for which we had price risk
were (in millions of pounds) 97.0, 162.7 and 228.3, respectively. At December 31, 2010, we had
sales contracts for the delivery of fabricated aluminum products that have the effect of creating
price risk on anticipated primary aluminum purchases for the period 2011 through 2013 and
thereafter totaling approximately (in millions of pounds) 90.9, 14.5 and 0.4, respectively.
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 our operating
costs of our London, Ontario facility and for cash commitments for equipment purchases.
We do not anticipate recognition of equity income or losses relating to our investment in
Anglesey for at least the next 12 months. Further, we expect to purchase and sell our share of
Anglesey secondary aluminum production under pricing mechanisms that are intended to eliminate
metal price risk and currency exchange risk. As a result, the British Pound Sterling exchange
exposure related to our income and cash flow relating to Anglesey is effectively eliminated in the
near-term.
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 operating costs by approximately $3.8 million.
We, from time-to-time, in the ordinary course of business, enter into hedging transactions
with major suppliers of energy and energy-related financial investments. As of December 31, 2010,
our exposure to fluctuations in natural gas prices had been substantially reduced for approximately
95% of the expected natural gas purchases for 2011, approximately 74% of the expected natural gas
purchases for 2012 and approximately 22% of the expected natural gas purchases for 2013.
62
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Item 8. Financial Statements and Supplementary Data
Managements Report on the Financial Statements and Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
Consolidated Balance Sheet
Statement of Consolidated Income (Loss)
Statement of Consolidated Stockholders Equity and Comprehensive Income (Loss)
Statement of Consolidated Cash Flows
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
63
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, 2010, 2009 and 2008, 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, 2010, using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission 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, 2010.
Deloitte & Touche LLP, the independent registered public accounting firm that audited our
consolidated financial statements for the year ended December 31, 2010 included in Item 8.
Financial Statements and Supplementary Data of this Report, has issued an audit report on the
effectiveness of our internal control over financial reporting.
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/s/ Jack A. Hockema
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/s/ Daniel J. Rinkenberger |
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President and Chief Executive Officer
(Principal Executive Officer)
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Senior Vice President and Chief Financial Officer
(Principal Financial Officer) |
64
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, 2010 and 2009, and the related consolidated
statements of income (loss), stockholders equity and comprehensive income (loss), and cash flows
for each of the three years ended December 31, 2010. We also have audited the Companys internal
control over financial reporting as of December 31, 2010, 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 these financial statements, 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 these financial statements and an opinion on the Companys internal control over
financial reporting 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 and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
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 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Kaiser Aluminum Corporation and subsidiaries as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2010, based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
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/s/ DELOITTE & TOUCHE LLP
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Costa Mesa, California |
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February 22, 2011 |
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65
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In millions of dollars, except share and per |
|
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share amounts) |
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Receivables: |
|
$ |
135.6 |
|
|
$ |
30.3 |
|
Trade, less allowance for doubtful receivables of $0.6 at December 31, 2010
and $0.8 at December 31, 2009, respectively |
|
|
83.0 |
|
|
|
83.7 |
|
Due from affiliate |
|
|
|
|
|
|
0.2 |
|
Other |
|
|
5.2 |
|
|
|
2.2 |
|
Inventories |
|
|
167.5 |
|
|
|
125.2 |
|
Prepaid expenses and other current assets |
|
|
80.1 |
|
|
|
59.1 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
471.4 |
|
|
|
300.7 |
|
Property, plant, and equipment net |
|
|
354.1 |
|
|
|
338.9 |
|
Net asset in respect of VEBA |
|
|
195.7 |
|
|
|
127.5 |
|
Deferred tax assets net |
|
|
231.1 |
|
|
|
277.2 |
|
Intangible assets, net |
|
|
4.0 |
|
|
|
|
|
Goodwill |
|
|
3.1 |
|
|
|
|
|
Other assets |
|
|
83.0 |
|
|
|
41.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,342.4 |
|
|
$ |
1,085.5 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
50.8 |
|
|
$ |
49.0 |
|
Accrued salaries, wages, and related expenses |
|
|
31.1 |
|
|
|
33.1 |
|
Other accrued liabilities |
|
|
42.0 |
|
|
|
32.1 |
|
Payable to affiliate |
|
|
17.1 |
|
|
|
9.0 |
|
Long-term debt-current portion |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
142.3 |
|
|
|
123.2 |
|
Net liability in respect of VEBA |
|
|
|
|
|
|
0.3 |
|
Long-term liabilities |
|
|
134.7 |
|
|
|
53.7 |
|
Cash convertible senior notes |
|
|
141.4 |
|
|
|
|
|
Other long-term debt |
|
|
11.8 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
430.2 |
|
|
|
184.3 |
|
Commitments and contingencies Note 13 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, par value $0.01, 90,000,000 shares authorized at
both December 31, 2010 and
at December 31, 2009; 19,214,451 shares issued and
outstanding at December 31,
2010 and
20,276,571 shares issued and outstanding at December 31, 2009 |
|
|
0.2 |
|
|
|
0.2 |
|
Additional capital |
|
|
987.1 |
|
|
|
967.8 |
|
Retained earnings |
|
|
80.1 |
|
|
|
85.0 |
|
Common stock owned by Union VEBA subject to transfer restrictions, at
reorganization value, 3,523,980 shares at December 31, 2010 and
4,845,465 shares at December 31, 2009 |
|
|
(84.6 |
) |
|
|
(116.4 |
) |
Treasury stock, at cost, 1,724,606 shares at December 31, 2010 and 572,706 shares
at December 31, 2009 |
|
|
(72.3 |
) |
|
|
(28.1 |
) |
Accumulated other comprehensive income (loss) |
|
|
1.7 |
|
|
|
(7.3 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
912.2 |
|
|
|
901.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,342.4 |
|
|
$ |
1,085.5 |
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
66
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In millions of dollars, except share and per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,079.1 |
|
|
$ |
987.0 |
|
|
$ |
1,508.2 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold, excluding depreciation,
amortization and
other items |
|
|
946.8 |
|
|
|
766.4 |
|
|
|
1,400.7 |
|
Lower of cost or market inventory write-down |
|
|
|
|
|
|
9.3 |
|
|
|
65.5 |
|
Impairment of investment in Anglesey |
|
|
|
|
|
|
1.8 |
|
|
|
37.8 |
|
Restructuring costs and other (benefits) charges |
|
|
(0.3 |
) |
|
|
5.4 |
|
|
|
8.8 |
|
Depreciation and amortization |
|
|
19.8 |
|
|
|
16.4 |
|
|
|
14.7 |
|
Selling, administrative, research and development, and general |
|
|
64.4 |
|
|
|
69.9 |
|
|
|
73.1 |
|
Other operating charges (benefits), net |
|
|
4.0 |
|
|
|
(0.9 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,034.7 |
|
|
|
868.3 |
|
|
|
1,599.2 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
44.4 |
|
|
|
118.7 |
|
|
|
(91.0 |
) |
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(11.8 |
) |
|
|
|
|
|
|
(1.0 |
) |
Other (expense) income, net |
|
|
(4.2 |
) |
|
|
(0.1 |
) |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
28.4 |
|
|
|
118.6 |
|
|
|
(91.3 |
) |
Income tax (provision) benefit |
|
|
(14.3 |
) |
|
|
(48.1 |
) |
|
|
22.8 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
14.1 |
|
|
$ |
70.5 |
|
|
$ |
(68.5 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings per share, Basic Note 1, 15
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share |
|
$ |
0.72 |
|
|
$ |
3.51 |
|
|
$ |
(3.45 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings per share, Diluted Note 1, 15
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share |
|
$ |
0.72 |
|
|
$ |
3.51 |
|
|
$ |
(3.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding (000): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
19,377 |
|
|
|
19,639 |
|
|
|
19,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
19,377 |
|
|
|
19,639 |
|
|
|
19,980 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
67
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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 |
|
|
$ |
0.2 |
|
|
$ |
948.9 |
|
|
$ |
116.1 |
|
|
$ |
(116.4 |
) |
|
$ |
|
|
|
$ |
(6.0 |
) |
|
$ |
942.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68.5 |
) |
Tax effect of prior year pension adjustments |
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
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 net actuarial loss
(net of tax of $(0.1)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
0.2 |
|
Less: amortization of prior service cost
(net of tax of $(0.3)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
0.5 |
|
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 $0.1) |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital distribution by unconsolidated affiliate
to its parent company (net of tax of $0.6) |
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of non-vested shares to employees |
|
|
52,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares to directors |
|
|
3,689 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common stock ($0.66 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned equity compensation |
|
|
|
|
|
|
|
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008 |
|
|
20,044,913 |
|
|
$ |
0.2 |
|
|
$ |
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.
68
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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, 2008 |
|
|
20,044,913 |
|
|
$ |
0.2 |
|
|
$ |
958.6 |
|
|
$ |
34.1 |
|
|
$ |
(116.4 |
) |
|
$ |
(28.1 |
) |
|
$ |
(60.3 |
) |
|
$ |
788.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.5 |
|
Defined benefit plans adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain arising during the period
(net of tax of $(43.2)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.4 |
|
|
|
71.4 |
|
Prior service cost arising during the period
(net of tax of $12.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.2 |
) |
|
|
(20.2 |
) |
Less: amortization of net actuarial loss
(net of tax of $(1.4)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
2.4 |
|
Less: amortization of prior service cost
(net of tax of $(0.6)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
0.9 |
|
Foreign currency translation adjustment,
net of tax of $0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital distribution by unconsolidated affiliate
to its parent company |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of non-vested shares to employees |
|
|
196,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares to employees in lieu
of cash bonus |
|
|
15,674 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares to directors |
|
|
3,734 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares to employees upon
vesting of restricted stock units and
performance shares |
|
|
21,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of employee non-vested shares |
|
|
(5,668 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common stock ($0.96 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax deficiency upon vesting of non-vested
shares and dividend payment on unvested
shares expected to vest |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned equity compensation |
|
|
|
|
|
|
|
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009 |
|
|
20,276,571 |
|
|
$ |
0.2 |
|
|
$ |
967.8 |
|
|
$ |
85.0 |
|
|
$ |
(116.4 |
) |
|
$ |
(28.1 |
) |
|
$ |
(7.3 |
) |
|
$ |
901.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these
statements.
