e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2006
Commission file number 0-52105
KAISER ALUMINUM
CORPORATION
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
94-3030279
|
(State of
Incorporation)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
27422 PORTOLA PARKWAY,
SUITE 350,
|
|
92610-2831
|
FOOTHILL RANCH, CALIFORNIA
|
|
(Zip Code)
|
(Address of principal executive
offices)
|
|
|
Registrants telephone number, including area code:
(949) 614-1740
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes þ No o
In accordance with the registrants plan of reorganization,
all of the pre-emergence equity interests of the Company were
cancelled without consideration upon the registrants
emergence from the Chapter 11 on July 6, 2006. As of
October 31, 2006, there were 20,525,660 newly issued shares
of the Common Stock of the registrant outstanding.
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I
FINANCIAL INFORMATION
|
|
Item 1.
|
Financial
Statements
|
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
(In millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
September 30,
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52.7
|
|
|
|
$
|
49.5
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful
receivables of $2.0 and $2.9
|
|
|
109.3
|
|
|
|
|
94.6
|
|
Other
|
|
|
6.9
|
|
|
|
|
6.9
|
|
Inventories
|
|
|
181.3
|
|
|
|
|
115.3
|
|
Prepaid expenses and other current
assets
|
|
|
27.7
|
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
377.9
|
|
|
|
|
287.3
|
|
Investments in and advances to
unconsolidated affiliate
|
|
|
13.3
|
|
|
|
|
12.6
|
|
Property, plant, and
equipment net
|
|
|
148.4
|
|
|
|
|
223.4
|
|
Personal injury-related insurance
recoveries receivable
|
|
|
|
|
|
|
|
965.5
|
|
Intangible assets including
goodwill of $11.4 at December 31, 2005
|
|
|
9.6
|
|
|
|
|
11.4
|
|
Net assets in respect of VEBAs
|
|
|
32.9
|
|
|
|
|
|
|
Other assets
|
|
|
39.0
|
|
|
|
|
38.7
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
621.1
|
|
|
|
$
|
1,538.9
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Liabilities not subject to
compromise
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
61.7
|
|
|
|
$
|
51.4
|
|
Accrued interest
|
|
|
.1
|
|
|
|
|
1.0
|
|
Accrued salaries, wages, and
related expenses
|
|
|
33.6
|
|
|
|
|
42.0
|
|
Other accrued liabilities
|
|
|
50.9
|
|
|
|
|
55.2
|
|
Payable to affiliate
|
|
|
19.5
|
|
|
|
|
14.8
|
|
Long-term debt current
portion
|
|
|
|
|
|
|
|
1.1
|
|
Discontinued operations
current liabilities
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
165.8
|
|
|
|
|
167.6
|
|
Long-term liabilities
|
|
|
59.4
|
|
|
|
|
42.0
|
|
Long-term debt
|
|
|
50.0
|
|
|
|
|
1.2
|
|
Discontinued operations
liabilities (liabilities subject to compromise)
|
|
|
|
|
|
|
|
68.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275.2
|
|
|
|
|
279.3
|
|
Liabilities subject to compromise
|
|
|
|
|
|
|
|
4,400.1
|
|
Minority interests
|
|
|
|
|
|
|
|
.7
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.01,
authorized 45,000,000 shares; issued and outstanding shares
20,525,660 at September 30, 2006
|
|
|
.2
|
|
|
|
|
.8
|
|
Additional capital
|
|
|
482.5
|
|
|
|
|
538.0
|
|
Retained earnings (deficit)
|
|
|
14.3
|
|
|
|
|
(3,671.2
|
)
|
Common stock owned by Union VEBA
subject to transfer restrictions, at reorganization value,
6,291,945 shares at September 30, 2006
|
|
|
(151.1
|
)
|
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
|
|
|
|
|
|
(8.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
345.9
|
|
|
|
|
(3,141.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
621.1
|
|
|
|
$
|
1,538.9
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
1
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(In millions of dollars except share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
Three Months
|
|
|
|
through
|
|
|
|
Predecessor
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Net sales
|
|
$
|
331.4
|
|
|
|
$
|
|
|
|
$
|
271.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
291.8
|
|
|
|
|
|
|
|
|
233.5
|
|
Depreciation and amortization
|
|
|
2.8
|
|
|
|
|
|
|
|
|
4.9
|
|
Selling, administrative, research
and development, and general
|
|
|
18.0
|
|
|
|
|
|
|
|
|
13.2
|
|
Other operating charges (credits),
net
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
309.7
|
|
|
|
|
|
|
|
|
251.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
21.7
|
|
|
|
|
|
|
|
|
19.7
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (excluding
unrecorded contractual interest expense of $23.7 for the three
months ended September 30, 2005)
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
Reorganization items
|
|
|
|
|
|
|
|
3,108.1
|
|
|
|
(8.2
|
)
|
Other net
|
|
|
.9
|
|
|
|
|
|
|
|
|
(.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
discontinued operations
|
|
|
22.6
|
|
|
|
|
3,108.1
|
|
|
|
10.0
|
|
Provision for income taxes
|
|
|
(8.3
|
)
|
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
14.3
|
|
|
|
|
3,108.1
|
|
|
|
8.6
|
|
Income from discontinued
operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14.3
|
|
|
|
$
|
3,108.1
|
|
|
$
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
.72
|
|
|
|
$
|
39.02
|
|
|
$
|
.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
.72
|
|
|
|
$
|
39.02
|
|
|
$
|
.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
Diluted (same as basic for Predecessor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding (000):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,002
|
|
|
|
|
79,672
|
|
|
|
79,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
20,029
|
|
|
|
|
79,672
|
|
|
|
79,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
2
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(In millions of dollars except share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
Period from
|
|
|
Nine Months
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
to July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Net sales
|
|
$
|
331.4
|
|
|
|
$
|
689.8
|
|
|
$
|
815.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
291.8
|
|
|
|
|
596.4
|
|
|
|
710.9
|
|
Depreciation and amortization
|
|
|
2.8
|
|
|
|
|
9.8
|
|
|
|
15.0
|
|
Selling, administrative, research
and development, and general
|
|
|
18.0
|
|
|
|
|
30.3
|
|
|
|
38.0
|
|
Other operating charges (credits),
net
|
|
|
(2.9
|
)
|
|
|
|
.9
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
309.7
|
|
|
|
|
637.4
|
|
|
|
770.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
21.7
|
|
|
|
|
52.4
|
|
|
|
45.5
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (excluding
unrecorded contractual interest expense of $47.4 for the period
from January 1, 2006 to July 1, 2006 and $71.2 for the nine
months ended September 30, 2005)
|
|
|
|
|
|
|
|
(.8
|
)
|
|
|
(4.2
|
)
|
Reorganization items
|
|
|
|
|
|
|
|
3,093.1
|
|
|
|
(25.3
|
)
|
Other net
|
|
|
.9
|
|
|
|
|
1.2
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
discontinued operations
|
|
|
22.6
|
|
|
|
|
3,145.9
|
|
|
|
14.5
|
|
Provision for income taxes
|
|
|
(8.3
|
)
|
|
|
|
(6.2
|
)
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
14.3
|
|
|
|
|
3,139.7
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations, net of income taxes
|
|
|
|
|
|
|
|
4.3
|
|
|
|
21.3
|
|
Gain from sale of commodity
interests, net of income taxes of $8.5 in 2005
|
|
|
|
|
|
|
|
|
|
|
|
365.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
4.3
|
|
|
|
386.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect on years prior to
2005 of adopting accounting for conditional asset retirement
obligations
|
|
|
|
|
|
|
|
|
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
14.3
|
|
|
|
$
|
3,144.0
|
|
|
$
|
390.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
.72
|
|
|
|
$
|
39.42
|
|
|
$
|
.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
|
$
|
.05
|
|
|
$
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from cumulative effect on
years prior to 2005 of adopting accounting for conditional asset
retirement obligations
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
(.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
.72
|
|
|
|
$
|
39.47
|
|
|
$
|
4.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
Diluted (same as basic for Predecessor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
.72
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Loss from cumulative effect on
years prior to 2005 of adopting accounting for conditional asset
retirement obligations
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.72
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding (000):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,002
|
|
|
|
|
79,672
|
|
|
|
79,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
20,029
|
|
|
|
|
79,672
|
|
|
|
79,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
3
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions of dollars)
For the
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned by
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Union VEBA
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
Earnings
|
|
|
Subject to Transfer
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Restrictions
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
BALANCE, December 31, 2005-
Predecessor
|
|
$
|
.8
|
|
|
$
|
538.0
|
|
|
$
|
(3,671.2
|
)
|
|
$
|
|
|
|
$
|
(8.8
|
)
|
|
$
|
(3,141.2
|
)
|
Net income (same as Comprehensive
income) Predecessor
|
|
|
|
|
|
|
|
|
|
|
35.9
|
|
|
|
|
|
|
|
|
|
|
|
35.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30,
2006-Predecessor
|
|
|
.8
|
|
|