69
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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, 2009 |
|
|
20,276,571 |
|
|
$ |
0.2 |
|
|
$ |
967.8 |
|
|
$ |
85.0 |
|
|
$ |
(116.4 |
) |
|
$ |
(28.1 |
) |
|
$ |
(7.3 |
) |
|
$ |
901.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1 |
|
Net actuarial gain arising during the period
(net of tax of $(4.4)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.0 |
|
|
|
7.0 |
|
Less: amortization of net actuarial gain
(net of tax of $0.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Less: amortization of prior service cost
(net of tax of $(1.6)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6 |
|
|
|
2.6 |
|
Unrealized gain on available for sale securities
(net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
Foreign currency translation adjustment,
net of tax of $0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Union VEBA shares by the Union
VEBA, net of tax of $19.6 |
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
31.8 |
|
|
|
|
|
|
|
|
|
|
|
32.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of non-vested shares to employees |
|
|
97,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares to directors |
|
|
4,612 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares to employees upon
vesting of restricted stock units and
performance shares |
|
|
4,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of employee non-vested shares |
|
|
(5,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of shares to cover employees
tax withholdings upon vesting of non-vested
shares |
|
|
(11,729 |
) |
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
(1,151,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44.2 |
) |
|
|
|
|
|
|
(44.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common stock ($0.96 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned equity compensation |
|
|
|
|
|
|
|
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2010 |
|
|
19,214,451 |
|
|
$ |
0.2 |
|
|
$ |
987.1 |
|
|
$ |
80.1 |
|
|
$ |
(84.6 |
) |
|
$ |
(72.3 |
) |
|
$ |
1.7 |
|
|
$ |
912.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
70
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In millions of dollars) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
14.1 |
|
|
$ |
70.5 |
|
|
$ |
(68.5 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
19.5 |
|
|
|
16.4 |
|
|
|
14.7 |
|
Amortization of definite-lived intangible assets |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
Amortization of debt discount and debt issuance costs |
|
|
4.5 |
|
|
|
|
|
|
|
0.2 |
|
Deferred income taxes |
|
|
14.5 |
|
|
|
47.3 |
|
|
|
(31.0 |
) |
Excess tax deficiency (benefit) upon vesting of non-vested shares and dividend
payment on unvested shares expected to vest |
|
|
|
|
|
|
0.1 |
|
|
|
(0.1 |
) |
Non-cash equity compensation |
|
|
4.7 |
|
|
|
9.1 |
|
|
|
10.1 |
|
Net non-cash LIFO charges and lower of cost or market inventory write-down |
|
|
16.5 |
|
|
|
18.0 |
|
|
|
57.7 |
|
Non-cash unrealized losses (gains) on derivative positions |
|
|
5.5 |
|
|
|
(80.5 |
) |
|
|
87.1 |
|
Amortization of option premiums |
|
|
1.8 |
|
|
|
5.5 |
|
|
|
|
|
Non-cash impairment charges |
|
|
4.6 |
|
|
|
2.3 |
|
|
|
42.1 |
|
Equity in (income) loss of unconsolidated affiliate, net of distributions |
|
|
|
|
|
|
(1.9 |
) |
|
|
1.8 |
|
Losses (gains) on disposition of property, plant and equipment |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
(0.1 |
) |
Other non-cash changes in assets and liabilities |
|
|
1.0 |
|
|
|
5.5 |
|
|
|
(0.3 |
) |
Changes in operating assets and liabilities, net of effect of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other receivables |
|
|
(1.2 |
) |
|
|
30.1 |
|
|
|
(13.2 |
) |
Receivable from affiliate |
|
|
0.2 |
|
|
|
11.6 |
|
|
|
(2.3 |
) |
Inventories (excluding LIFO charges (benefits) and lower of cost or market write-down) |
|
|
(56.3 |
) |
|
|
29.1 |
|
|
|
(22.7 |
) |
Prepaid expenses and other current assets |
|
|
(0.9 |
) |
|
|
(2.0 |
) |
|
|
(7.0 |
) |
Accounts payable |
|
|
4.2 |
|
|
|
(2.5 |
) |
|
|
(18.9 |
) |
Accrued liabilities |
|
|
0.4 |
|
|
|
(19.8 |
) |
|
|
7.1 |
|
Payable to affiliate |
|
|
8.1 |
|
|
|
(18.5 |
) |
|
|
8.9 |
|
Accrued income taxes |
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
Long-term assets and liabilities, net |
|
|
24.7 |
|
|
|
7.3 |
|
|
|
(18.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
66.3 |
|
|
|
127.7 |
|
|
|
46.9 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(38.9 |
) |
|
|
(59.2 |
) |
|
|
(93.2 |
) |
Purchase of available for sale securities |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
Net proceeds from dispositions of manufacturing facility and related assets |
|
|
4.8 |
|
|
|
|
|
|
|
|
|
Net proceeds from dispositions of property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
1.6 |
|
Cash payment for acquisition of manufacturing facility and related assets |
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
Change in restricted cash |
|
|
1.1 |
|
|
|
18.5 |
|
|
|
(20.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(46.4 |
) |
|
|
(40.7 |
) |
|
|
(112.5 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of cash convertible senior notes |
|
|
175.0 |
|
|
|
|
|
|
|
|
|
Cash paid for financing costs in connection with issuance of cash convertible senior notes |
|
|
(5.9 |
) |
|
|
|
|
|
|
|
|
Purchase of call option in connection with issuance of cash convertible senior notes |
|
|
(31.4 |
) |
|
|
|
|
|
|
|
|
Proceeds from issuance of warrants |
|
|
14.3 |
|
|
|
|
|
|
|
|
|
Repayment of promissory note current portion |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
Borrowings under note payable |
|
|
|
|
|
|
|
|
|
|
7.0 |
|
Borrowings under the revolving credit facility |
|
|
|
|
|
|
111.6 |
|
|
|
171.5 |
|
Repayment of borrowings under the revolving credit facility |
|
|
|
|
|
|
(147.6 |
) |
|
|
(135.5 |
) |
Cash paid for financing costs in connection with the revolving credit facility |
|
|
(2.7 |
) |
|
|
(1.2 |
) |
|
|
|
|
Excess tax (deficiency) benefit upon vesting of non-vested shares and dividend payment
on unvested shares expected to vest |
|
|
|
|
|
|
(0.1 |
) |
|
|
0.1 |
|
Retirement of common stock |
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
Repurchase of common stock |
|
|
(44.2 |
) |
|
|
|
|
|
|
(28.1 |
) |
Cash dividend paid to stockholders |
|
|
(19.0 |
) |
|
|
(19.6 |
) |
|
|
(17.2 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
85.4 |
|
|
|
(56.9 |
) |
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents during the period |
|
|
105.3 |
|
|
|
30.1 |
|
|
|
(68.5 |
) |
Cash and cash equivalents at beginning of period |
|
|
30.3 |
|
|
|
0.2 |
|
|
|
68.7 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
135.6 |
|
|
$ |
30.3 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
71
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation. The consolidated financial statements
consolidate the financial statements of the Company and its wholly owned subsidiaries and are
prepared in accordance with United States generally accepted accounting principles (US GAAP).
Intercompany balances and transactions are eliminated. See Note 3 for a description of the
Companys accounting for its 49%, non-controlling ownership interest in Anglesey Aluminium Limited
(Anglesey). References to specific US GAAP in this Report cite topics within the Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC).
Use of Estimates in the Preparation of Financial Statements. The preparation of financial
statements in accordance with 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 operations.
Recognition of Sales. Sales are generally recognized on a gross basis when title, ownership
and risk of loss pass to the buyer and collectability is reasonably assured. In connection with
Angleseys remelt operations, which commenced in the fourth quarter of 2009, the Company
substantially reduced or eliminated its risks with respect to inventory loss and fluctuations in
metal prices and foreign currency exchange rates. In the fourth quarter of 2009, the Company in
substance began to act as an agent in connection with sales of secondary aluminum produced by
Anglesey and, consequently, the Companys sales of such secondary aluminum are presented net of
cost of sales.
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.
From time to time, in the ordinary course of business, the Company may enter into agreements
with customers in which the Company, in return for a fee, agrees to reserve certain amounts of its
existing production capacity to the customer, defer an existing customer purchase commitment into
future periods and reserve certain amounts of its expected production capacity in those periods to
the customer, or cancel or reduce existing commitments under existing contracts. These agreements
may have terms or impact periods exceeding one year.
Certain of the capacity reservation and commitment deferral agreements provide for periodic,
such as quarterly or annual, billing for the duration of the contract. For capacity reservation
agreements, the Company recognizes revenue ratably over the period of the capacity reservation.
Accordingly, the Company may recognize revenue prior to billing reservation fees. At December 31,
2010 and December 31, 2009, the Company had $1.1 and $0.3 of unbilled receivables, respectively,
included within Trade receivables on the Companys Consolidated Balance Sheets. For commitment
deferral agreements, the Company recognizes revenue upon the earlier occurrence of the related sale
of product or the end of the commitment period. In connection with other agreements, the Company
may collect funds from customers in advance of the periods for which (i) the production capacity is
reserved, (ii) commitments are deferred, (iii) commitments are reduced or (iv) performance is
completed, in which event the recognition of revenue is deferred until such time as the fee is
earned. Any unearned fees are included within Other accrued liabilities or Long-term liabilities,
as appropriate, on the Companys Consolidated Balance Sheets (see Note 6). At December
31, 2010 and December 31, 2009, the Company had total deferred revenues of $24.0 and $15.5,
respectively, relating to these agreements. Such deferred revenue is included within Other accrued
liabilities or Long-term liabilities, as appropriate, on the Companys Consolidated Balance Sheets
(see Note 6).
Earnings per Share. ASC Topic 260, Earnings Per Share, defines unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) as participating securities and requires inclusion of such securities in the computation of
earnings per share pursuant to the two-class method. Topic 260 mandates the application of the
foregoing principles to all financial statements issued for fiscal years beginning after December
2008 and requires retrospective application. Upon adoption, the Company retrospectively adjusted
its earnings per share data, resulting in a $0.02 per share reduction in both the basic and diluted
earnings per common share for 2008.
Basic earnings per share is computed by dividing distributed and undistributed earnings
allocable to common shares by the weighted-average number of common shares outstanding during the
applicable period. The basic weighted-average number of common shares outstanding during the period
excludes unvested share-based payment awards. The shares owned by a voluntary employees
beneficiary association (VEBA) for the benefit of certain union retirees, their surviving spouses
and eligible dependents
72
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
(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 weighted-average number of common
shares outstanding because such shares were irrevocably issued and have full dividend and voting
rights. Diluted earnings per share is calculated as the more dilutive result of computing earnings
per share under: (i) the treasury stock method or (ii) the two-class method (see Note 15).
Stock-Based Compensation. Stock based compensation is provided to certain employees, directors
and a director emeritus, and is accounted for at fair value, pursuant to the requirements of ASC
Topic 718, Compensation Stock Compensation. The Company measures the cost of 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 fair value of awards provided to the director
emeritus is not material. The cost of an award is recognized as an expense over the requisite
service period of the award on a straight-line basis. The Company has elected to amortize
compensation expense for equity awards with graded vesting using the straight-line method. The
Company recognized compensation expense for 2010, 2009 and 2008 of $3.7, $8.2, and $9.9
respectively, in connection with vested awards and non-vested stock, restricted stock units and
stock options (see Note 12).
The Company grants performance shares to executive officers and other key employees. These
awards are subject to performance requirements pertaining to the Companys economic value added
(EVA) performance, measured over a three-year performance period. The EVA is a measure of the
excess of the Companys adjusted pre-tax operating income for a particular year over a
pre-determined percentage of the adjusted net assets of the immediately preceding year, as defined
in the 2008-2010, 2009-2011 and 2010-2012 Long-Term Incentive (LTI) programs. The number of
performance shares, if any, that will ultimately vest and result in the issuance of common shares
depends on the average annual EVA achieved for the specified three-year performance periods. The
fair value of performance-based awards is measured based on the most probable outcome of the
performance condition, which is estimated quarterly using the Companys forecast and actual
results. The Company expenses the fair value, after assuming an estimated forfeiture rate, over the
specified three-year performance periods on a ratable basis. The Company recognized compensation
expense for 2010, 2009 and 2008 of $0.8, $0.9, and $0.2 respectively, in connection with the
performance shares.
Acquisition, Goodwill and Intangible Assets. Acquisitions are accounted for in accordance with
ASC Topic 805, Business Combinations (ASC 805). The Company recognizes assets acquired and
liabilities assumed, including assets acquired and liabilities assumed arising from contractual
contingencies at the acquisition date, at their respective estimated fair values. The Company
recognizes goodwill as of the acquisition date as a residual over the fair values of the
identifiable net assets acquired. Acquisition-related costs are expensed directly in the period in
which they are incurred and are included in Selling, administrative, research and development, and
general in the Statements of Consolidated Income.
Goodwill is tested for impairment on an annual basis during the third quarter, as well as on
an interim basis, as warranted, at the time of events and changes in circumstances. Intangible
assets with definite lives are initially recognized at fair value and will be amortized over the
estimated useful lives to reflect the pattern in which the economic benefits of the intangible
assets are consumed. In the event the pattern cannot be reliably determined, the Company uses a
straight-line amortization method. Whenever events or changes in circumstances indicate that the
carrying amount of the intangible assets may not be recoverable, the intangible assets will be
reviewed for impairment. The weighted-average estimated useful life of the Companys intangible
assets is 18 years (see Note 9).
Environmental Contingencies. With respect to environmental loss contingencies, the Company
records a loss contingency whenever such contingency is probable and reasonably estimable. Accruals
for estimated losses from environmental remediation obligations are generally recognized no later
than completion of the remedial feasibility study. Such accruals are adjusted as further
information develops or circumstances change. Costs of future expenditures for environmental
remediation obligations are not discounted to their present value. Environmental expense relating
to continuing operations is included in Cost of products sold, excluding depreciation, amortization
and other items in the Statement of Consolidated Income. Environmental expense relating to
discontinued operations is included in Selling, administrative, research and development, and
general in the Statement of Consolidated Income.
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 exit and disposal activities. The Company applies
the provisions of ASC Topic 420, Exit or Disposal Cost Obligations, to account for obligations
arising from such activities. Severance and benefit costs incurred in connection with exit
activities 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, impairment losses recognized are 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 close facilities, terminate contractual commitments and
73
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
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. During 2010, 2009 and
2008, the Company recorded $(0.3), $5.4 and $8.8, respectively, of restructuring costs and other
(benefits) charges relating to employee termination and other personnel costs, and contract
termination and other facility-related activities, in connection with the Companys closure of its
Tulsa, Oklahoma extrusion facility, reductions of operations at its Bellwood, Virginia facility,
and reduction of personnel in other locations (see Note 17).
Other (Expense) Income, net. Amounts included in Other (expense) income in 2010, 2009 and 2008
included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest income |
|
$ |
0.3 |
|
|
$ |
0.1 |
|
|
$ |
1.7 |
|
Unrealized loss on financial derivatives1 |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
All other, net |
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4.2 |
) |
|
$ |
(0.1 |
) |
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
See Derivative Financial Instruments below, for a discussion of accounting policy for such instruments. |
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. In accordance with ASC Topic 740, Income Taxes, 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. 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 (see Note 10).
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. The
Companys cash equivalents consist primarily of funds in savings accounts, demand notes, money
market accounts and other highly liquid investments, which are classified within Level 1 of the
fair value hierarchy. Cash equivalents at December 31, 2010 and 2009 were $30.1 and $29.4,
respectively.
Restricted Cash. The Company is required to keep certain amounts on deposit relating to
workers compensation and other agreements. Such amounts totaled $17.2 and $18.3 at December 31,
2010 and December 31, 2009, respectively. Of the restricted cash balance, $0.9 and $0.9 were
considered short-term and included in Prepaid expenses and other current assets on the Consolidated
Balance Sheets at December 31, 2010 and December 31, 2009, respectively, and $16.3 and $17.4 were
considered long-term and included in Other assets on the Consolidated Balance Sheets at December
31, 2010 and December 31, 2009, respectively. There were no margin call deposits with the Companys
derivative financial instrument counterparties in restricted cash at December 31, 2010 and 2009.
Trade Receivables and Allowance for Doubtful Accounts. Trade receivables primarily consist of
amounts billed to customers for products sold. Accounts receivable are generally due within 30
days. For the majority of its receivables, the Company establishes an allowance for doubtful
accounts based upon 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. Any subsequent cash
collections relating to accounts that have been previously written off are typically recorded as a
reduction to total bad debt expense in the period of payment.
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 2).
74
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
Shipping and Handling Costs. Shipping and handling costs are recorded as a component of Cost
of products sold excluding depreciation, amortization and other items.
Advertising Costs. Advertising costs, which are included in Selling, administrative, research
and development, and general, are expensed as incurred. Advertising costs for 2010, 2009 and 2008
were $0.3, $0.4, and $0.3, 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
2010, 2009 and 2008, were $4.9, $4.4, and $4.8, respectively.
Depreciation. Depreciation is computed 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 (in years):
|
|
|
|
|
Land improvements |
|
|
3-25 |
|
Buildings |
|
|
15-45 |
|
Machinery and equipment |
|
|
1-24 |
|
Depreciation expense relating to Fabricated Products is not included in Cost of products sold,
excluding depreciation, amortization and other items, but is included in Depreciation and
amortization on the Statements of Consolidated Income (Loss). Depreciation expense is not adjusted
when assets are temporarily idled. Property, plant and equipment held for future development are
presented as idled assets. Such assets are evaluated for impairment on a held-and-used basis.
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 payable under the lease as part of deferred
rent, in Other accrued liabilities or 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
which could be capitalized as part of construction in progress. Deferred financing costs included
in other assets at December 31, 2010 and 2009 were $7.7 and $1.1, respectively.
Foreign Currency. One of the Companys foreign subsidiaries uses the local currency as its
functional currency, its assets and liabilities are translated at exchange rates in effect at the
balance sheet date; and its 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 ASC Topic 830, Foreign Currency
Matters. Where the U.S. dollar is the functional currency of a foreign facility or subsidiary,
re-measurement adjustments are recorded in Other income (expense). At both December 31, 2010 and
December 31, 2009, 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. From time-to-time, the Company also enters
into hedging arrangements in connection with financing transactions to mitigate financial risks.
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 units
to minimize transaction costs, monitor consolidated net exposures and allow for increased
responsiveness to changes in market factors.
On March 29, 2010, the Company issued $175.0 aggregate principal amount of 4.5% cash
convertible senior notes due 2015 (the Notes). The Notes may be settled only in cash. The cash
conversion feature
of the Notes requires bifurcation from the Notes according to ASC Topic 815,
Derivatives and Hedging (ASC 815). The Company accounts for such cash conversion feature
75
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
(Bifurcated Conversion Feature) as a derivative liability. In connection with the issuance of the
Notes, the Company purchased cash-settled call options relating to its common stock (the Call
Options) to hedge against potential cash payments that could result from the conversion of the
Notes. The Call Options are accounted for as derivative assets, as they meet the definition of a
derivative under ASC 815 (Notes 7 and 14).
The Company recognizes all derivative instruments as assets or liabilities in its balance
sheet and measures these instruments at fair value by marking-to-market all of its hedging
positions at each period-end (Note 14). The Company does not meet the documentation requirements
for hedge (deferral) accounting under ASC 815. Unrealized and realized gains and losses associated
with hedges of operational risks are reflected as a reduction or increase in Cost of products sold,
excluding depreciation, amortization and other items. Unrealized and realized gains and losses
relating to hedges of financing transactions are reflected as a component of Other income
(expense).
Concentration of Credit Risk. Financial arrangements which potentially subject the Company to
concentrations of credit risk consist of metal, currency, and natural gas derivative contracts, the
Call Options, and arrangements related to its cash equivalents. If the market value of the
Companys net commodity and currency derivative positions with certain counterparties 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 these net derivative positions
falls below a specified threshold, the Company is required to transfer cash collateral below the
threshold to certain counterparties. At both December 31, 2010 and December 31, 2009, the Company
had no margin deposits with or from its counterparties.
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 of counterparties to return cash
collateral previously transferred to the counterparties. The counterparties to the Companys
derivative contracts are major financial institutions, and the Company does not expect to
experience nonperformance by any of its counterparties.
The Company places its cash in bank deposits and money market funds with high credit quality
financial institutions which invest primarily in commercial paper and time deposits of prime
quality, short-term repurchase agreements, and U.S. government agency notes. The Company has not
experienced 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, roofs, ceilings or piping) of certain of the
Companys older facilities if such facilities were to undergo major renovation or be demolished.
The Company, in accordance with ASC Topic 410, Asset Retirement and Environmental Obligations,
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. 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 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.
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 related to stock-based awards. 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 stock-based 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
stock-based award activities.
Fair Value Measurement. The Company applies the provisions of ASC Topic 820, Fair Value
Measurements and Disclosures (ASC 820), in measuring the fair value of its derivative contracts
(Note 14), plan assets invested by certain of the Companys employee benefit plans (Note 11) and
its Notes (Note 7).
Fair value is defined 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. ASC 820
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
76
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
(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 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 and 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. |
New Accounting Pronouncements. In December 2010, the Financial Accounting Standards Board
issued Accounting Standards Update (ASU) No. 2010-29, Business Combinations, Disclosure of
Supplementary Pro Forma Information for Business Combinations (ASU 2010-29), which provides
clarification regarding pro forma revenue and earnings disclosure requirements for business
combinations. The amendments in this ASU specify that if a public entity presents comparative
financial statements, the entity should disclose only revenue and earnings of the combined entity
as though the business combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period. The amendments also expand the
supplemental pro forma disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. The amendments are effective prospectively for
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The
Company expects to adopt ASU 2010-29 during the first interim reporting period of 2011 as it
relates to pro-forma disclosure of the Companys acquisition of assets from Alexco, L.L.C.
(Alexco) effective January 1, 2011 (see Note 19). The Company does not expect the adoption of ASU
2010-29 to have a material impact on its consolidated financial statements.
ASU No. 2010-06, Fair Value Measurements and DisclosuresImproving Disclosures about Fair
Value Measurements (ASU 2010-06) was issued in January 2010. This ASU amends ASC Subtopic 820-10,
Fair Value Measurements and DisclosuresOverall, to require new disclosures regarding transfers in
and out of Level 1 and Level 2, as well as activity in Level 3, fair value measurements. ASU
2010-06 became effective for financial statements issued by the Company for interim and annual
periods beginning after December 15, 2009, except for disclosures relating to purchases, sales,
issuances, and settlements in the roll-forward of activity in Level 3 fair value measurements,
which are effective for fiscal years beginning after December 15, 2010. The Company adopted during
2010 the applicable provisions of ASU 2010-06, which did not have a material impact on the
disclosures in its consolidated financial statements. The Company does not expect the adoption of
the provisions of ASU 2010-06 relating to increased disclosure of activity in Level 3 fair value
measurements to have a material impact on the disclosures in its consolidated financial statements.
ASU No. 2010-20, Receivables (Topic 310) Disclosure about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses (ASU 2010-20) was issued in July 2010. This ASU
amends existing disclosure requirements and requires additional disclosure regarding financing
receivables (other than short-term trade receivables or receivables measured at fair value or lower
of cost or fair value), including: (i) credit quality indicators of financing receivables at the
end of the reporting period by class of financing receivables, (ii) the aging of past due financing
receivables at the end of the reporting period by class of financing receivables, and (iii) the
nature and extent of troubled debt restructurings that occurred during the period by class of
financing receivables and their effect on the allowance for credit losses. For public entities, the
requirement for disclosures as of the end of a
reporting period is effective for interim and annual reporting periods ending on or after
December 15, 2010. The requirement for disclosures about activities that occur during a reporting
period is effective for interim and annual reporting periods beginning on or after December 15,
2010. The Company adopted on December 31, 2010 the applicable provisions of ASU 2010-20, which did
not have a material impact on the disclosures in its consolidated financial statements. The Company
does not expect the adoption of the provisions of ASU 2010-20 relating to increased disclosure
activities relating to financing receivables to have a material impact on the disclosures in its
consolidated financial statements.
77
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
ASU No. 2010-28, Intangibles Goodwill and Other, When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (ASU 2010-28) was
issued in December 2010. The amendments in this ASU modify Step 1 of the goodwill impairment test
for reporting units with zero or negative carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are any events or circumstances that
would more likely than not reduce the fair value of a reporting unit below its carrying amount. The
amendments in this ASU are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. The Company expects to adopt
ASU 2010-28 for the quarter ending March 31, 2011 and does not expect the adoption to have a
material impact on its consolidated financial statements.
2. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Fabricated Products segment |
|
|
|
|
|
|
|
|
Finished products |
|
$ |
53.8 |
|
|
$ |
40.4 |
|
Work in process |
|
|
49.6 |
|
|
|
44.9 |
|
Raw materials |
|
|
50.9 |
|
|
|
27.1 |
|
Operating supplies and repairs and maintenance parts |
|
|
13.2 |
|
|
|
12.8 |
|
|
|
|
|
|
|
|
|
|
$ |
167.5 |
|
|
$ |
125.2 |
|
|
|
|
|
|
|
|
The Company recorded net non-cash LIFO (charges) benefits of approximately $(16.5), $(8.7) and
$7.5 during 2010, 2009 and 2008, respectively. These amounts are primarily a result of changes in
metal prices and changes in inventory volumes.