|
538.0
|
|
|
|
(3,635.3
|
)
|
|
|
|
|
|
|
(8.8
|
)
|
|
|
(3,105.3
|
)
|
Cancellation of Predecessor common
stock
|
|
|
(.8
|
)
|
|
|
.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Successor common stock
(20,000,000 shares) to creditors
|
|
|
.2
|
|
|
|
480.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480.4
|
|
Common stock owned by Union VEBA
subject to transfer restrictions, at reorganization value,
6,291,945 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151.1
|
)
|
|
|
|
|
|
|
(151.1
|
)
|
Plan and fresh start adjustments
|
|
|
|
|
|
|
(538.8
|
)
|
|
|
3,635.3
|
|
|
|
|
|
|
|
8.8
|
|
|
|
3,105.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, July 1, 2006
|
|
|
.2
|
|
|
|
480.2
|
|
|
|
|
|
|
|
(151.1
|
)
|
|
|
|
|
|
|
329.3
|
|
|
Net income (same as Comprehensive
income)
|
|
|
|
|
|
|
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
14.3
|
|
Issuance of 4,273 shares of
common stock to directors in lieu of annual retainer fees
|
|
|
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2
|
|
Amortization of unearned equity
compensation
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2006
|
|
$
|
.2
|
|
|
$
|
482.5
|
|
|
$
|
14.3
|
|
|
$
|
(151.1
|
)
|
|
$
|
|
|
|
$
|
345.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Nine Months Ended September 30, 2005
(Restated)
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned by
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Union VEBA
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
Earnings
|
|
|
Subject to Transfer
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Restrictions
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
BALANCE, December 31, 2004
|
|
$
|
.8
|
|
|
$
|
538.0
|
|
|
$
|
(2,917.5
|
)
|
|
$
|
|
|
|
$
|
(5.5
|
)
|
|
$
|
(2,384.2
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
390.7
|
|
|
|
|
|
|
|
|
|
|
|
390.7
|
|
Unrealized net increase in value
of derivative instruments arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.2
|
)
|
|
|
(.2
|
)
|
Reclassification adjustment for
net realized losses on derivative instruments included in net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2005
|
|
$
|
.8
|
|
|
$
|
538.0
|
|
|
$
|
(2,526.8
|
)
|
|
$
|
|
|
|
$
|
(5.5
|
)
|
|
$
|
(1,993.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
4
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
Period from
|
|
|
Nine Months
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
to July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14.3
|
|
|
|
$
|
3,144.0
|
|
|
$
|
390.7
|
|
Less net income from discontinued
operations
|
|
|
|
|
|
|
|
4.3
|
|
|
|
386.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing
operations
|
|
|
14.3
|
|
|
|
|
3,139.7
|
|
|
|
3.8
|
|
Adjustments to reconcile net income
(loss) from continuing operations to net cash provided (used) by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(including deferred financing costs of $.1, $.9 and $3.5,
respectively)
|
|
|
2.9
|
|
|
|
|
10.7
|
|
|
|
18.5
|
|
Non-cash equity compensation
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
Gain on discharge of pre-petition
obligations and fresh start adjustments
|
|
|
|
|
|
|
|
(3,113.1
|
)
|
|
|
|
|
Payments pursuant to plan of
reorganization
|
|
|
|
|
|
|
|
(25.3
|
)
|
|
|
|
|
Loss from cumulative effect on
years prior to 2005 of adopting accounting for conditional asset
retirement obligations
|
|
|
|
|
|
|
|
|
|
|
|
4.7
|
|
Gain on sale of real estate
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(.2
|
)
|
Equity in (income) loss of
unconsolidated affiliate, net of distributions
|
|
|
(2.1
|
)
|
|
|
|
(10.1
|
)
|
|
|
.7
|
|
Decrease (increase) in trade and
other receivables
|
|
|
4.3
|
|
|
|
|
(18.3
|
)
|
|
|
(2.1
|
)
|
(Increase) decrease in inventories
|
|
|
(9.3
|
)
|
|
|
|
(7.8
|
)
|
|
|
4.5
|
|
Decrease (increase) in prepaid
expenses and other current assets
|
|
|
6.0
|
|
|
|
|
(14.5
|
)
|
|
|
7.1
|
|
Increase (decrease) in accounts
payable and accrued interest
|
|
|
7.4
|
|
|
|
|
4.7
|
|
|
|
(10.2
|
)
|
(Decrease) increase in other
accrued liabilities
|
|
|
(8.7
|
)
|
|
|
|
5.7
|
|
|
|
(11.8
|
)
|
(Decrease) increase in payable to
affiliate
|
|
|
(13.6
|
)
|
|
|
|
18.2
|
|
|
|
(2.7
|
)
|
Increase (decrease) in accrued and
deferred income taxes
|
|
|
6.3
|
|
|
|
|
(.5
|
)
|
|
|
.8
|
|
Net cash impact of changes in
long-term assets and liabilities
|
|
|
(6.9
|
)
|
|
|
|
(8.0
|
)
|
|
|
(14.9
|
)
|
Net cash provided by discontinued
operations
|
|
|
|
|
|
|
|
8.5
|
|
|
|
13.4
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
operating activities
|
|
|
2.9
|
|
|
|
|
(11.7
|
)
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net of
accounts payable of $1.6 in both the period from July 1,
2006 to September 30, 2006 and the period from
January 1, 2006 to July 1, 2006
|
|
|
(11.6
|
)
|
|
|
|
(28.1
|
)
|
|
|
(20.4
|
)
|
Net proceeds from sale of real
estate
|
|
|
|
|
|
|
|
1.0
|
|
|
|
.9
|
|
Net cash provided by discontinued
operations; primarily proceeds from sale of QAL in 2005
|
|
|
|
|
|
|
|
|
|
|
|
401.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by
investing activities
|
|
|
(11.6
|
)
|
|
|
|
(27.1
|
)
|
|
|
381.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Term
Loan Facility
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Revolving Credit
Facility, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs
|
|
|
(.6
|
)
|
|
|
|
(.2
|
)
|
|
|
(3.6
|
)
|
Repayment of debt
|
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
Decrease (increase) in restricted
cash
|
|
|
|
|
|
|
|
1.5
|
|
|
|
(1.7
|
)
|
Net cash used by discontinued
operations; primarily increase in restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
(402.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
financing activities
|
|
|
49.4
|
|
|
|
|
1.3
|
|
|
|
(409.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents during the period
|
|
|
40.7
|
|
|
|
|
(37.5
|
)
|
|
|
(12.1
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
12.0
|
|
|
|
|
49.5
|
|
|
|
55.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
52.7
|
|
|
|
$
|
12.0
|
|
|
$
|
43.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized
interest of $.6, $1.0 and $.2
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
.4
|
|
|
|
$
|
1.2
|
|
|
$
|
19.5
|
|
Less income taxes paid by
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
.4
|
|
|
|
$
|
1.2
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
5
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except prices and per share
amounts)
(Unaudited)
|
|
1.
|
Emergence
from Reorganization Proceedings
|
Summary. As more fully discussed in
Note 13, during the past four years, Kaiser Aluminum
Corporation (Kaiser, KAC or the
Company), its wholly owned subsidiary, Kaiser
Aluminum & Chemical Corporation (KACC), and
24 of KACCs subsidiaries operated under Chapter 11 of
the United States Bankruptcy Code (the Code) under
the supervision of the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court).
As also outlined in Note 13, Kaiser, KACC and their debtor
subsidiaries which included all of the Companys core
fabricated products facilities and a 49% interest in Anglesey
Aluminium Limited (Anglesey), which owns a smelter
in the United Kingdom, emerged from Chapter 11 on
July 6, 2006 (hereinafter referred to as the
Effective Date) pursuant to Kaisers Second
Amended Plan of Reorganization (the Plan). Four
subsidiaries not related to the fabricated products operations
were liquidated in December 2005. Pursuant to the Plan, all
material pre-petition debt, pension and post-retirement medical
obligations and asbestos and other tort liabilities, along with
other pre-petition claims (which in total aggregated to
approximately $4.4 billion in the June 30, 2006
consolidated financial statements) were addressed and resolved.
Pursuant to the Plan, the equity interests of all of
Kaisers pre-emergence stockholders were cancelled without
consideration. The equity of the newly emerged Kaiser was issued
and delivered to a third-party disbursing agent for distribution
to claimholders pursuant to the Plan.
Impacts on the Opening Balance Sheet After
Emergence. As a result of the Companys
emergence from Chapter 11, the Company applied fresh
start accounting to its opening July 2006 consolidated
financial statements as required by American Institute of
Certified Professional Accountants (AICPA) Statement
of
Position 90-7
(SOP 90-7),
Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code. As such, the Company adjusted its
stockholders equity to equal the reorganization value at
the Effective Date. Items such as accumulated depreciation,
accumulated deficit and accumulated other comprehensive income
(loss) were reset to zero. The Company allocated the
reorganization value to its individual assets and liabilities
based on their estimated fair value. Items such as current
liabilities, accounts receivable, and cash reflected values
similar to those reported prior to emergence. Items such as
inventory, property, plant and equipment, long-term assets and
long-term liabilities were significantly adjusted from amounts
previously reported. Because fresh start accounting was adopted
at emergence and because of the significance of liabilities
subject to compromise that were relieved upon emergence,
comparisons between the historical financial statements and the
financial statements from and after emergence are difficult to
make.
The following balance sheet shows the impacts of the Plan and
the adoption of fresh start accounting on the opening balance
sheet of the new reporting entity.