With the inevitable ebb and flow of business cycles, non-cash LIFO (charges) benefits will
result when inventory levels and metal prices fluctuate. Further, potential lower of cost or market
adjustments can occur when metal prices decline and margins compress. At December 31, 2008, due to
the decline in the London Metal Exchange (LME) price of primary aluminum, the Company recorded a
$65.5 lower of cost or market inventory write-down to reflect the inventory at market value. During
the first quarter of 2009, the Company recorded an additional lower of cost or market inventory
write-down of $9.3 due to the continued decline in the LME price of primary aluminum. The
write-downs of inventory were recorded pursuant to ASC Topic 330, Inventory, under which the market
value of inventory 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. There were no lower of cost or
market inventory write-downs during 2010.
3. Investment In and Advances To Unconsolidated Affiliate
The Company has a 49%, non-controlling ownership interest in Anglesey. Anglesey operated as a
primary aluminum smelter until September 30, 2009, when it fully curtailed its smelting operations
due to the expiration of its long-term power contract and its inability to find alternative
affordable power to continue operating as a smelter. In the fourth quarter of 2009, Anglesey
commenced a remelt and casting operation to produce secondary aluminum.
Through September 30, 2009, the Company and Anglesey had interrelated operations. The Company
was responsible for selling alumina to Anglesey in proportion to its ownership percentage. To meet
its obligation to provide alumina to Anglesey, the Company purchased alumina under a contract that
provided adequate alumina for Angleseys operations through September 2009. Further, the
Company was responsible for purchasing primary aluminum from Anglesey in proportion to its
ownership percentage, at prices based on the primary aluminum market prices.
At December 31, 2008, the Company recorded a charge of $37.8 to fully impair its investment in
Anglesey. In the first half of 2009, the Company recorded additional impairment charges totaling
$1.8 to maintain its investment balance at zero. During the quarter ended September 30, 2009,
Anglesey incurred a significant net loss, primarily as the result of employee redundancy costs
incurred in connection with the cessation of its smelting operations. Commencing in the quarter
ended September 30, 2009 and continuing through December 31, 2010, the Company suspended the use of
the equity method of accounting with respect to its
78
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
ownership in Anglesey as the Company is not
obligated to advance any funds to Anglesey, guarantee any obligations of Anglesey, or make any
commitments to provide any financial support for Anglesey. Accordingly, the Company did not
recognize its share of Angleseys net loss for such periods, pursuant to ASC Topic 323, Investments
Equity Method and Joint Ventures. The Company does not anticipate resuming the use of the equity
method of accounting with respect to its investment in Anglesey unless and until (i) its share of
any future net income of Anglesey equals or is greater than the Companys share of net losses not
recognized during periods for which the equity method was suspended and (ii) future dividends can
be expected. The Company does not anticipate the occurrence of such event during the next 12
months.
After the cessation of Angleseys smelting operations on September 30, 2009, Anglesey no
longer requires alumina for its operations, and the Companys obligation to sell alumina to
Anglesey terminated. Since such date, the Company has purchased secondary aluminum products from
Anglesey in proportion to its ownership interest, at prices tied to the market price of primary
aluminum. The Company in turn sells the secondary aluminum products to a third party and receive a
portion of a premium over normal commodity market prices. The transactions are structured to
largely eliminate metal price and currency exchange rate risks with respect to income and cash
flow.
In the fourth quarter of 2009, the Company in substance began to act as an agent in connection
with sales of secondary aluminum produced by Anglesey and, consequently, the Companys sales of
such secondary aluminum are presented net of the cost of sales. Prior to the cessation of
Angleseys smelting operations as of September 30, 2009, the Companys sales of primary aluminum
produced by Anglesey were recorded on a gross basis when title, ownership and risk of loss were
passed to the buyer and collectability was reasonably assured. The
Company recorded $0.3, $89.9 and
$171.4 of revenue relating to the sales of primary aluminum produced by Anglesey in 2010, 2009 and
2008, respectively. The Company did not record any net revenue relating to sales of secondary
aluminum produced by Anglesey.
The Company recorded zero equity in income from Anglesey in 2009 and 2008. The Company
received no dividends from Anglesey for 2010 or 2009, and received dividends from Anglesey of $3.9
million in 2008.
Purchases from and sales to Anglesey were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
2008 |
Purchases |
|
$ |
93.3 |
|
|
$ |
91.4 |
|
|
$ |
155.9 |
|
Sales |
|
|
|
|
|
|
18.1 |
|
|
|
52.1 |
|
At December 31, 2010 and 2009, receivables from Anglesey were $0.0 and $0.2, respectively. At
December 31, 2010 and 2009, payables to Anglesey were $17.1 and $9.0, respectively.
4. 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, roofs, ceilings or piping) at certain of the
Companys older facilities if such facilities were to undergo major renovation or be demolished.
There are currently plans for such renovation or demolition at one facility and managements
current assessment is that certain immaterial CAROs may be triggered during the next four years.
For locations where there are no current plans for renovations or demolitions, the most probable
scenario is that such CAROs would not be triggered for 20 or more years, if at all.
The inputs in estimating the fair value of CAROs include: (i) timing of when any such CARO may
be incurred, (ii) incremental costs associated with special handling or treatment of CARO materials
and (iii) credit adjusted risk free rate, all of which are considered level 3 inputs as they
involve significant judgment of the Company.
During the quarter ended September 30, 2010, the Company re-assessed and revised its estimates
relating to the timing and future costs of various asbestos removal projects at one facility. Both
upward and downward revisions relating to cost estimates were made. The downward revisions in cost
estimates resulted in a $1.3 decrease in CARO liabilities and cumulative adjustments reducing Cost
of products sold, excluding depreciation, amortization and other items, and Depreciation and
amortization by approximately $1.1 and
79
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
$0.1, respectively. The total of such adjustments increased
both basic and diluted earnings per share by approximately $0.05 per share. The upward revisions in
costs estimates resulted in a $1.3 increase in both CARO liabilities and CARO assets. The Company
used a credit-adjusted, risk-free rate of 10.8% in estimating the fair value with respect to the
CARO liability associated with the upward cost adjustment. Accretion and depreciation expense over
the next 20 years is expected to increase as a result of the revisions. Revisions to timing of CARO
settlement did not have a material impact on the Companys financial statements.
The Companys results for 2010, 2009 and 2008 included an immaterial amount of depreciation
expense associated with CARO-related costs. For 2010, 2009 and 2008, accretion of CARO liabilities
(recorded in Cost of products sold) was $0.3, $0.2 and $0.3, respectively. The estimated fair
value of CARO liabilities at December 31, 2010 and December 31, 2009 was $3.8 and $3.5,
respectively.
For purposes of the Companys fair value estimates with respect to the CARO liabilities prior
to the quarter ended September 30, 2010, a credit adjusted risk free rate of 7.5% was used.
5. 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, |
|
|
|
2010 |
|
|
2009 |
|
Land and improvements |
|
$ |
23.3 |
|
|
$ |
23.6 |
|
Buildings |
|
|
43.5 |
|
|
|
31.9 |
|
Machinery and equipment |
|
|
338.0 |
|
|
|
246.2 |
|
Construction in progress |
|
|
7.7 |
|
|
|
83.4 |
|
|
|
|
|
|
|
|
|
|
|
412.5 |
|
|
|
385.1 |
|
Accumulated depreciation |
|
|
(63.9 |
) |
|
|
(46.2 |
) |
|
|
|
|
|
|
|
Active property, plant, and equipment, net |
|
|
348.6 |
|
|
|
338.9 |
|
Idled equipment |
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net |
|
$ |
354.1 |
|
|
$ |
338.9 |
|
|
|
|
|
|
|
|
The majority of the Construction in progress at December 31, 2009 was related to the Companys Kalamazoo, Michigan facility. The facility is equipped with
two extrusion presses and a remelt operation. This investment program was substantially completed in late 2010. The decrease in the Construction in progress balance
from December 31, 2009 to December 31, 2010 reflects principally the commissioning of certain equipment during that period, the cost of which is reflected above in
Machinery and equipment as of December 31, 2010.
The amount of interest expense capitalized as construction in progress was $2.8, $2.7 and $0.3 during the years ended 2010, 2009, and 2008, respectively.
For 2010, 2009, and 2008, the Company recorded depreciation expense of $19.4, $16.2, and $14.6, respectively, relating to 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 such periods.
In December 2010, the Company re-assessed the expected utilization of certain of its
manufacturing equipment, in light of factors such as the production capacity and added capabilities
resulting from the acquisition of assets from Alexco effective January 1, 2011 (see Note 19).
Based upon this assessment, the Company concluded that certain of its existing equipment would be
idled until such time as the equipment is needed for production. As such equipment is currently
expected to be idled on more than a temporary basis, the Company suspended the depreciation expense
relating to such equipment.
Concurrent with the reclassification of assets to the Idled equipment category of Property,
plant and equipment, the Company performed an assessment of the net carrying amount of such assets.
Of the $5.5 carrying amount of Idled assets as of December 31, 2010, $1.1 represents equipment
used by the Companys Tulsa, Oklahoma facility prior to the closure of that facility in the fourth
80
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
quarter of 2008. The remaining Idled equipment as of December 31, 2010 represents assets
that were acquired by the Company but had not yet been placed into service. For such assets, the
Company performed an appraisal in the fourth quarter of 2010 and recorded an impairment charge of
$2.0 to write-down the carrying amount of the equipment to $4.4, representing the estimated fair
value. The fair value was estimated using a combination of the cost approach and market approach.
The cost approach is based on replacement cost and the market approach is based on prices for
similar assets, both of which used level 3 fair value inputs.
In addition to the $2.0 impairment charge noted above, the Company recorded an asset
impairment charge of $1.9 in connection with the sale of its Greenwood, South Carolina facility in
July 2010. The combined asset impairment charges of $3.9 in 2010 are included in Other operating
charges (benefits), net in the Statements of Consolidated Income (Loss) and are included in the
Fabricated Products segment.
Further, as discussed in Note 17, the Company recorded $0.7, $0.3 and $4.3 of asset impairment
charges in 2010, 2009 and 2008, respectively, in connection with the restructuring plans to close
its Tulsa, Oklahoma facility and curtail operations at its Bellwood, Virginia location. Such
charges are reflected within Restructuring costs and other (benefits) charges in the Statements of
Consolidated Income (Loss).
6. Supplemental Balance Sheet Information
Trade Receivables.
Trade receivables were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
|
Billed trade receivables |
|
$ |
82.5 |
|
|
$ |
84.2 |
|
Unbilled trade receivables Note 1 |
|
|
1.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
83.6 |
|
|
|
84.5 |
|
Allowance for doubtful receivables |
|
|
(0.6 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
$ |
83.0 |
|
|
$ |
83.7 |
|
|
|
|
Prepaid Expenses and Other Current Assets.
Prepaid expenses and other current assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
|
Current derivative assets Note 14 |
|
$ |
22.1 |
|
|
$ |
7.2 |
|
Current deferred tax assets |
|
|
46.8 |
|
|
|
40.6 |
|
Option premiums paid |
|
|
5.6 |
|
|
|
3.1 |
|
Short-term restricted cash |
|
|
0.9 |
|
|
|
0.9 |
|
Prepaid taxes |
|
|
1.3 |
|
|
|
4.2 |
|
Prepaid expenses |
|
|
3.4 |
|
|
|
3.1 |
|
|
|
|
Total |
|
$ |
80.1 |
|
|
$ |
59.1 |
|
|
|
|
Other Assets.
Other assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
|
Derivative assets Note 14 |
|
$ |
50.8 |
|
|
$ |
18.2 |
|
Option premiums paid |
|
|
0.6 |
|
|
|
1.6 |
|
Restricted cash |
|
|
16.3 |
|
|
|
17.4 |
|
Long-term income tax receivable |
|
|
2.9 |
|
|
|
2.8 |
|
Deferred financing costs |
|
|
7.7 |
|
|
|
1.1 |
|
Available for sale securities |
|
|
4.6 |
1 |
|
|
|
|
Other |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
Total |
|
$ |
83.0 |
|
|
$ |
41.2 |
|
|
|
|
81
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
|
|
1 |
|
Available for sale securities represent investments related to the Companys deferred compensation plan, in various
investment funds measured at fair value based on the net asset value of the investment funds which is considered to be a level 2 input. The fair value of these securities
approximate amortized cost. |
Other Accrued Liabilities.
Other accrued liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
|
Current derivative liabilities Note 14 |
|
$ |
8.9 |
|
|
$ |
5.1 |
|
Option premiums received |
|
|
7.0 |
|
|
|
1.6 |
|
Current portion of income tax liabilities |
|
|
1.1 |
|
|
|
1.1 |
|
Accrued income taxes and taxes payable |
|
|
1.8 |
|
|
|
2.0 |
|
Accrued book overdraft (uncleared cash disbursements) |
|
|
|
|
|
|
3.4 |
|
Accrued annual VEBA contribution |
|
|
2.1 |
|
|
|
2.4 |
|
Accrued freight |
|
|
1.9 |
|
|
|
2.1 |
|
Environmental accrual Note13 |
|
|
1.1 |
|
|
|
3.9 |
|
Accrued interest |
|
|
2.1 |
|
|
|
0.1 |
|
Deferred revenue |
|
|
10.8 |
|
|
|
6.8 |
|
Other |
|
|
5.2 |
|
|
|
3.6 |
|
|
|
|
Total |
|
$ |
42.0 |
|
|
$ |
32.1 |
|
|
|
|
Long-term Liabilities.
Long-term liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
|
Derivative liabilities Note 14 |
|
$ |
62.2 |
|
|
$ |
5.3 |
|
Option premiums received |
|
|
0.3 |
|
|
|
1.6 |
|
Income tax liabilities |
|
|
12.9 |
|
|
|
13.4 |
|
Workers compensation accruals |
|
|
15.9 |
|
|
|
14.1 |
|
Environmental accrual Note13 |
|
|
19.1 |
|
|
|
5.8 |
|
Asset retirement obligations |
|
|
3.8 |
|
|
|
3.5 |
|
Deferred revenue |
|
|
13.2 |
|
|
|
8.7 |
|
Deferred compensation liability |
|
|
4.9 |
|
|
|
|
|
Other long-term liabilities |
|
|
2.4 |
|
|
|
1.3 |
|
|
|
|
Total |
|
$ |
134.7 |
|
|
$ |
53.7 |
|
|
|
|
7. Cash Convertible Senior Notes and Related Transactions
Indenture. On March 29, 2010, the Company issued Notes in the aggregate principal amount of
$175.0 pursuant to an indenture by and between the Company and Wells Fargo Bank, National
Association, as trustee (the Indenture). Net proceeds from this transaction were approximately
$169.2, after deducting the initial purchasers discounts and transaction fees and expenses. The
Notes bear a stated interest rate of 4.50% per annum. As described in Note 1, the Company accounts
for the Bifurcated Conversion Feature of the Notes as a derivative instrument. The fair value of
the Bifurcated Conversion Feature on the issuance date of the Notes was recorded as the original
issue discount for purposes of accounting for the debt component of the Notes. At issuance, the
original issue discount relating to the Notes was $38.1, which will be amortized based on the
effective interest method over the term of the Notes. Therefore, interest expense greater than the
interest rate of 4.50% will be recognized over the term of the Notes, primarily due to the
82
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
accretion of the discounted carrying value of the Notes to their face amount. The initial
purchasers discounts and transaction fees and expenses totaling $5.8 were capitalized as deferred
financing costs and will be amortized over the term of the Notes using the effective interest
method. The effective interest rate of the Notes is approximately 11% per annum. Interest is
payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1,
2010. The Notes will mature on April 1, 2015, subject to earlier repurchase or conversion upon the
occurrence of certain events. Holders may convert their Notes before January 1, 2015, only in
certain circumstances determined by (i) the market price of the Companys common stock, (ii) the
trading price of the Notes, or (iii) the occurrence of specified corporate events. The Notes can be
converted by the holders at any time on or after January 1, 2015 until the close of business on the
second scheduled trading date immediately preceding the maturity date of the Notes. The Notes are
subject to repurchase by the Company at the option of the holders following a fundamental change,
as defined in the Indenture, including, but not limited to, (i) certain ownership changes, (ii)
certain recapitalizations, mergers and dispositions, (iii) approval of any plan or proposal for the
liquidation, or dissolution of the Company, and (iv) the Companys common stock ceasing to be
listed on any of the New York Stock Exchange, the NASDAQ Global Select Market or the NASDAQ Global
Market, at a price equal to 100% of the principal amount of the Notes plus accrued and unpaid
interest up to the fundamental change repurchase date. The Notes have an initial conversion rate of
20.6949 shares of common stock per (in whole dollars) $1,000 principal amount of the Notes
(equivalent to an initial conversion price of approximately $48.32 per share, representing a 26%
conversion premium over the closing price of $38.35 per share of the Companys common stock on
March 23, 2010), subject to adjustment, based on the occurrence of certain events, including, but
not limited to, (i) the issuance of certain dividends on the Companys common stock, (ii) the
issuance of certain rights, options or warrants, (iii) the effectuation of share splits or
combinations, (iv) certain distributions of property and (v) certain issuer tender or exchange
offers as described in the Indenture, with the amount due on conversion payable in cash. The Notes
are not convertible into the Companys common stock or any other securities under any
circumstances.
Convertible Note Hedge Transactions. On March 23 and March 26, 2010, the Company purchased the
Call Options from several financial institutions (the Option Counterparties). The Call Options
have an exercise price equal to the conversion price of the Notes, subject to anti-dilution
adjustments substantially similar to the anti-dilution adjustments for the Notes. The Call Options
will expire upon the maturity of the Notes. The Company paid an aggregate amount of approximately
$31.4 to the Option Counterparties for the Call Options.
The Call Options are expected to generally reduce the Companys exposure to potential cash
payments in excess of the principal amount of the Notes that it may be required to make upon the
conversion of the Notes. If the market price per share of the Companys common stock at the time of
cash conversion of any Notes is above the strike price of the Call Options (which strike price is
initially equal to the initial conversion price of the Notes of approximately $48.32 per share of
the Companys common stock), the Call Options will entitle the Company to receive from the Option
Counterparties in the aggregate the same amount of cash as it would be required to deliver to the
holder of the converted Notes in excess of the principal amount thereof.
Warrant Transactions. On March 23 and March 26, 2010, the Company also entered into warrant
transactions pursuant to which the Company sold to the Option Counterparties net-share-settled
warrants (the Warrants) relating to approximately 3.6 million shares of the Companys common
stock. The warrants expire on July 1, 2015. The Option Counterparties paid an aggregate amount of
approximately $14.3 to the Company for the Warrants.
If the market price per share of the Companys common stock, as measured under the terms of
the Warrants, exceeds the strike price of the Warrants, which is initially equal to $61.36 per
share (representing a 60% premium over the closing price of $38.35 per share of the Companys
common stock on March 23, 2010), the Company will issue to the Option Counterparties shares of the
Companys common stock having a value equal to such excess, as measured under the terms of the
Warrants. The Warrants may not be exercised prior to the expiration date.
Other. The Call Options and Warrant transactions are separate transactions entered into by the
Company with the Option Counterparties, and are not part of the terms of the Notes and do not
affect the rights of holders under the Notes.
As described in Note 1, the cash conversion feature of the Notes meets the definition of a
derivative under ASC 815 and requires bifurcation from the Notes for accounting purposes. The Call
Options also meet the definition of derivatives under ASC 815. As such, the Company accounts for
both instruments as derivatives and marks to market both instruments at the end of each reporting
period. At December 31, 2010, the Bifurcated Conversion Feature had a fair value of $60.0 and was
recorded as a long-term derivative liability, and the Call Options had a fair value of $48.4 and
were recorded as long-term derivative assets (Note 6).
83
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
The Warrants meet the definition of derivatives under ASC 815; however, because the Warrants
have been determined to be indexed to the Companys common stock and to have met the requirement to
be classified as equity instruments, they are not subject to the fair value provisions of ASC 815
(Note 14).
At December 31, 2010, the carrying value of the Notes was $141.4, which consists of $175.0
face amount net of $33.6 of debt discount. The fair value of the Notes was $214.7 based on the
trading price of the Notes on December 31, 2010. The trading price of the Notes is considered a
Level 1 input in the fair value hierarchy. Total interest expense related to the Notes for the year
ended December 31, 2010 was $11.3 consisting $6.0 of cash interest and $5.3 of non-cash
amortization of original issue discount and debt issuance cost, a portion of which was capitalized
as Construction in progress.
8. Secured Debt and Credit Facilities
Secured credit facility and long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Revolving Credit Facility |
|
$ |
|
|
|
$ |
|
|
Other |
|
|
13.1 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
Total |
|
|
13.1 |
|
|
|
7.1 |
|
Less Current portion |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Long-term secured debt |
|
$ |
11.8 |
|
|
$ |
7.1 |
|
|
|
|
|
|
|
|
Revolving Credit Facility. On March 23, 2010, the Company and certain of its subsidiaries
entered into a $200.0 revolving credit facility with a group of lenders (the Revolving Credit
Facility), of which up to a maximum of $60.0 may be utilized for letters of credit. The Revolving
Credit Facility amended and restated the Companys previously existing $265.0 revolving credit
facility. In connection with the amendment and restatement, the Company expensed $0.4 of
unamortized deferred financing costs relating to the $265.0 revolving credit facility, resulting in
a residual balance of $0.7 of unamortized deferred financing costs related to such financing
arrangement. Also, in connection with the amendment and restatement, the Company incurred $2.7 of
additional financing costs, which were capitalized. Accordingly, a total of $3.4 of capitalized
financing costs will be amortized over the term of the Revolving Credit Facility on a straight-line
basis. At December 31, 2010, $2.7 of deferred financing costs remained on the Consolidated Balance
Sheets.
Under the Revolving Credit Facility, the Company is able to borrow from time to time an
aggregate amount equal to the lesser of $200.0 or a borrowing base comprised of approximately 85%
of eligible accounts receivable and approximately 65% of eligible inventory, reduced by certain
reserves, all as specified in the Revolving Credit Facility. The Revolving Credit Facility matures
in March 2014, at which time all amounts outstanding under the Revolving Credit Facility 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, in each case, 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 up to $250.0.
Amounts owed under the Revolving Credit Facility may be accelerated upon the occurrence of
various events of default including, without limitation, the failure to make principal or interest
payments when due and breaches of covenants, representations and warranties set forth in the
Revolving Credit Facility. The Revolving Credit Facility places limitations on the ability of the
Company and certain of its subsidiaries to, among other things, grant liens, engage in mergers,
sell assets, incur debt, make investments, undertake transactions with affiliates, pay dividends
and repurchase shares. In addition, the Company is required to maintain a fixed charge coverage
ratio on a consolidated basis at or above 1.1 to 1.0 if borrowing availability under the Revolving
Credit Facility is less than $30.
The Revolving Credit Facility is secured by a first priority lien on substantially all of the
accounts receivable, inventory and certain other related assets and proceeds of the Company and its
domestic operating subsidiaries. At December 31, 2010, the Company was in compliance with all
covenants contained in the Revolving Credit Facility.
At December 31, 2010, based on the borrowing base determination in effect as of that date, the
Company had under the Revolving Credit Facility borrowing availability of $178.8, of which $9.9 was
being used to support outstanding letters of credit, leaving $168.9
84
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
of availability. There were no borrowings under the Revolving Credit Facility at December 31,
2010, but the interest rate applicable to any borrowings under the Revolving Credit Facility would
have been 5.25% at December 31, 2010 for overnight borrowings.