6
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
Plan
|
|
|
Fresh Start
|
|
|
Balance
|
|
|
|
Historical
|
|
|
Adjustments(a)
|
|
|
Adjustments(b)
|
|
|
Sheet
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37.3
|
|
|
$
|
(25.3
|
)
|
|
$
|
|
|
|
$
|
12.0
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful
receivables
|
|
|
114.1
|
|
|
|
|
|
|
|
.7
|
|
|
|
114.8
|
|
Other
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
5.7
|
|
Inventories
|
|
|
123.1
|
|
|
|
|
|
|
|
48.9
|
|
|
|
172.0
|
|
Prepaid expenses and other current
assets
|
|
|
34.0
|
|
|
|
(.3
|
)
|
|
|
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
314.2
|
|
|
|
(25.6
|
)
|
|
|
49.6
|
|
|
|
338.2
|
|
Investments in and advances to
unconsolidated affiliate
|
|
|
22.7
|
|
|
|
(.3
|
)
|
|
|
(11.3
|
)
|
|
|
11.1
|
|
Property, plant, and
equipment net
|
|
|
242.7
|
|
|
|
(4.1
|
)
|
|
|
(98.9
|
)
|
|
|
139.7
|
|
Personal injury-related insurance
recoveries receivable
|
|
|
963.3
|
|
|
|
(963.3
|
)
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
11.4
|
|
|
|
(11.7
|
)
|
|
|
12.6
|
|
|
|
12.3
|
|
Net assets in respect of VEBAs
|
|
|
|
|
|
|
33.2(c
|
)
|
|
|
|
|
|
|
33.2
|
|
Other assets
|
|
|
43.6
|
|
|
|
2.1
|
|
|
|
(.8
|
)
|
|
|
44.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,597.9
|
|
|
$
|
(969.7
|
)
|
|
$
|
(48.8
|
)
|
|
$
|
579.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Liabilities not subject to
compromise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
56.1
|
|
|
$
|
(.5
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
53.8
|
|
Accrued interest
|
|
|
1.1
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Accrued salaries, wages, and
related expenses
|
|
|
37.0
|
|
|
|
(4.1
|
)
|
|
|
.7
|
|
|
|
33.6
|
|
Other accrued liabilities
|
|
|
61.0
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
59.2
|
|
Payable to affiliate
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
|
|
33.0
|
|
Long-term debt current
portion
|
|
|
1.1
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Discontinued operations
current liabilities
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
190.8
|
|
|
|
(8.6
|
)
|
|
|
(1.1
|
)
|
|
|
181.1
|
|
Long-term liabilities
|
|
|
49.0
|
|
|
|
17.5
|
|
|
|
2.5
|
|
|
|
69.0
|
|
Long-term debt
|
|
|
1.2
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
Discontinued operations
liabilities (liabilities subject to compromise)
|
|
|
73.5
|
|
|
|
(73.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314.5
|
|
|
|
(65.8
|
)
|
|
|
1.4
|
|
|
|
250.1
|
|
Liabilities subject to compromise
|
|
|
4,388.0
|
|
|
|
(4,388.0
|
)
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
.7
|
|
|
|
(.7
|
)
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
.8
|
|
|
|
.2
|
(d)
|
|
|
(.8
|
)
|
|
|
.2
|
|
Additional capital
|
|
|
538.0
|
|
|
|
480.2
|
(d)
|
|
|
(538.0
|
)
|
|
|
480.2
|
|
Common stock owned by Union VEBA
subject to transfer restrictions
|
|
|
|
|
|
|
(151.1
|
)(c)
|
|
|
|
|
|
|
(151.1
|
)
|
Accumulated deficit
|
|
|
(3,635.3
|
)
|
|
|
3,155.5
|
(e)
|
|
|
479.8
|
(f)
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(8.8
|
)
|
|
|
|
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(3,105.3
|
)
|
|
|
3,484.8
|
|
|
|
(50.2
|
)
|
|
|
329.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,597.9
|
|
|
$
|
(969.7
|
)
|
|
$
|
(48.8
|
)
|
|
$
|
579.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
Reflects impacts on the Effective Date of implementing the Plan,
including the settlement of liabilities subject to compromise
and related payments, distributions of cash and new shares of
common stock and the cancellation of predecessor common stock
(see Note 13). Includes the reclassification of
approximately $21.0 from Liabilities subject to compromise to
Long-term liabilities in respect of certain pension and benefit
plans retained by the Company pending the outcome of the
litigation with the Pension Benefit Guaranty Corporation
(PBGC) as more fully discussed in Note 8. |
|
(b) |
|
Reflects the adjustments to reflect fresh start
accounting. These include the write up of Inventories (see
Note 2) and Property, plant and equipment to their
appraised values and the elimination of Accumulated deficit and
Additional paid in capital. The fresh start adjustments for
intangible assets and stockholders equity are based on a
third party appraisal report. |
|
|
|
In accordance with generally accepted accounting principles
(GAAP), the reorganization value is allocated to
individual assets and liabilities by first allocating value to
current assets, current liabilities, monetary and similar long
term items for which specific market values are determinable.
The remainder is allocated to long term assets such as property,
plant and equipment, equity investments, identified intangibles
and unidentified intangibles (e.g. goodwill). To the extent that
there is insufficient value to allocate to long term assets
after first allocating to the current, monetary and similar
items, such shortfall is first used to reduce unidentified
intangibles to zero and then to proportionately reduce the
amount allocated to property, plant and equipment, equity
investments and identified intangibles based on the initial
(pre-reorganization value allocation) assessed fair value. In
allocating the reorganization value, the Company determined that
the value of the long term assets exceeded the amount of
reorganization value available to be allocated to such items by
approximately $187.2. Such excess value was allocated to
Property, plant and equipment, Investment in unconsolidated
affiliate and Identified intangibles in the following amounts
based on initial fair value assessments determined by a third
party appraisal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraised Value
|
|
|
Allocation of
|
|
|
Opening Balance
|
|
|
|
Based on Third
|
|
|
Reorganization
|
|
|
Sheet Amount at
|
|
|
|
Party Appraisal
|
|
|
Value Shortfall
|
|
|
July 1, 2006
|
|
|
Property, plant and equipment
|
|
$
|
299.8
|
|
|
$
|
(160.1
|
)
|
|
$
|
139.7
|
|
Investment in and advances to
unconsolidated affiliate
|
|
|
24.0
|
|
|
|
(12.9
|
)
|
|
|
11.1
|
|
Identified intangibles
|
|
|
26.5
|
|
|
|
(14.2
|
)
|
|
|
12.3
|
|
|
|
|
(c) |
|
As more fully discussed in Note 7, after discussions with
the Securities and Exchange Commission, the Company concluded
that, while the Companys only obligations in respect of
two voluntary employee beneficiary associations (the
VEBAs) is an annual variable contribution obligation
based primarily on earnings and capital spending, the Company
should account for the VEBAs as defined benefit postretirement
plans with a cap. Note 8 provides information regarding the
opening balance sheet amounts in respect of the VEBAs and key
assumptions used to derive such amounts. |
|
(d) |
|
Reflects the issuance of new common stock to pre-petition
creditors. |
|
(e) |
|
Reflects gain extinguishment of obligations from implementation
of the Plan. |
|
(f) |
|
Reflects fresh start loss of $47.4 and elimination of retained
deficit. |
The Companys emergence from Chapter 11 and adoption
of fresh start accounting resulted in a new reporting entity for
accounting purposes. Although the Company emerged from
Chapter 11 on July 6, 2006, the Company adopted fresh
start accounting under the provisions of
SOP 90-7
effective as of the beginning of business on July 1, 2006.
As such, it was assumed that the emergence was completed
instantaneously at the beginning of business on July 1,
2006 such that all operating activities during the three months
ended September 30, 2006 are reported as
8
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
applying to the new reporting entity. The Company believes that
this is a reasonable presentation as there were no material
non-Plan-related transactions between July 1, 2006 and
July 6, 2006.
The Predecessor Statement of Consolidated Cash Flows for the
period January 1, 2006 to July 1, 2006 includes
plan-related payments of $25.3 made between July 1, 2006
and July 6, 2006.
The accompanying financial statements include the financial
statements of Kaiser both before and after emergence. Financial
information related to the newly emerged Kaiser is generally
referred to throughout this Report as Successor
information. Information of Kaiser before emergence is generally
referred to as Predecessor information. The
financial information of the Successor entity is not comparable
to that of the Predecessor given the impacts of the Plan,
implementation of fresh start reporting and other factors.
The Notes to Interim Consolidated Financial Statements are
grouped into two categories: (1) those primarily affecting
the Successor entity (Notes 2 through 11) and (2
)those primarily affecting the Predecessor entity (Notes 12
through 19).
SUCCESSOR
|
|
2.
|
Summary
of Significant Accounting Policies
|
This Report should be read in conjunction with the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2005.
This is the first public report under the Securities Exchange
Act of 1934 reflecting Successor financial information and, as
discussed in Note 1, reflects the terms of the Plan and
certain related actions and the application of fresh start
reporting. In accordance with GAAP, while the Predecessor
financial information will continue to be presented, Predecessor
and Successor financial statement information for 2006 is
reported separately and not combined.
As stated in Note 1, due to the implementation of the Plan,
the application of fresh start accounting and due to changes in
accounting policies and procedures, the financial statements of
the Successor are not comparable to those of the Predecessor.
Additionally, results for interim periods are not necessarily
indicative of anticipated results for the entire year.
Principles of Consolidation and Basis of
Presentation. The consolidated financial
statements include the statements of the Company and its
majority owned subsidiaries.
In connection with the Plan, Kaiser also restructured and
simplified its corporate structure. The result of the simplified
corporate structure is summarized as follows:
|
|
|
|
|
the Company directly owns 100% of the issued and outstanding
shares of capital stock of Kaiser Aluminum Investments Company,
a newly formed Delaware corporation (KAIC), which is
intended to function as an intermediate holding company.
|
|
|
|
KAIC owns 49% of the ownership interests of Anglesey Aluminium
Limited (Anglesey) and 100% of the ownership
interests of each of:
|
|
|
|
|
|
Kaiser Aluminum Fabricated Products, LLC, a newly formed
Delaware limited liability company (KAFP), which
holds the assets and liabilities associated with the
Companys fabricated products business unit (excluding
those assets and liabilities associated with the London, Ontario
facility);
|
|
|
|
Kaiser Aluminum Canada Limited, a newly formed Ontario
corporation (KACL), which holds the assets and
liabilities of the London, Ontario operations and certain former
KACC Canadian subsidiaries that were largely inactive;
|
9
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Kaiser Aluminum & Chemical Corporation, LLC, a newly
formed Delaware limited liability company (KACC,
LLC), which, as a successor by merger, holds the remaining
non-operating assets and liabilities of KACC not assumed by KAFP;
|
|
|
|
Kaiser Aluminium International, Inc., Trochus Insurance Co.,
Ltd., and Kaiser Bauxite Company
|
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with GAAP for
interim financial information and the rules and regulations of
the Securities and Exchange Commission. Accordingly, these
financial statements do not include all of the disclosures
required by GAAP for complete financial statements. In the
opinion of management, the unaudited interim consolidated
financial statements furnished herein include all adjustments,
all of which are of normal recurring nature unless otherwise
noted, necessary for a fair statement of the results for the
interim periods presented.