Other. In connection with the Companys acquisition of the manufacturing facility and related
assets of Nichols Wire, Incorporated (Nichols) in Florence, Alabama (the Florence, Alabama
facility) on August 9, 2010 (Note 9), a promissory note in the amount of $6.7 (the Nichols
Promissory Note) was issued to Nichols as a part of the consideration paid. The Nichols Promissory
Note bears interest at a rate of 7.5% per annum. Accrued but unpaid interest is due quarterly
through maturity of the Nichols Promissory Note on August 9, 2015. The Company has the option to
repay all or a portion of the Nichols Promissory Note at any time prior to the maturity date.
Principal payments on the Nichols Promissory Note are due in equal quarterly installments, with the
first two payments having been made on September 30, 2010 and December 31, 2010. The Nichols
Promissory Note is secured by certain real property and equipment included in the assets acquired
from Nichols in the acquisition. At December 31, 2010, the outstanding principal balance under the
Nichols Promissory Note was $6.0, of which $1.3 was payable within 12 months. For the year ended
December 31, 2010, the Company recorded $0.2 of interest expense related to the Nichols Promissory
Note.
As of December 31, 2010, the carrying amount of the Nichols Promissory Note was representative
of its fair value due to the fact that this obligation originated in late 2010.
As of December 31, 2010, the Company also had a $7.0 outstanding promissory note (the LA
Promissory Note) in connection with the Companys purchase of the previously leased land and
buildings associated with its Los Angeles, California facility in December 2008. Interest is
payable on the unpaid principal balance of the LA Promissory Note monthly in arrears at the prime
rate, as defined in the LA Promissory Note, plus 1.5%, in no event exceeding 10% per annum. A
principal payment of $3.5 will be due on January 1, 2012, and the remaining $3.5 will be due on
January 1, 2013. The LA Promissory Note is secured by a deed of trust on the property. For the
years ended December 31, 2010 and December 31, 2009, the Company incurred $0.3 and $0.4 of interest
expense relating to the LA Promissory Note, respectively. The interest rate applicable to the LA
Promissory Note was 4.75% at December 31, 2010.
As of December 31, 2010 and 2009, the carrying amount of the LA Promissory Note is deemed to
approximate its fair value as such instrument bears a variable rate of interest and the Companys
credit quality has remained materially consistent since the inception of that obligation.
9. Acquisition
On August 9, 2010, the Company acquired the Florence, Alabama facility, and related assets of
Nichols, which manufactures bare mechanical alloy wire products, nails and aluminum rod for
aerospace, general engineering, and automotive applications. The acquired assets have been
integrated into and complement the existing assets of the Companys Fabricated Products segment. In
connection with the purchase, the Company hired approximately 100 personnel who were formerly
employees of Nichols. The majority of such employees are members of the United Steel, Paper and
Foresting, rubber, Manufacturing, Energy, Allied Industrial and Service Workers International
Union, AFL-CIO, CLC (the USW).
Consideration consisted of (i) $9.0 in cash, (ii) the $6.7 Nichols Promissory Note from the
Company to Nichols (Note 8), and (iii) the assumption of certain liabilities totaling approximately
$2.1. The goodwill of $3.1 arising from the acquisition represents the commercial opportunity for
the Company to sell small-diameter rod, bar and wire products, as a complement to its other
products, to its core markets and end market segment applications and is expected to be deductible for
income tax purposes over the next 15 years. All of the goodwill is included in the Companys
Fabricated Products segment. Total acquisition-related costs were approximately $0.8, of which $0.4
was expensed during the year ended December 31, 2010 and was included in Selling, administrative,
research and development, and general in the Statement of Consolidated Income. The Company does not
expect the acquisition will have a material impact on its consolidated financial statements.
The following table summarizes recognized amounts of identifiable assets acquired and
liabilities assumed at the acquisition date:
|
|
|
|
|
Inventory |
|
$ |
3.9 |
|
Other current assets |
|
|
2.3 |
|
Property, plant and equipment |
|
|
4.2 |
|
Identifiable intangible assets with definite lives |
|
|
4.3 |
|
85
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
|
|
|
|
Goodwill |
|
|
3.1 |
|
Liabilities assumed |
|
|
(2.1 |
) |
|
|
|
|
Consideration paid |
|
$ |
15.7 |
|
|
|
|
|
Identifiable intangible assets at December 31, 2010 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
|
|
useful life |
|
|
Original cost |
|
|
amortization |
|
|
value |
|
Customer relationships |
|
|
20 |
|
|
$ |
3.8 |
|
|
$ |
(0.1 |
) |
|
$ |
3.7 |
|
Backlog |
|
|
3 |
|
|
|
0.5 |
|
|
|
(0.2 |
) |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
$ |
4.3 |
|
|
$ |
(0.3 |
) |
|
$ |
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense for 2010 relating to definite-lived intangible assets arising from the acquisition of the Florence, Alabama facility was $0.3 which was recorded in the
Fabricated Products segment. Amortization expense relating to intangible assets will be $0.3 for each of 2011 and 2012, and $0.2 for each of 2013 and 2014.
10. Income Tax Matters
Tax (provision) benefit. Income (loss) before income taxes by geographic area is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Domestic |
|
$ |
26.3 |
|
|
$ |
117.8 |
|
|
$ |
(105.9 |
) |
Foreign |
|
|
2.1 |
|
|
|
0.8 |
|
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28.4 |
|
|
$ |
118.6 |
|
|
$ |
(91.3 |
) |
|
|
|
|
|
|
|
|
|
|
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 (provision) benefit for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
Foreign |
|
|
State |
|
|
Total |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
(0.5 |
) |
|
$ |
(0.4 |
) |
Deferred |
|
|
(30.4 |
) |
|
|
0.2 |
|
|
|
(9.7 |
) |
|
|
(39.9 |
) |
Benefit applied to decrease Additional capital/
Other comprehensive income |
|
|
22.8 |
|
|
|
0.4 |
|
|
|
2.8 |
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(7.6 |
) |
|
$ |
0.7 |
|
|
$ |
(7.4 |
) |
|
$ |
(14.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
0.7 |
|
|
$ |
(3.6 |
) |
|
$ |
(1.1 |
) |
|
$ |
(4.0 |
) |
Deferred |
|
|
(75.9 |
) |
|
|
0.3 |
|
|
|
(4.1 |
) |
|
|
(79.7 |
) |
Benefit applied to decrease Additional capital/
Other comprehensive income |
|
|
29.3 |
|
|
|
2.7 |
|
|
|
3.6 |
|
|
|
35.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(45.9 |
) |
|
$ |
(0.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(48.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
Foreign |
|
|
State |
|
|
Total |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
(0.8 |
) |
|
$ |
0.5 |
|
|
$ |
(1.3 |
) |
|
$ |
(1.6 |
) |
Deferred |
|
|
64.3 |
|
|
|
(0.2 |
) |
|
|
5.5 |
|
|
|
69.6 |
|
Benefit applied to increase Additional capital/
Other comprehensive income |
|
|
(33.4 |
) |
|
|
(6.9 |
) |
|
|
(4.9 |
) |
|
|
(45.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30.1 |
|
|
$ |
(6.6 |
) |
|
$ |
(0.7 |
) |
|
$ |
22.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Amount of federal income tax (provision) benefit based on the statutory rate |
|
$ |
(9.9 |
) |
|
$ |
(41.5 |
) |
|
$ |
32.0 |
|
(Increase) decrease in federal valuation allowances |
|
|
(0.2 |
) |
|
|
0.5 |
|
|
|
(3.9 |
) |
Non-deductible compensation expense |
|
|
(0.6 |
) |
|
|
(4.7 |
) |
|
|
|
|
Non-deductible expense |
|
|
(0.3 |
) |
|
|
(0.5 |
) |
|
|
(0.3 |
) |
State income taxes, net of federal benefit |
|
|
(4.8 |
)1 |
|
|
(1.0 |
) |
|
|
(0.5 |
) |
Foreign income tax benefit (provision) |
|
|
1.5 |
|
|
|
|
|
|
|
(4.7 |
) |
Other |
|
|
|
|
|
|
(0.9 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit |
|
$ |
(14.3 |
) |
|
$ |
(48.1 |
) |
|
$ |
22.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
State income taxes of $4.8 primarily consists of (i) a $1.9 increase in the valuation allowance relating to certain unused state net operating losses expected to expire
and (ii) a $2.3 increase in the income tax provision from a reduction in the state deferred tax asset relating to a decrease in state net operating losses resulting from lower state apportionment
factors in various states. |
The table above reflects a full statutory U.S. tax provision despite the fact that the Company is only paying alternative minimum tax (AMT) in the U.S. and some state income taxes. See Tax Attributes
below.
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:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Loss and credit carryforwards |
|
$ |
379.6 |
|
|
$ |
374.2 |
|
Pension benefits |
|
|
0.8 |
|
|
|
0.9 |
|
Other assets |
|
|
25.9 |
|
|
|
13.9 |
|
Inventories and other |
|
|
27.3 |
|
|
|
26.7 |
|
|
|
|
|
|
|
|
|
|
Valuation allowances |
|
|
(20.1 |
) 1 |
|
|
(18.0 |
)2 |
|
|
|
|
|
|
|
Total deferred income tax assets net |
|
|
413.5 |
|
|
|
397.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant, and equipment |
|
|
(61.9 |
) |
|
|
(32.0 |
) |
VEBA |
|
|
(73.7 |
) |
|
|
(47.9 |
) |
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
(135.6 |
) |
|
|
(79.9 |
) |
|
|
|
|
|
|
|
Net deferred income tax assets |
|
$ |
277.9 |
3 |
|
$ |
317.8 |
4 |
|
|
|
|
|
|
|
87
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
|
|
1 |
|
The increase in the valuation allowance is primarily due to the expiration of
projected net state operating losses as a result of lower state apportionment in various state
jurisdictions. The Company anticipates that $0.8 of the 2010 increase in valuation allowance will
reverse in the first quarter of 2011 due to a change in tax law in the State of Illinois. |
|
2 |
|
Valuation allowance decreased in 2009. The decrease was primarily due to a change in
the State of Ohios tax regime. Ohio phased out its corporate income tax and changed to a gross
receipts tax. As a result, the deferred tax asset and the related valuation allowance, relating to
Ohio net operating losses, were reversed at December 31, 2009. |
|
3 |
|
Of the total net deferred income tax assets of $277.9, $46.8 was included in Prepaid
expenses and other current assets and $231.1 was presented as Deferred tax assets, net on the
Consolidated Balance Sheet as of December 31, 2010. |
|
4 |
|
Of the total net deferred income tax assets of $317.8, $40.6 was included in Prepaid
expenses and other current assets and $277.2 was presented as Deferred tax assets, net on the
Consolidated Balance Sheet as of December 31, 2009. |
Tax Attributes. At December 31, 2010, the Company had $882.6 of NOL carryforwards available to
reduce future cash payments for income taxes in the United States. Of the $882.6 of NOL
carryforwards at December 31, 2010, $1.7 relates to the excess tax benefits from employee
restricted stock. Equity will be increased by $1.7 if and when such excess tax benefits are
ultimately realized. The NOL carryforwards expire periodically through 2030. The Company also had
$31.1 of AMT credit carryforwards with an indefinite life, available to offset regular federal
income tax requirements.
To preserve the NOL carryforwards that may be available to the Company, the Companys
certificate of incorporation was amended and restated to, among other things, include certain
restrictions on the transfer of the Companys common stock. Pursuant to the amendment, the Company
and the Union VEBA, the Companys largest stockholder, entered into a stock transfer restriction
agreement.
In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities,
tax planning strategies and projected future taxable income in making this assessment. As of
December 31, 2010, 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 $20.1 against its deferred tax assets. When
recognized, the tax benefits relating to any reversal of this valuation allowance will be recorded
as a reduction of income tax expense.