The preparation of financial statements in accordance with GAAP
requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date
the financial statements are published, and the reported amounts
of revenues and expenses during the reporting period.
Uncertainties, with respect to such estimates and assumptions,
are inherent in the preparation of the Companys
consolidated financial statements; accordingly, it is possible
that the actual results could differ from these estimates and
assumptions, which could have a material effect on the reported
amounts of the Companys consolidated financial position
and results of operation.
Investments in 50%-or-less-owned entities are accounted for
primarily by the equity method. Intercompany balances and
transactions are eliminated.
Recognition of Sales. Sales are recognized
when title, ownership and risk of loss pass to the buyer and
collectibility is reasonably assured. A provision for estimated
sales returns from and allowances to customers is made in the
same period as the related revenues are recognized, based on
historical experience or the specific identification of an event
necessitating a reserve.
Earnings per Share. Basic earnings per share
is computed by dividing earnings by the weighted average number
of common shares outstanding during the period. The shares owned
by a VEBA for the benefit of certain union retirees, their
surviving spouses and eligible dependents (the Union
VEBA) that are subject to transfer restrictions, while
being treated similar to treasury stock (i.e. as a reduction) in
Stockholders equity, are included in the computation of
basic shares outstanding as such shares were irrevocably issued
and are subject to full dividend and voting rights.
Diluted earnings per share are computed by dividing earnings by
the weighted average number of diluted common shares outstanding
during the period. The weighted average number of diluted shares
includes the dilutive effect of the non-vested stock granted
during the period from the dates of grant (see Note 7).The
impact of the non-vested shares on the number of dilutive common
shares is calculated by reducing the total number of non-vested
shares (521,387) by the theoretical number of shares that could
be repurchased under the assumption that the hypothetical
proceeds of such non-vested shares are the amount of
unrecognized compensation expense together with any related
income tax benefits (495,016). Based on the foregoing, a total
26,371 shares of common stock have been added to the
diluted earnings per share computation.
Stock-Based Employee Compensation. The Company
accounts for stock-based employee compensation plans at fair
value. The Company measures the cost of employee services
received in exchange for an award of equity instruments based on
the grant-date fair value of the award. The cost of the award is
recognized as an expense over the period that the employee
provides service for the award. During the period from
July 1, 2006 through September 30, 2006, $2.3 of
compensation cost was recognized in connection with vested and
non-vested stock issued to executive officers, other key
employees and directors during the period (see Note 7). The
Company has elected to amortize compensation expense for equity
awards with grading vesting using the straight line method.
10
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other Income (Expense). Other income
(expense), other than interest expense and reorganization items,
included an adjustment of approximately $1.2 in the period from
January 1, 2006 to July 1, 2006, to decrease the
environmental liabilities for an amount that was no longer
required because the related non-operating property had been
sold. Other income (expense), other than interest expense and
reorganization items, for the three and nine months ended
September 30, 2005 included a loss of approximately $.7
from the sale of certain non-operating properties and an
adjustment of approximately $.2 to increase the environmental
liabilities.
Income Taxes. In accordance with
SOP 90-7,
the Company adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48) at emergence. In
accordance with FIN 48, the Company uses a more
likely than not threshold for recognition of tax
attributes that are subject to uncertainties and measures any
reserves in respect of such expected benefits based on their
probability as prescribed by FIN 48. The Company does not
consider this a change from the practice of the Predecessor. The
adoption of FIN 48 did not have a material impact on the
Companys financial statements.
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.
Inventories. Substantially all product
inventories are stated at
last-in,
first-out (LIFO) cost, not in excess of market
value. Replacement cost is not in excess of LIFO cost. Other
inventories, principally operating supplies and repair and
maintenance parts, are stated at the lower of average cost or
market. Inventory costs consist of material, labor and
manufacturing overhead, including depreciation. Abnormal costs,
such as idle facility expenses, freight, handling costs and
spoilage, are accounted for as current period charges.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Fabricated products
|
|
|
|
|
|
|
|
|
Finished products
|
|
$
|
57.4
|
|
|
$
|
34.7
|
|
Work in process
|
|
|
59.2
|
|
|
|
43.1
|
|
Raw materials
|
|
|
52.1
|
|
|
|
26.3
|
|
Operating supplies and repairs and
maintenance parts
|
|
|
12.4
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181.1
|
|
|
|
115.2
|
|
Commodities Primary
aluminum
|
|
|
.2
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
181.3
|
|
|
$
|
115.3
|
|
|
|
|
|
|
|
|
|
|
As stated above, the Company accounts for substantially all of
its product inventories on a LIFO basis. All Predecessor LIFO
layers were eliminated in fresh start accounting. The Company
applies LIFO differently than the Predecessor did in that it
views each quarter on a standalone basis for computing LIFO;
whereas the Predecessor recorded LIFO amounts with a view to the
entire fiscal year which, with certain exceptions, tended to
result in LIFO charges being recorded in the fourth quarter or
the second half of the year. The Company recorded a non-cash
LIFO benefit of approximately $3.3 at September 30, 2006
and a non-cash LIFO charge of approximately $21.7 at
June 30, 2006. These amounts are primarily a result of
changes in metal prices. There were no LIFO benefits or charges
in the three or nine months ended September 30, 2005.
Pursuant to fresh start accounting, in the Companys
opening July 2006 balance sheet, all inventory amounts were
stated at fair market value. Raw materials and Operating
supplies and repairs and maintenance parts were recorded at
published market prices including any location premiums.
Finished products and Work in progress (WIP) were
recorded at selling price less cost to sell, cost to complete
and a reasonable apportionment of the
11
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
profit margin associated with the selling and conversion
efforts. As reported in Note 1, this resulted in increased
inventories by approximately $48.9.
Given the recent strength in demand for many types of fabricated
aluminum products and primary aluminum, the Company has a larger
volume of raw materials, WIP and finished goods than is its
historical average, and the price for such goods, given the
application of fresh start accounting, is higher than long term
historical averages. As such, with the inevitable ebb and flow
of business cycles, non-cash LIFO charges will result when
inventory levels drop
and/or
margins compress. Such adjustments could be material to results
in future periods.
Depreciation. Depreciation is computed
principally using the straight-line method at rates based on the
estimated useful lives of the various classes of assets. The
principal estimated useful lives, which were determined based on
a third party appraisal, are as follows:
|
|
|
|
|
|
|
Useful Life
|
|
Land improvements
|
|
|
3-7
|
|
Buildings
|
|
|
15-35
|
|
Machinery and equipment
|
|
|
2-22
|
|
As more fully discussed in Note 1, upon emergence from
reorganization, the Company applied fresh start accounting to
its consolidated financial statements as required by
SOP 90-7.
As a result, accumulated depreciation was reset to zero. The new
lives assigned to the individual assets and the application of
fresh start accounting (see Notes 1 and 4) will cause
future depreciation to be different than historical depreciation
of the Predecessor.
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.
Intangible Assets. Pursuant to fresh start
accounting, the Company allocated the reorganization value to
its assets and liabilities, including intangible assets, based
on a third party appraisal. The appraisal indicated that certain
intangible assets existed. The values assigned as part of the
allocation of the reorganization value, the balance at September
30, 2006, and useful lives assigned to each type of identified
intangible asset is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
July 1, 2006
|
|
|
Useful Life
|
|
Customer relationships
|
|
$
|
6.3
|
|
|
$
|
8.1
|
|
|
15-18
|
Trade name
|
|
|
2.9
|
|
|
|
3.7
|
|
|
Indefinite
|
Patents
|
|
|
.4
|
|
|
|
.5
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9.6
|
|
|
$
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets were reduced proportionately during the
quarter ended September 30, 2006 by approximately $2.7 in
respect of the resolution of certain pre-emergence income tax
attributes recognized during the three months ended September
30, 2006.
The Company reviews intangibles for impairment at least annually
in the fourth quarter of each year or more frequently if events
or changes in circumstances indicate that the asset might be
impaired.
Foreign Currency. The Company uses the United
States dollar as the functional currency for its foreign
operations.
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. 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
12
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys business segments to minimize transaction costs,
monitor consolidated net exposures and allow for increased
responsiveness to changes in market factors.
The Company recognizes all derivative instruments as assets or
liabilities in its balance sheet and measures those instruments
at fair value by
marking-to-market
all of its hedging positions at each period-end (see
Note 9). Changes in the market value of the Companys
open hedging positions resulting from the
mark-to-market
process represent unrealized gains or losses. Such unrealized
gains or losses will fluctuate, based on prevailing market
prices at each subsequent balance sheet date, until the
settlement date occurs. These changes are recorded as an
increase or reduction in stockholders equity through
either other comprehensive income (OCI) or net
income, depending on the facts and circumstances with respect to
the transaction and its documentation. If the derivative
transaction qualifies for hedge (deferral) treatment under
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133), the changes are
recorded initially in OCI. Such changes reverse out of OCI
(offset by any fluctuations in other open positions)
and are recorded in net income (included in Net sales or Cost of
products sold, as applicable) when the subsequent settlement
transactions occur. If derivative transactions do not qualify
for hedge accounting treatment, the changes in market value are
recorded in net income. To qualify for hedge accounting
treatment, the derivative transaction must meet criteria
established by SFAS No. 133. Even if the derivative
transaction meets the SFAS No. 133 criteria, the
Company must also comply with a number of complex documentation
requirements, which, if not met, result in the derivative
transaction being precluded from being treated as a hedge (i.e.,
it must then be
marked-to-market
with period to period changes in market value being recorded in
quarterly results) unless and until such documentation is
modified and determined to be in accordance with
SFAS No. 133. Additionally, if the level of physical
transactions falls below the net exposure hedged,
hedge accounting must be terminated for such
excess hedges and the
mark-to-market
changes on such excess hedges would be recorded in the income
statement rather than in OCI.
As more fully discussed in Note 15, in connection with the
Companys preparation of its December 31, 2005
financial statements, the Company concluded that its derivative
financial instruments did not meet certain specific
documentation criteria in SFAS No. 133. Accordingly,
the Company restated its prior results for the quarters ended
March 31, June 30 and September 2005 and marked all of
its derivatives to market in 2005. The change in accounting for
derivative contracts was related to the form of the
Companys documentation. The Company determined that its
hedging documentation did not meet the strict documentation
standards established by SFAS No. 133. More
specifically, the Companys documentation did not comply
with SFAS No. 133 in respect to the Companys
methods for testing and supporting that changes in the market
value of the hedging transactions would correlate with
fluctuations in the value of the forecasted transaction to which
they relate. The Company had documented that the derivatives it
was using would qualify for the short cut method
whereby regular assessments of correlation would not be
required. However, it ultimately concluded that, while the terms
of the derivatives were essentially the same as the forecasted
transaction, they were not identical and, therefore, the Company
should have done certain mathematical computations to prove the
ongoing correlation of changes in value of the hedge and the
forecasted transaction. As a result, under
SFAS No. 133, the Company de-designated
its open derivative transactions and reflected fluctuations in
the market value of such derivative transactions in its results
each period rather than deferring the effects until the
forecasted transactions (to which the hedges relate) occur. The
effect on the first three quarters of 2005 of marking the
derivatives to market rather than deferring gains/losses was to
increase Cost of products sold and decrease Operating income by
$2.0, $1.5 and $1.0, respectively.
The rules provide that, once de-designation has occurred, the
Company can modify its documentation and re-designate the
derivative transactions as hedges and, if
appropriately documented, re-qualify the transactions for
prospectively deferring changes in market fluctuations after
such corrections are made. The Company is working to modify its
documentation and to re-qualify open and post 2005 hedging
transactions for treatment as hedges. However, no assurances can
be provided in this regard.
In general, when hedge (deferral) accounting is being applied,
material fluctuations in OCI and Stockholders equity will
occur in periods of price volatility, despite the fact that the
Companys cash flow and earnings will be
13
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fixed to the extent hedged. This result is contrary
to the intent of the Companys hedging program, which is to
lock-in a price (or range of prices) for products
sold/used so that earnings and cash flows are subject to a
reduced risk of volatility.
Conditional Asset Retirement
Obligations. Effective December 31, 2005,
the Company adopted FASB Interpretation No. 47
(FIN 47), Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement
No. 143 (SFAS No. 143)
retroactive to the beginning of 2005. Pursuant to
SFAS No. 143 and FIN 47, companies are required
to estimate incremental costs for special handling, removal and
disposal costs of materials that may or will give rise to
conditional asset retirement obligations (CAROs) and
then discount the expected costs back to the current year using
a credit adjusted risk free rate. Under the guidelines clarified
in FIN 47, liabilities and costs for CAROs must be
recognized in a companys financial statements even if it
is unclear when or if the CARO may/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.
The Company evaluated FIN 47 and determined that it has
CAROs at several of its fabricated products facilities. The vast
majority of such CAROs consist of incremental costs that would
be associated with the removal and disposal of asbestos (all of
which is believed to be fully contained and encapsulated within
walls, floors, ceilings or piping) of certain of the older
plants if such plants were to undergo major renovation or be
demolished. No plans currently exist for any such renovation or
demolition of such facilities and the Companys current
assessment is that the most probable scenarios are that no such
CARO would be triggered for 20 or more years, if at all.
Nonetheless, the retroactive application of FIN 47 resulted
in the Company recognizing retroactive to the beginning of 2005,
the following in the fourth quarter of 2005: (i) a charge
of approximately $2.0 reflecting the cumulative earnings impact
of adopting FIN 47, (ii) an increase in Property,
plant and equipment of $.5 and (iii) offsetting the amounts
in (i) and (ii), an increase in Long term liabilities of
approximately $2.5. In addition, pursuant to FIN 47 there
was an immaterial amount of incremental depreciation expense
recorded (in Depreciation and amortization) for the year ended
December 31, 2005 as a result of the retroactive increase
in Property, plant and equipment (discussed in (ii) above)
and there was an incremental $.2 of non-cash charges (in Cost of
products sold) to reflect the accretion of the liability
recognized at January 1, 2005 (discussed in
(iii) above) to the estimated fair value of the CARO of
$2.7 at December 31, 2005.
Anglesey, a 49% owned unconsolidated aluminum investment, also
recorded a CARO liability of approximately $15.0 in its
financial statements at December 31, 2005. The treatment
applied by Anglesey was not consistent with the principles of
SFAS No. 143 or FIN 47. Accordingly, the Company
adjusted Angleseys recording of the CARO to comply with US
GAAP treatment. The Company determined that application of US
GAAP would have resulted in (a) a non-cash cumulative
adjustment of $2.7 reducing the Companys investment
retroactive to the beginning of 2005 and (b) a decrease in
the Companys share of Angleseys earnings totaling
approximately $.1 for 2005 (representing additional
depreciation, accretion and foreign exchange charges).
See Notes 2 and 4 of Notes to Consolidated Financial
Statements in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005 for additional
information regarding the CAROs.
The Companys estimates and judgments that affect the
probability weighted estimated future contingent cost amounts
did not change during the first nine months of 2006. The
following amounts have been reflected in the Companys
results for the three and nine months ended September 30,
2006 and 2005: (i) an immaterial incremental amount of
depreciation expense and (ii) an immaterial amount of
incremental accretion of the estimated liability for the three
months and incremental accretion of the estimated liability of
$.1 for the nine months ended September 30, 2006 (included
in Cost of products sold).
New Accounting Pronouncements. Statement of
Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R) (SFAS No. 158) was issued in
September 2006. SFAS No. 158 requires a company to
recognize the overfunded or underfunded status of a
single-employer defined benefit postretirement plan(s) as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in
14
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
comprehensive income in the year in which the changes occur.
Prior standards only required the overfunded or underfunded
status of a plan to be disclosed in the notes to the financial
statements. In addition, SFAS No. 158 requires that a
company disclose in the notes to the financial statements
additional information about certain effects on net periodic
benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or
credits, and transition asset or obligation. The Company must
adopt SFAS No. 158 in its year-end 2006 financial
statements. Given the application of fresh start reporting in
the third quarter of 2006, the funded status of the
Companys defined benefit pension plans is fully reflected
in the Companys September 30, 2006 balance sheet and
therefore the Company expects SFAS No. 158 to have no
material impact on the Companys balance sheet reporting
for these plans. However, the Company has not yet completed its
review of the possible impacts of SFAS No. 158 in
respect of a VEBA that provides benefits for certain eligible
retirees of the Company and their surviving spouses and eligible
dependents (the Salaried VEBA) and the Union VEBA
net assets or obligations and cannot, therefore, predict what,
if any, impacts adoption of SFAS No. 158 will have on
the balance sheet in regard to the VEBAs.
Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157) was issued in
September 2006 to increase consistency and comparability in fair
value measurements and to expand their disclosures. The new
standard includes a definition of fair value as well as a
framework for measuring fair value. The provisions of this
standard apply to other accounting pronouncements that require
or permit fair value measurements. The standard is effective for
fiscal periods beginning after November 15, 2007 and should
be applied prospectively, except for certain financial
instruments where it must be applied retrospectively as a
cumulative-effect adjustment to the balance of opening retained
earnings in the year of adoption. The Company is still
evaluating SFAS No. 157 but does not currently anticipate that
the adoption of this standard will have a material impact on its
financial statements.
Staff Accounting Bulletin No. 108, Guidance for Quantifying
Financial Statement Misstatements (SAB
No. 108) was issued by the Securities and Exchange
Commission (SEC) staff in September 2006.
SAB 108 establishes a specific approach for the
quantification of financial statement errors based on the
effects of the error on each of the Companys financial
statements and the related financial statement disclosures. The
provisions of SAB 108 are effective for the Companys
December 31, 2006 annual financial statements. The Company
does not anticipate that the adoption of this bulletin will have
a material impact on its financial statements.
Significant accounting policies of the Predecessor are discussed
in Note 12.
|
|
3.
|
Investment
In and Advances To Unconsolidated Affiliate
|
See Note 3 of Notes to Consolidated Financial Statements in
the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005 for summary financial
information for Anglesey, which owns an aluminum smelter at
Holyhead, Wales. The Companys equity in income before
income taxes of Anglesey is treated as a reduction (increase) in
Cost of products sold. The income tax effects of the
Companys equity in income are included in the
Companys income tax provision.
The nuclear plant that supplies power to Anglesey is currently
slated for decommissioning in late 2010. For Anglesey to be able
to operate past September 2009 when its current power contract
expires, Anglesey will have to secure a new or alternative power
contract at prices that make its operation viable. No assurances
can be provided that Anglesey will be successful in this regard.