Other. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction
and various states and foreign jurisdictions. The Canada Revenue Agency audited and issued
assessment notices for 1998 through 2001 for which Notices of Objection have been filed. In
addition, the Canada Revenue Agency has audited and issued assessment notices for 2002 through
2004, of which $7.9 has been paid to the Canada Revenue Agency against previously accrued tax
reserves in the third quarter of 2009. There is an additional Canadian Provincial income tax
assessment of $1.1, including interest, for the 2002 through 2004 income tax audit that is
anticipated to be paid against previously accrued tax reserves in next 12 months. 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, 2010. 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.
88
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
The Company has gross unrecognized benefits relating to uncertain tax positions. If and when
the gross unrecognized tax benefits are ultimately recognized, it will go through the Companys
income tax provision and affect the effective tax rate in future periods. A reconciliation of
changes in the gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Gross unrecognized tax benefits at beginning of period |
|
$ |
15.6 |
|
|
$ |
15.8 |
|
|
$ |
19.7 |
|
Gross increases for tax positions of prior years |
|
|
|
|
|
|
1.6 |
|
|
|
1.9 |
|
Gross decreases for tax positions of prior years |
|
|
|
|
|
|
(1.6 |
) |
|
|
(3.2 |
) |
Gross increases for tax positions of current years |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.3 |
|
Settlements |
|
|
|
|
|
|
(2.8 |
) |
|
|
|
|
Gross decrease for tax positions relating to lapse of a
statute of limitation |
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
0.7 |
|
|
|
2.2 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at end of period |
|
$ |
15.0 |
|
|
$ |
15.6 |
|
|
$ |
15.8 |
|
|
|
|
|
|
|
|
|
|
|
The change during 2010 was primarily due to a partial release of an unrecognized tax benefit
as a result of the expiration of a statue, foreign currency fluctuations and change in tax
positions. The change during 2009 was primarily due to settlements with taxing authorities, foreign
currency fluctuations and change in tax positions. The change during 2008 was primarily due to
foreign currency fluctuations and change in tax positions.
In addition, the Company recognizes interest and penalties related to above unrecognized tax
benefits in the income tax provision. The Company had $6.6 and $6.2 accrued at December 31, 2010
and December 31, 2009, respectively, for interest and penalties. Of these amounts, $0.4 and $0.3
were recorded as current liabilities and were included in Other accrued liabilities on the
Consolidated Balance Sheets at December 31, 2010 and December 31, 2009, respectively. The Company
recognized an increase (reduction) in interest and penalty of $0.4, $(3.2) and $(1.3) in its tax
provision in 2010, 2009 and 2008, respectively.
In connection with the gross unrecognized tax benefits (including interest and penalty)
denominated in foreign currency, we incur foreign currency translation adjustments. During 2010,
2009 and 2008, the foreign currency impact on such liabilities resulted in a $0.6, $2.7 and $(5.2)
currency translation adjustments, respectively, which were recorded as Other comprehensive loss
(income).
The Company expects its gross unrecognized tax benefits to be reduced by $1.7 within the next
12 months.
11. Employee Benefits
Pension and Similar Plans. Pensions and similar plans include:
|
|
|
Monthly contributions of (in whole dollars) $1.00 per hour worked by each bargaining unit
employee to the appropriate multi-employer pension plans sponsored by the USW and
International Association of Machinists and certain other unions at certain of the Companys
production facilities, except that the monthly contributions per hour worked by each
bargaining unit employee to a pension plan sponsored by the USW at the Companys Newark,
Ohio and Spokane, Washington facilities increased to (in whole dollars) $1.25 starting July
2010 and will increase to (in whole dollars) $1.50 in July 2015, and monthly contributions
to a pension plan sponsored by the USW at the Companys newly acquired Florence, Alabama
facility are (in whole dollars) $1.25 per hour worked by each bargaining unit employee. The
Company currently estimates that contributions will range from $2.0 to $4.0 per year through
2013. |
|
|
|
|
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 four of these production facilities
ranging from (in whole dollars) $800 to $2,400 per employee per year, depending on the
employees age. The Company currently estimates that contributions to such plans will range
from $1.0 to $3.0 per year. |
89
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
|
|
A defined benefit plan for 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, 2010 and 2009, approximately 62% and 55% of the plan assets were invested in
equity securities, respectively, and 36% and 40% of plan assets were invested in debt
securities, respectively. The remaining plan assets were invested in short-term securities
in both years. The Companys investment committee reviews and evaluates the investment
portfolio. The asset mix target allocation on the long-term investments is approximately 60%
in equity securities and 36% in debt securities with the remaining assets in short-term
securities. |
|
|
|
|
A defined contribution 401(k) savings plan for salaried and certain hourly employees
providing for a concurrent match of up to 4% of certain contributions 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
annually. The Company currently estimates that contributions to such plan will range from
$4.0 to $6.0 per year. |
|
|
|
|
A non-qualified, unfunded, unsecured plan of deferred compensation for key employees who
would otherwise suffer a loss of benefits under the Companys defined contribution plan, as
a result of the limitations imposed by the Internal Revenue Code. Despite the plan being an
unfunded plan, the Company makes an annual contribution to a rabbi trust to fulfill future
funding obligations, as contemplated by the terms of the plan. The assets in the trust are
at all times subject to the claims of the Companys general creditors, and no participant
has a claim to any assets of the trust. Plan participants are eligible to receive
distributions from the trust subject to vesting and other eligibility requirements. Assets
in the rabbi trust relating to the deferred compensation plan are accounted for as available
for sale securities and are included as Other assets on the Consolidated Balance Sheets
(Note 6). Liabilities relating to the deferred compensation plan are included on the
Consolidated Balance Sheets as Long-term liabilities (Note 6). |
|
|
|
|
An employment agreement with the Companys chief executive officer which was renewed in
November 2010 and extends through July 6, 2015. The Company also provides certain members of
senior management, including each of the Companys named executive officers, with benefits
related to terminations of employment in specified circumstances, including in connection
with a change in control, by the Company without cause and by the named executive officer
with good reason. |
Postretirement Medical Obligations. As a part of the Companys reorganization, the Companys
postretirement medical plan was terminated in 2004. Participants were given the option of coverage
under the 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 and, together with the Union
VEBA, the VEBAs)). Qualifying bargaining unit employees who do not, or are 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 will 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.
The Union VEBA received rights to 11,439,900 common shares upon the Companys emergence from
chapter 11 bankruptcy. A stock transfer restriction agreement between the Union VEBA and the
Company places certain restrictions on the Union VEBA relating to the sale of shares of the
Companys common stock owned by the Union VEBA. The number of shares of the Companys common stock
that generally may be sold by the Union VEBA during any 12-month period without further approval of
our Board of Directors is 1,321,485. On April 2, 2010, the Company filed a registration statement
on Form S-3 for the resale of the shares of the Companys common stock held by the Union VEBA in
response to a demand by the Union VEBA under a registration rights agreement entered into by the
Company and the VEBA Trust on July 6, 2006. The registration statement became effective on July 9,
2010. While the registration statement provides for registration of all shares of the Companys
common stock owned by the Union VEBA, the Union VEBA is also permitted to sell all or some portion
of these shares in transactions exempt from the registration requirements of applicable securities
laws including Rule 144 of the Securities Act of 1933, as amended (the Securities Act).
Regardless of whether the Union VEBA sells shares pursuant to the registration statement or in
transactions exempt from registration requirements, including Rule 144 of the Securities Act, the
Union VEBA will continue to be prohibited from selling more than 1,321,485 shares of our common
stock during any 12-month period without the approval of our Board of Directors.
During 2010, the Union VEBA sold 1,321,485 shares of the Companys common stock permitted
under the stock transfer restriction agreement. The 1,321,485 shares sold resulted in (i) an
increase of $52.1 in VEBA assets (at a weighted-average price of $39.39 per share realized by the
Union VEBA), (ii) a reduction of $31.8 in common stock owned by Union VEBA (at $24.02 per
share reorganization value) and (iii) the difference between the two amounts, net of tax
adjustment, was credited to Additional capital.
90
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
As of December 31, 2010, the Union VEBA owned 3,523,980 shares of the Companys common stock or approximately 18% of the Companys issued and
outstanding shares of common stock.
The Companys only obligation to the Union VEBA and the Salaried VEBA is an annual variable
cash contribution. This obligation extends through September 30, 2017 with respect to the Union
VEBA (reflecting a five-year extension agreed by the Company on January 20, 2010 in connection with
the renewal and ratification of a labor agreement with the members of the USW at the Companys
Newark, Ohio and Spokane, Washington facilities), while the obligation to the Salaried VEBA has no
termination date. The amount to be contributed to the VEBAs through September 2017 pursuant to the
Companys obligation 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 the
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. The Union VEBA is managed by four
trustees (two appointed by the Company and two appointed by the USW) and the assets are managed by
an independent fiduciary.
Amounts owing by the Company to the VEBAs are recorded in the Companys Consolidated Balance
Sheets under Other accrued liabilities, with a corresponding increase in Net assets in respect of
VEBAs. At December 31, 2009, the Company had preliminarily determined that $2.4 was owed to the
VEBAs (comprised of $2.0 to the Union VEBA and $0.4 to the Salaried VEBA); and these amounts were
paid during the first quarter of 2010 along with an additional payment of $0.4 based on the final
2009 results. As of December 31, 2010, the Company had preliminarily determined that $2.1 was owed
to the VEBAs (comprised of $0.3 to the Salaried VEBA and $1.8 to the Union VEBA), which will be
paid in the first quarter of 2011. In addition to contribution obligations, the Company is
obligated to pay one-half of the administrative expenses of the Union VEBA, up to $0.3 in each
successive year, which annual cap was effective beginning with 2008. During 2010, 2009 and 2008,
the Company recorded $0.3 each year in administrative expenses of the Union VEBA.
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 ASC Topic
715, Compensation Retirement Benefits, and records any difference between the assets of each
VEBA and its accumulated postretirement benefit obligation in the Companys financial statements.
Information necessary for the valuation of the net funded status of the plans must be obtained from
the Salaried VEBA and Union VEBA on an annual basis. It is possible that existing assets may be
insufficient to fund the accumulated benefit obligation resulting in a negative net funded position
on the Companys Consolidated Balance Sheets; however, the Company has no obligation to fund either
the Salaried VEBA or the Union VEBA beyond the annual variable cash contributions as determined.
Key assumptions made in computing the net obligation of each VEBA and in total at December 31,
2010 and 2009 include:
With respect to VEBA assets:
|
|
|
The 3,523,980 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). |
|
|
|
|
At December 31, 2010 and 2009, neither VEBA held any unrestricted shares of the
Companys common stock. |
|
|
|
|
Based on the information received from the VEBAs at December 31, 2010 and 2009, both
the Salaried VEBA and Union VEBA assets were invested in various managed proprietary
funds. VEBA plan assets are managed by various investment advisors selected by the VEBA
trustees, and are not under the control of the Company. |
91
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
|
|
The Company assumed that the Salaried VEBA would achieve a long-term rate of return
of approximately 7.25% on its assets as of each December 31, 2010 and 2009. The Company
assumed that the Union VEBA would achieve a long term rate of return of approximately
4.75% and 5.75% on its assets as of December 31, 2010 and 2009, respectively. The
long-term rate of return assumption is based on the historical investment portfolios
provided to the Company by the VEBAs trustees. |
|
|
|
|
The annual variable payment obligation is being treated as a funding/contribution
policy and not counted as a VEBA asset at December 31, 2010 for actuarial purposes.
However, the amount owed under the funding obligation in relation to the results for the
year ended December 31, 2010 has been accrued and is included within Net asset in respect
of VEBAs. |
With respect to VEBA obligations:
|
|
|
The accumulated postretirement benefit obligation (APBO) for each VEBA was computed
based on the level of benefits being provided by each VEBA at December 31, 2010 and 2009. |
|
|
|
|
The present value of APBO for the Union VEBA was computed using a discount rate of
return of 5.25% and 5.70% at December 31, 2010 and 2009, respectively. The present value
of APBO for the Salaried VEBA was computed using a discount rate of return of 4.70% and
5.40% at December 31, 2010 and 2009, respectively. |
|
|
|
|
Since the Salaried VEBA was paying a fixed annual amount to its constituents at both
December 31, 2010 and 2009, no future cost trend rate increase has been assumed in
computing the APBO for the Salaried VEBA. |
|
|
|
|
For the Union VEBA, which is currently paying certain prescription drug benefits, an
initial cost trend rate of 9.5% and 9.0% has been assumed at December 31, 2010 and 2009,
respectively. The trend rate is assumed to decline to 5% by 2019 at December 31, 2010. The
trend rate is assumed to decline to 5% by 2013 at December 31, 2009. 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 table presents the net assets of each VEBA as of December 31, 2010 and 2009
(such information is also included in the tables required under US GAAP below which roll forward
the assets and obligations):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Union VEBA |
|
|
Salaried VEBA |
|
|
Total |
|
|
Union VEBA |
|
|
Salaried VEBA |
|
|
Total |
|
APBO |
|
$ |
(251.3 |
) |
|
$ |
(59.6 |
) |
|
$ |
(310.9 |
) |
|
$ |
(234.4 |
) |
|
$ |
(60.8 |
) |
|
$ |
(295.2 |
) |
Plan assets |
|
|
445.7 |
|
|
|
60.9 |
|
|
|
506.6 |
|
|
|
361.9 |
|
|
|
60.5 |
|
|
|
422.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
(liability) |
|
$ |
194.4 |
|
|
$ |
1.3 |
|
|
$ |
195.7 |
|
|
$ |
127.5 |
|
|
$ |
(0.3 |
) |
|
$ |
127.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Assumptions The following table presents the key assumptions used and the amounts reflected in the Companys financial statements with respect to the Companys Canadian pension
plan and the VEBAs. In accordance with U.S. GAAP, impacts of the changes in the Companys Canadian pension and the VEBAs discussed above have been reflected in such information.
The Company uses a December 31 measurement date for all of its plans.
Weighted-average assumptions used to determine benefit obligations as of December 31 and net periodic benefit cost (income) for the years ended December 31 are:
92
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian Pension Benefits1
|
|
VEBA Benefits |
|
|
2010 |
|
2009 |
|
2008 |
|
2010 |
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Union |
|
Salaried |
|
Union |
|
Salaried |
|
Union |
|
Salaried |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VEBA |
|
VEBA |
|
VEBA |
|
VEBA |
|
VEBA |
|
VEBA |
Benefit obligations
assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.70 |
% |
|
|
6.70 |
% |
|
|
7.50 |
% |
|
|
5.25 |
% |
|
|
4.70 |
% |
|
|
5.70 |
% |
|
|
5.40 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Rate of compensation
increase |
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
3.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit
cost assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.70 |
% |
|
|
7.50 |
% |
|
|
5.60 |
% |
|
|
5.70 |
% |
|
|
5.40 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Expected return on plan
assets |
|
|
5.40 |
% |
|
|
6.00 |
% |
|
|
5.50 |
% |
|
|
4.75 |
% |
|
|
7.25 |
% |
|
|
5.75 |
% |
|
|
7.25 |
% |
|
|
5.00 |
% |
|
|
4.50 |
% |
Rate of compensation
increase |
|
|
3.50 |
% |
|
|
3.30 |
% |
|
|
3.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligations and Funded Status The following table presents the benefit obligations and funded status of the Companys
Canadian pension and the VEBAs as of December 31, 2010 and 2009, and the corresponding amounts that are included in the Companys Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian Pension Benefits |
|
|
VEBA Benefits |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at beginning of year |
|
$ |
4.1 |
|
|
$ |
3.0 |
|
|
$ |
295.2 |
|
|
$ |
321.3 |
|
Foreign currency translation adjustment |
|
|
0.2 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
Service cost |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
3.0 |
|
|
|
2.2 |
|
Interest cost |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
16.0 |
|
|
|
18.6 |
|
Plan amendments relating to Salaried VEBA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.4 |
|
Actuarial loss (gain)1 |
|
|
0.7 |
|
|
|
0.4 |
|
|
|
16.8 |
|
|
|
(58.3 |
) |
Plan participant contribution |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
Reimbursement from Retiree Drug Subsidy2 |
|
|
|
|
|
|
|
|
|
|
3.1 |
|
|
|
2.7 |
|
Benefits paid by VEBA |
|
|
|
|
|
|
|
|
|
|
(23.2 |
) |
|
|
(23.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at end of year |
|
|
5.4 |
|
|
|
4.1 |
|
|
|
310.9 |
|
|
|
295.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FMV of plan assets at beginning of year |
|
|
4.1 |
|
|
|
3.1 |
|
|
|
422.4 |
|
|
|
363.5 |
|
Foreign currency translation adjustment |
|
|
0.2 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
Actual return on assets |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
49.9 |
|
|
|
77.5 |
|
Plan participant contribution |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer/Company contributions3 |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
54.4 |
|
|
|
2.4 |
|
Reimbursement from Retiree Drug Subsidy2 |
|
|
|
|
|
|
|
|
|
|
3.1 |
|
|
|
2.7 |
|
Benefits paid |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(23.2 |
) |
|
|
(23.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FMV of plan assets at end of year |
|
|
4.9 |
|
|
|
4.1 |
|
|
|
506.6 |
|
|
|
422.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit4 |
|
$ |
(0.5 |
) |
|
$ |
|
|
|
$ |
195.7 |
|
|
$ |
127.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
|
|
1 |
|
The actuarial loss (gain) relating to other postretirement benefit plans in 2009 is primarily the result of a change in the assumption
in participant marital status in the Union VEBA and a change in annual benefit payment per participant in the Salaried VEBA in 2009. |
|
2 |
|
In January 2005, the Department of Health and Human Services Centers for Medicare and Medicaid Services (CMS) released final
regulations governing the Medicare prescription drug benefit and other key elements of the Medicare Modernization Act that went into effect January 1, 2006. The Union VEBA is
eligible for the Retiree Drug Subsidy because the plan meets the definition of actuarial equivalence and therefore qualifies for federal subsidies equal to 28% of allowable
drug costs. As a result, the Company has measured the Union VEBAs obligations and costs to take into account this subsidy. This subsidy decreased the accumulated benefit
obligation for the Union VEBA by approximately $54.2 at December 31, 2010 and decreased the net periodic benefit cost for 2011 by approximately $5.0, of which $0.7 is related
to service cost, $2.8 is related to interest cost and $1.5 is related to amortization of net actuarial gain. |
|
3 |
|
Company contributions to the VEBAs in 2010 primarily consist of $52.1 related to the release of transfer restrictions and subsequent sale of 1,321,485 shares of the Companys common stock by the Union
VEBA plus a $2.1 accrued VEBA contribution at December 31, 2010 in respect to the annual variable cash contribution which will be paid in the first quarter of 2011. Company contribution
to the VEBAs in 2009 consists of a $2.4 accrued VEBA contribution at December 31, 2009 in respect to the annual variable cash contribution which was paid in the first quarter of 2010. |
|
4 |
|
Prepaid benefit of $195.8 relating to the VEBAs at December 31, 2010, was included in Net Assets in respect of the VEBAs on the
Consolidated Balance Sheets. With respect to the $127.2 prepaid benefit relating to the VEBAs at December 31, 2009, $127.5 was included in Net asset in respect of the VEBAs and $0.3 was included in Net
liabilities in respect of the VEBAs on the Consolidated Balance Sheets. |
The accumulated benefit obligation for all defined benefit pension plans was $4.8 and $3.7 at December 31, 2010 and 2009, respectively. The Company expects to contribute $0.4 to the Canadian
pension plan in 2011.
As of December 31, 2010, the net benefits expected to be paid in each of the next five fiscal years
and in aggregate for the five fiscal years thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Payments Due by Period |
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
2016-2020 |
|
Pension plan |
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
1.9 |
|
Gross VEBA benefit payments |
|
|
25.2 |
|
|
|
25.6 |
|
|
|
25.8 |
|
|
|
25.8 |
|
|
|
25.8 |
|
|
|
124.5 |
|
Anticipated Retiree Drug Subsidy |
|
|
(3.2 |
) |
|
|
(3.3 |
) |
|
|
(3.4 |
) |
|
|
(3.5 |
) |
|
|
(3.5 |
) |
|
|
(17.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net benefits |
|
$ |
22.2 |
|
|
$ |
22.5 |
|
|
$ |
22.6 |
|
|
$ |
22.6 |
|
|
$ |
22.6 |
|
|
$ |
108.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of loss (income) which is recognized in the balance sheet (in Accumulated other
comprehensive income (loss)) associated with the Companys defined benefit pension plan that have
not been recognized in earnings as of December 31, 2010 was $1.4, of which $1.8 was related to net
actuarial loss and $(0.4) was related to transition asset. The amount of (income) loss which is
recognized in the balance sheet (in Accumulated other comprehensive income (loss)) associated with
the VEBAs that have not been recognized in earnings as of December 31, 2010 was $(3.8), of which
$43.9 was related to prior service cost and $(47.7) was related to net gain.
The amounts in accumulated other comprehensive income, relating to the pension plans, that
have not yet been recognized in earnings at December 31, 2010 that is expected to be recognized in
earnings in 2011 is immaterial. The amounts in accumulated other comprehensive income, relating to
the VEBAs, that have not yet been recognized in earnings at December 31, 2010 that is expected to
be recognized in earnings in 2011 is $3.3, of which $4.1 is related to amortization of prior
service costs and $(.8) is related to amortization of net gain.
Fair Value of Plan Assets. The assets of the Companys Canadian pension plan are managed by
advisors selected by the Company, with the investment portfolio subject to periodic review and
evaluation by the Companys investment committee. The investment of
94
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)
assets in the Canadian pension plan is based upon the objective of maintaining a diversified
portfolio of investments in order to minimize concentration of credit and market risks (such as
interest rate, currency, equity price and liquidity risks). The degree of risk and risk tolerance
take into account the obligation structure of the plan, the anticipated demand for funds and the
maturity profiles required from the investment portfolio in light of these demands.
As noted above, the VEBA assets are managed by various investment advisors selected by the
trustees of each of the VEBAs. The plan assets are outside of the Companys control and the Company
does not have insight into the investment strategies.
The fair value of the plan assets of the VEBAs and the Companys Canadian defined benefit
pension plan are reflected in the Companys Consolidated Balance Sheets at fair value. In
determining the fair value of plan assets each period, the Company utilizes primarily the results
of valuations supplied by the investment advisors responsible for managing the assets of each plan.
Certain assets are valued based upon unadjusted quoted market prices in active markets that
are accessible at the measurement date for identical, unrestricted assets (e.g., liquid securities
listed on an exchange). Such assets are classified within Level 1 of the fair value hierarchy.
Valuation of other invested assets is based on significant observable inputs (e.g., net asset
values of registered investment companies, valuations derived from actual market transactions,
broker-dealer supplied valuations, or correlations between a given U.S. market and a non-U.S.
security). Valuation model inputs can generally be verified and valuation techniques do not involve
significant judgment. The fair values of such financial instruments are classified within Level 2
of the fair value hierarchy.
The following tables present the fair value of plan assets of the VEBAs and the Companys
Canadian pension plan at December 31, 2010 and December 31, 2009. The fair value of the VEBAs plan
assets are based on information made available to us by the VEBA administrators.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
VEBAs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income investments in registered investment companies1 |
|
$ |
|
|
|
$ |
299.1 |
|
|
$ |
|
|
|
$ |
299.1 |
|
Mortgage backed securities |
|
|
|
|
|
|
81. |