In addition, given the potential for future shutdown and related
costs, the Company expects that dividends from Anglesey may be
suspended or curtailed either temporarily or permanently while
Anglesey studies future cash requirements. Dividends over the
past five years have fluctuated substantially depending on
various operational and market factors. During the nine months
ended September 30, 2006 and the last five years, cash
dividends received were as follows: 2006 $11.7,
2005 $9.0, 2004 $4.5, 2003
$4.3, 2002 $6.0 and 2001 $2.8.
15
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company and Anglesey have interrelated operations. The
Company is responsible for selling Anglesey alumina in respect
of its ownership percentage. Such alumina is purchased at prices
that are tied to primary aluminum prices under a contract that
expires in 2007. The Company is responsible for purchasing from
Anglesey primary aluminum in respect to its ownership percentage
at prices tied to primary aluminum prices.
Purchases from and sales to Anglesey were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
Predecessor
|
|
Predecessor
|
|
Predecessor
|
|
|
July 1, 2006
|
|
Three Months
|
|
Period from
|
|
Nine Months
|
|
|
through
|
|
Ended
|
|
January 1, 2006
|
|
Ended
|
|
|
September 30,
|
|
September 30,
|
|
to July 1,
|
|
September 30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Purchases
|
|
$
|
50.1
|
|
|
$
|
30.3
|
|
|
$
|
82.4
|
|
|
$
|
94.8
|
|
Sales
|
|
|
8.6
|
|
|
|
6.9
|
|
|
|
24.9
|
|
|
|
27.7
|
|
There were no receivables due from Anglesey at either
September 30, 2006 or December 31, 2005.
As a result of fresh start accounting, the Company decreased its
investment in Anglesey at the Effective Date by $11.6 (see
Note 1). The $11.6 difference between the Companys
share of Anglesey equity and the investment amount reflected in
the Companys balance sheet is being amortized (included in
Cost of products sold) over the period from July 2006 to
September 2009, the end of the current power contract. The
noncash amortization was approximately $.9 for the three months
ended September 30, 2006.
|
|
4.
|
Property,
Plant, and Equipment
|
The major classes of property, plant, and equipment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land and improvements
|
|
$
|
12.8
|
|
|
$
|
7.7
|
|
Buildings
|
|
|
15.7
|
|
|
|
62.4
|
|
Machinery and equipment
|
|
|
73.0
|
|
|
|
460.4
|
|
Construction in progress
|
|
|
49.7
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151.2
|
|
|
|
555.5
|
|
Accumulated depreciation
|
|
|
(2.8
|
)
|
|
|
(332.1
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
$
|
148.4
|
|
|
$
|
223.4
|
|
|
|
|
|
|
|
|
|
|
Pursuant to fresh start accounting, as more fully discussed in
Note 1, the Company adjusted its Property, plant and
equipment to its fair value as adjusted for the allocation of
the reorganization value and reset Accumulated depreciation to
zero. The fair value of most of the Companys Property,
plant and equipment was based on an independent appraisal. The
balance was based on managements estimates. As reported in
Note 1, this resulted in a net decrease in Property, plant
and equipment of $103.0. The amount of depreciation to be
recognized by the Company will be lower than the amount
historically recognized by the Predecessor.
Approximately $39.5 of the Construction in progress at
September 30, 2006, relates to the Companys Spokane,
Washington facility (see Commitments
Note 8).
16
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Secured
Debt and Credit Facilities
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Revolving Credit Facility
|
|
$
|
|
|
|
$
|
|
|
Term Loan Facility
|
|
|
50.0
|
|
|
|
|
|
Pre-Emergence Credit Agreement
|
|
|
|
|
|
|
|
|
Other borrowings (fixed rate)
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50.0
|
|
|
|
2.3
|
|
Less Current portion
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
50.0
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
On the Effective Date, the Company and certain subsidiaries of
the Company entered into a new Senior Secured Revolving Credit
Agreement with a group of lenders providing for a $200.0
revolving credit facility (the Revolving Credit
Facility), of which up to a maximum of $60.0 may be
utilized for letters of credit. Under the Revolving Credit
Facility, the Company is able to borrow (or obtain letters of
credit) from time to time in an aggregate amount equal to the
lesser of $200.0 and a borrowing base comprised of eligible
accounts receivable, eligible inventory and certain eligible
machinery, equipment and real estate, reduced by certain
reserves, all as specified in the Revolving Credit Facility. The
Revolving Credit Facility has a five-year term and matures in
July 2011, at which time all principal amounts outstanding
thereunder will be due and payable. Borrowings under the
Revolving Credit Facility bear interest at a rate equal to
either a base prime rate or LIBOR, at the Companys option,
plus a specified variable percentage determined by reference to
the then remaining borrowing availability under the Revolving
Credit Facility. The Revolving Credit Facility may, subject to
certain conditions and the agreement of lenders thereunder, be
increased up to $275.0 at the request of the Company.
Concurrent with the execution of the Revolving Credit Facility,
the Company also entered into a Term Loan and Guaranty Agreement
with a group of lenders (the Term
Loan Facility). The Term Loan Facility provides
for a $50.0 term loan and is guaranteed by the Company and
certain of its domestic operating subsidiaries. The Term
Loan Facility was fully drawn on August 4, 2006. The
Term Loan Facility has a five-year term and matures in July
2011, at which time all principal amounts outstanding thereunder
will be due and payable. Borrowings under the Term
Loan Facility bear interest at a rate equal to either a
premium over a base prime rate or LIBOR, at the Companys
option.
Amounts owed under each of the Revolving Credit Facility and the
Term Loan Facility may be accelerated upon the occurrence of
various events of default set forth in each such agreement,
including, without limitation, the failure to make principal or
interest payments when due, and breaches of covenants,
representations and warranties.
The Revolving Credit Facility is secured by a first priority
lien on substantially all of the assets of the Company and
certain of its domestic operating subsidiaries that are also
borrowers thereunder. The Term Loan Facility is secured by a
second lien on substantially all of the assets of the Company
and the Companys domestic operating subsidiaries that are
the borrowers or guarantors thereof.
Both credit facilities place restrictions on the ability of the
Company and certain of its subsidiaries to, among other things,
incur debt, create liens, make investments, pay dividends, sell
assets, undertake transactions with affiliates and enter into
unrelated lines of business.
During July 2006, the Company borrowed and repaid $8.6 under the
Revolving Credit Facility. At September 30, 2006, there
were no borrowings outstanding under the Revolving Credit
Facility, there were approximately $17.7 of outstanding letters
of credit and there was $50.0 outstanding under the Term
Loan Facility.
The debt and credit facilities of the Predecessor are discussed
in Note 16.
17
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Tax Provisions. Tax provisions for the three
and nine months ended September 30, 2006 and 2005 consist
of:
Three
Months Ended September 30, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
Three Months
|
|
|
|
through
|
|
|
|
Predecessor
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
Domestic
|
|
$
|
2.7
|
|
|
|
$
|
|
|
|
$
|
|
|
Foreign
|
|
|
5.6
|
|
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.3
|
|
|
|
$
|
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
Period from
|
|
|
Nine Months
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
to July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
Domestic
|
|
$
|
2.7
|
|
|
|
$
|
(.8
|
)
|
|
$
|
|
|
Foreign
|
|
|
5.6
|
|
|
|
|
7.0
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.3
|
|
|
|
$
|
6.2
|
|
|
$
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign taxes primarily represent Canadian income taxes and
United Kingdom income taxes in respect of the Companys
ownership interest in Anglesey.
The provision (benefit) for income tax is based on an assumed
effective rate for each applicable period.
Results of operations for discontinued operations are net of an
income tax provision (benefit) of $(.7) and $12.0 for the three
and nine months ended September 30, 2005, respectively.
For the three and nine months ended September 30, 2006 and
2005, as a result of the Chapter 11 proceedings, the
Company did not recognize any U.S. income tax benefit for
the losses incurred from its domestic operations (including
temporary differences) or any U.S. income tax benefit for
foreign income taxes. Instead, the increases in federal and
state deferred tax assets as a result of additional net
operating losses and foreign tax credits generated in 2006 and
2005 were fully offset by increases in valuation allowances.
Tax Attributes. The Company is in the process
of calculating the additional deductions, cancellation of
indebtedness incomes and other impacts of the Plan and ongoing
operations on an
entity-by-entity
basis to determine the tax attributes available. Based on
preliminary estimates, the Company believes that it will have
net operating loss carryforwards in the $500 $800
range that will be available to reduce future cash payments for
income taxes in the United States (other than alternative
minimum tax AMT) and that additional
deductions for amounts capitalized into the tax basis of
inventories (totaling an estimated $55-$100) will become
available (likely over the next two or three years). Given the
complexity of the
entity-by-entity
analysis, unique tax regulations regarding Chapter 11
proceedings and other uncertainties, these estimates remain
subject to revision and such revisions could be significant.
18
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
While the Company will have substantial tax attributes available
to offset the impact of future income taxes, for a year or more
after the emergence, the Company did not meet the more
likely than not criteria for recognition of such
attributes at the Effective Date primarily because the Company
does not have sufficient history of paying taxes. As such, the
Company recorded a full valuation allowance against the amount
of tax attributes available and no deferred tax asset was
recognized. The benefit associated with any future recognition
of tax attributes will be first utilized to reduce intangible
assets with any excess being recorded as an adjustment to
Stockholders equity rather than as a reduction of income
tax expense. Therefore, despite the existence of such tax
attributes, the Company expects to record a full statutory tax
provision in future periods and, therefore, the benefit of any
tax attributes realized will only affect future balance sheets
and statements of cash flows. If the Company ultimately
determines that it meets the more likely than not
recognition criteria, the amount of net operating loss
carryforwards would be recorded on the balance sheet and would
reduce the amount of intangible assets recognized in fresh start
accounting, until such assets are exhausted and any excess
remaining would be recorded as an adjustment to
stockholders equity.
Pursuant to the Plan, to preserve the net operating loss
carryforwards that may be available to the Company after
emergence, on the Effective Date, the Companys certificate
of incorporation was amended and restated to, among other
things, include certain restrictions on the transfer of Common
Stock and the Company and the Union VEBA, the
Companys largest stockholder, entered into a stock
transfer restriction agreement.
As more fully discussed in Note 17, it is possible that the
Company may recoup from the trustee for the liquidating trust
for Kaiser Aluminum Australia Corporation (KAAC) and
Kaiser Finance Corporation (KFC) joint plan of
liquidation (the KAAC/KFC Plan) all or some portion
of approximately $6.9 of U.S. AMT payments made during
2005. Such recovery is not reflected in the Companys
financial statements as of September 30, 2006.
In connection with fresh start accounting, the Company
recognized deferred tax liabilities of approximately $4.6. Such
liabilities primarily relate to an excess of financial statement
basis over the U.S. tax basis that is not expected to
turn-around in the
20-year
U.S. net operating loss (NOL) carry-forward
period.
Other. The Company and its subsidiaries file
income tax returns in the U.S. federal jurisdiction, and
various states and foreign jurisdictions. Certain past years are
still subject to examination by taxing authorities. The last
year examined by major jurisdiction is as follows: U.S. Federal-
1996; Canada- 1997; State and local- generally 1996. However,
use of NOLs in future periods could trigger review of attributes
and other tax matters in years that are not otherwise subject to
examination.
In accordance with the requirements of
SOP 90-7,
the Company adopted the provisions of FIN 48 on
July 1, 2006. The Company was not required to recognize any
liability for unrecognized tax benefits as a result of the
implementation of FIN 48. From July 1, 2006 to
September 30, 2006, the Company did not recognize any
additional liabilities for unrecognized tax benefits.
The Company recognizes interest accrued for unrecognized tax
benefits in interest expense and penalties in the income tax
provision. During the three months ended September 30,
2006, the Company recognized approximately $.5 in interest and
penalties. The Company had approximately $4.0 and $4.5 accrued
at July 1, 2006 and September 30, 2006, respectively,
for interest and penalties.
Income tax matters of the Predecessor are discussed in
Note 17.
|
|
7.
|
Employee
Benefit and Incentive Plans
|
Emergence
Related Compensation.
On the Effective Date:
|
|
|
|
|
The Company issued 515,150 shares of non-vested Common
Stock to executive officers and other key employees. Of the
515,150 shares issued, 480,904 shares are subject to a
three year cliff vesting requirement that lapses on July 6,
2009. The remainder vest ratably over a three year period. The
fair value of the shares
|
19
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
issued, after assuming a 5% forfeiture rate of $20.7 is being
amortized to expense over a three year period on a roughly
ratable basis.
|
|
|
|
|
|
The Companys board of directors terminated the
Companys supplemental employee retirement plan (the
SERP more fully described in Note 18) and
funded payments totaling approximately $2.3. Such amounts had
been fully accrued by the Predecessor and were included in the
Companys opening balance sheet. The SERP has been replaced
by a non-qualified defined contribution plan (the
Restoration Plan) and will restore certain benefits
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.
|
|
|
|
The Company paid $.5 in July 2006 to certain officers in respect
of deferred retention payments previously accrued by the
Predecessor. During August 2006, the Company paid $5.1 in
respect of the pre-emergence long term incentive plan
(LTI). Another $3.4 of LTI payments is due in July
2007 and approximately $.5 was determined to have been resolved
pursuant to the Plan. The LTI amounts had been fully accrued by
the Predecessor.
|
|
|
|
Certain employment agreements between the Company and members of
management became effective. Additionally, other members of
management continue to retain certain pre-emergence contractual
arrangements. In particular, the terms of the severance and
change in control agreements implemented as a part of the key
employee retention plan (the KERP) survive after the
Effective Date for a period of one year and for a period ending
two years following a change in control, respectively, in each
case unless superseded by another agreement (see Note 18).
|
Incentive
Plans and Certain Other Plans.
Incentive plans for management and key employees include the
following:
|
|
|
|
|
A short term incentive compensation plan for management payable
in cash and which is based primarily on earnings, adjusted for
certain safety and performance factors. Most of the
Companys locations also have similar programs for both
hourly and salaried employees.
|
|
|
|
A stock based long term incentive plan for key managers. As more
fully discussed in Emergence Related Compensation above,
an initial, emergence-related award was made under this plan.
Additional awards are expected to be made in future years.
|
In early August 2006, the Company granted approximately 6,237
non-vested shares of Common Stock to its non-employee directors.
The shares vest in August 2007. The number of shares issued was
based on the approximate $43.00 per share average closing
price between July 18, 2006 and July 31, 2006. The
fair value of the non-vested stock grant ($.3), based on the
fair value of the shares at date of issuance, is being amortized
to earnings on a ratable basis over the vesting period. An
additional approximate 4,273 shares of vested Common Stock
were issued to non-employee directors electing to receive shares
of Common Stock in lieu of all or a portion of their annual
retainer fee. The fair value of the shares ($.2), based on the
fair value of the shares at date of issuance, was recognized in
earnings in the quarter ended September 30, 2006 as a
period expense.
Pension
and Similar Plans.
Pensions and similar plans include:
|
|
|
|
|
A commitment to provide one or more defined contribution plan(s)
as a replacement for the five defined benefit pension plans for
hourly bargaining unit employees at four of the Companys
production facilities and one inactive operation (the
Hourly DB Plans). The Hourly DB Plans at the four
production facilities will, as more fully discussed in
Note 8, likely be terminated during the fourth quarter of
2006, effective as of October 10, 2006 pursuant to a court
ruling received in July 2006. It is anticipated that the
replacement defined contribution plans for the production
facilities will provide for an annual contribution of one dollar
|
20
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
per hour worked by bargaining unit employee and, in certain
instances, will provide for certain matching of contributions.
|
|
|
|
|
|
A defined contribution savings plan for hourly bargaining unit
employees (the Hourly DC Plan) at all of the
Companys other production facilities (not covered by the
Hourly DB Plans). Pursuant to the terms of Hourly DC Plan, the
Company will be required to make annual contributions to the
Steelworkers Pension Trust on the basis of one dollar per United
Steelworkers (USW) employee hour worked at two
facilities. The Company will also be required to make
contributions to a defined contribution savings plan for active
USW employees that will range from eight hundred dollars to
twenty-four hundred dollars per employee per year, depending on
the employees age. Similar defined contribution savings
plans have been established for non-USW hourly employees subject
to collective bargaining agreements. The Company currently
estimates that contributions to all such plans will range from
$3.0 to $6.0 per year.
|
|
|
|
A defined contribution savings plan for salaried and
non-bargaining unit hourly employees (the Salaried DC
Plan) providing for a match of certain contributions made
by employees plus a contribution of between 2% and 10% of their
salary depending on their age and years of service.
|
Postretirement
Medical Obligations.
As a part of the Companys reorganization efforts, the
Predecessors postretirement medical plan was terminated in
2004. Participants were given the option of COBRA coverage or
participation in the applicable (Union or Salaried) VEBA. All
past and future bargaining unit employees are covered by the
Union VEBA. The Salaried VEBA covers all other retirees
including employees who retired prior to the 2004 termination of
the prior plan or who retire with the required age and service
requirements so long as their employment commenced prior to
February 2002. The benefits being paid by the VEBAs are at the
sole discretion of the respective VEBA trustees and are outside
the Companys control.
During the course of the reorganization process, $49.7 of
contributions were made to the VEBAs, of which $12.7 is
available to reduce post emergence payments that may become due
pursuant to an annual variable cash requirement discussed below.
At emergence the Salaried VEBA received rights to
1,940,100 shares of the Companys newly issued Common
Stock. However, prior to the Companys emergence, the
Salaried VEBA sold its rights to approximately
940,200 shares and received net proceeds of approximately
$31. The remaining approximately 999,900 shares of the
Companys Common Stock held by the Salaried VEBA at
July 1, 2006 are unrestricted. At emergence, the Union VEBA
received rights to 11,439,900 shares of the Companys
newly issued Common Stock. However, prior the Companys
emergence, the Union VEBA sold its rights to approximately
2,630,000 shares and received net proceeds of approximately
$81. The Union VEBA is subject to an agreement that limits its
ability to sell or otherwise transfer more than approximately
2,518,000 shares of the Companys Common Stock owned
at July 1, 2006 during the two years following the
emergence date.
Going forward, the Companys only obligation to the VEBAs
is an annual variable cash contribution. The amount to be
contributed to the VEBAs will be 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 will not
exceed $20.0 and will also be 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
will be determined on an annual basis and payable no later than
March 31st of the following year. However, the Company has
the ability to offset amounts that would otherwise be due to the
VEBAs with approximately $12.7 of excess contributions made to
the VEBAs prior to the Effective Date.
21
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For accounting purposes, after discussions with the Securities
and Exchange Commission, the Company has concluded that the
postretirement medical benefits to be paid by the VEBAs and the
Companys related annual variable contribution obligations
should be treated as defined benefit post-retirement plan with
the current VEBA assets and future variable contributions
described above, and earnings thereon, operate as a cap on the
benefits to be paid. As such, while the Companys only
obligation to the VEBAs is to pay the annual variable
contribution amount, the Company must account for net periodic
postretirement benefit costs in accordance with Statement of
Financial Accounting Standards No 106, Employers
Accounting for Postretirement Benefits other than Pensions
(SFAS No. 106) and record any
difference between the assets of each VEBA and its accumulated
postretirement benefit obligation (APBO) in the
Companys financial statements. Such information will have
to be obtained from the Salaried VEBA and Union VEBA on a
periodic basis. In general, as more fully described below, given
the significance of the assets currently and expected to be
available to the VEBAs in the future and the current level of
benefits, the cap does not impact the computation of the APBO.
However, should the benefit formulas being used by the VEBAs
increase and/or if the assets were to substantially decrease, it
is possible that existing assets may be insufficient alone to
fund such benefits and that the benefits to be paid in future
periods could be reduced to the amount of annual variable
contributions reasonably expected to be paid by the Company in
those years. Any such limitations would also have to consider
any remaining amount of excess pre-emergence VEBA contributions
made.
Key assumptions made in computing the net obligation of each
VEBA and in total include:
With respect to VEBA assets:
|
|
|
|
|
The 6,291,945 shares of the Companys Common Stock held by
the Union VEBA that are not currently 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.
|
|
|
|
The unrestricted shares of stock held by each VEBA have been
valued at the fresh-start date at the fair value of
$43.68 per share.
|
|
|
|
The Company has assumed that each VEBA will achieve a long term
rate of return of approximately 5.5% on its assets. The
long-term rate of return assumption is based on the
Companys expectation of the investment strategies to be
utilized by the VEBAs trustees.
|
|
|
|
The annual variable payment obligation has been treated as a
funding/contribution policy and not counted as a VEBA asset.
|
With respect to VEBA obligations:
|
|
|
|
|
The APBO for each VEBA has been computed based on the level of
benefits being provided by each VEBA at July 1, 2006.
|
|
|
|
The present value has been computed using a discount rate of
return of 6.25%
|
|
|
|
Since the Salaried VEBA is currently paying a fixed annual
amount to its constituents, 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 12%
has been assumed and the trend rate is assumed to decline to 5%
by 2013. The trend rate used by the Company is based on
information provided by the Union VEBA.
|
22
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following recaps the net assets of each VEBA as of
July 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Union VEBA
|
|
|
Salaried VEBA
|
|
|
Total
|
|
|
APBO
|
|
$
|
(211.2
|
)
|
|
$
|
(50.8
|
)
|
|
$
|
(262.0
|
)
|
Plan Assets
|
|
|
213.3
|
|
|
|
81.9
|
|
|
|
295.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset
|
|
$
|
2.1
|
|
|
$
|
31.1
|
|
|
$
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys results of operations will include 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.
Future payments of annual variable contributions will first be
applied to reduce any individual VEBA obligations recorded in
the Companys balance sheet at that time. Any remaining
amount of annual variable contributions in excess of recorded
obligations will be recorded as a VEBA asset in the balance
sheet. No accounting recognition has been accorded to the $12.7
of excess pre-emergence VEBA contributions at this time.
Components of Net Periodic Benefit Cost and Cash Flow and
Charges. The following tables present the
components of net periodic pension benefits cost for the three
and nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
Three Months
|
|
|
|
through
|
|
|
|
Predecessor
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
.3
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans
(including service costs of $.2, $ and $.3)
|
|
|
.2
|
|
|
|
|
|
|
|
|
.3
|
|
Defined contributions plans
|
|
|
1.7
|
|
|
|
|
|
|
|
|
1.8
|
|
Retroactive impact of 401(k)
adoption included in other operating charges
|
|
|
|
|
|
|
|
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.2
|
|
|
|
$
|
|
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
Period from
|
|
|
Nine Months
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
to July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
.3
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans
(including service costs of $.2, $.6 and $.8)
|
|
|
.2
|
|
|
|
|
.8
|
|
|
|
1.1
|
|
Defined contributions plans
|
|
|
1.7
|
|
|
|
|
4.1
|
|
|
|
5.2
|
|
Retroactive impact of 401(k)
adoption included in other operating charges
|
|
|
|
|
|
|
|
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.2
|
|
|
|
$
|
4.9
|
|
|
$
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 9 of Notes to Consolidated Financial Statements
included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005 for key assumptions
with respect to the Companys pension plans and
post-retirement benefit plans.
The following tables present the allocation of these charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
Three Months
|
|
|
|
through
|
|
|
|
Predecessor
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
Fabricated products segment
|
|
$
|
1.8
|
|
|
|
$
|
|
|
|
$
|
2.1
|
|
Corporate segment
|
|
|
.4
|
|
|
|
|
|
|
|
|
|
|
Other operating charges
(Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.2
|
|
|
|
$
|
|
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
Period from
|
|
|
Nine Months
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
to July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
Fabricated products segment
|
|
$
|
1.8
|
|
|
|
$
|
4.5
|
|
|
$
|
6.1
|
|
Corporate segment
|
|
|
.4
|
|
|
|
|
.4
|
|
|
|
.2
|
|
Other operating charges
(Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.2
|
|
|
|
$
|
4.9
|
|
|
$
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For all periods presented, substantially all of the Fabricated
products segments related charges are in Cost of products
sold with the balance being in Selling, administrative, research
and development and general expense.
24
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amount related to the retroactive implementation of the
Salaried DC Plan was paid in July 2005. In September 2005, the
Company and the USW amended a prior agreement to provide, among
other things, for the Company to contribute per employee amounts
to the Steelworkers Pension Trust totaling approximately
$.9. The amended agreement was approved by the Bankruptcy Court
and such amount was recorded in the fourth quarter of 2005.
The Successor also paid benefits applicable to the Predecessor
(see Emergence Related Compensation above).
Employee benefit and incentive plans of the Predecessor are
discussed in Note 18.
|
|
8.
|
Commitments
and Contingencies
|
Commitments. The Company and its subsidiaries
have a variety of financial commitments, including purchase
agreements, forward foreign exchange and forward sales contracts
(see Note 9), letters of credit and guarantees. They also
have agreements to supply alumina to and to purchase aluminum
from Anglesey (see Note 3). During the third quarter of
2005 and August 2006, orders were placed for certain equipment
and/or
services intended to augment the heat treat and aerospace
capabilities at the Trentwood facility in Spokane, Washington in
respect of which the Company expects to become obligated for
costs likely to total in the range of $105.0. Approximately
$45.0 of such costs was incurred in 2005 and through the first
nine months of 2006. The balance is expected to be incurred
primarily over the remainder of 2006 and 2007, with the majority
of the remaining costs being incurred in 2007.
Minimum rental commitments under operating leases at
December 31, 2005, are as follows: years ending
December 31, 2006 $2.6; 2007 $1.7;
2008 $1.4; 2009 $1.3; 2010
$.3; thereafter $.1. Rental expenses, after
excluding rental expenses of discontinued operations, were $3.6,
$3.1 and $8.6 for the years ended December 31, 2005, 2004
and 2003, respectively. Rental expenses of discontinued
operations were $4.9 and $6.6 for the years ended
December 31, 2004 and 2003, respectively.
Environmental Contingencies. The Company and
its subsidiaries are subject to a number of environmental laws
and regulations, to fines or penalties assessed for alleged
breaches of the environmental laws, and to claims and litigation
based upon such laws and regulations.
A substantial portion of the Companys obligations,
primarily in respect of non-owned locations, were resolved by
the Chapter 11 proceedings. Based on the Companys
evaluation of remaining environmental matters, the Company has
environmental accruals totaling approximately $9.2 at
September 30, 2006. Such amounts are primarily related to
potential solid waste disposal and soil and groundwater
remediation matters. These environmental accruals represent the
Companys estimate of costs reasonably expected to be
incurred based on presently enacted laws and regulations,
currently available facts, existing technology, and the
Companys assessment of the likely remediation action to be
taken. In the ordinary course, the Company expects that these
remediation actions will be taken over the next several years
and estimates that expenditures to be charged to these
environmental accruals will be approximately $4.0 during the
fourth quarter of 2006, in the range of $1.0 to $4.0 per
year for the years 2007 through 2010 and an aggregate of
approximately $6.0 thereafter.
As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of
remediation are established or alternative technologies are
developed, changes in these and other factors may result in
actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs
associated with these environmental matters may exceed current
accruals by amounts that could range, in the aggregate, up to an
estimated $15.0. As the resolution of these matters is subject
to further regulatory review and approval, no specific assurance
can be given as to when the factors upon which a substantial
portion of this estimate is based can be expected to be
resolved. However, the Company is currently working to resolve
certain of these matters.
25
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other Environmental Matters. The Company is
working with regulatory authorities and performing studies and
remediation pursuant to several consent orders with the State of
Washington relating to the historical use of oils containing
PCBs at our Trentwood facility in Spokane, Washington before
1978. During April 2004, the Company was served with a subpoena
for documents and has been notified by Federal authorities that
they are investigating certain environmental compliance issues
with respect to the Companys Trentwood facility in
Spokane, Washington. This investigation is ongoing. The Company
undertook its own internal investigation of the matter through
specially retained counsel to ensure that it has all relevant
facts regarding Trentwoods compliance with applicable
environmental laws. The Company believes it is currently in
compliance in all material respects with all applicable
environmental law and requirements at the facility. The Company
intends to defend any claims or charges, if any which may
result, vigorously. The Company cannot, however, assess what, if
any, impact this matter may have on the Companys financial
statements.
Contingencies Regarding Settlement with the
PBGC. As more fully described in Note 18, in
response to the January 2004 Debtors motion to terminate
or substantially modify substantially all of the Debtors
defined benefit pension plans, the Bankruptcy Court ruled that
the Company had met the factual requirements for distress
termination as to all of the plans at issue. The PBGC appealed
the Bankruptcy Courts ruling. However, as more fully
discussed in Note 18, while PBGCs appeal was pending,
the Company and the PBGC reached a settlement under which the
PBGC agreed to assume the Terminated Plans (as defined in
Note 18). The Bankruptcy Court approved this settlement in
January 2005. The Company believed that, subject to the Plan and
the Liquidating Plans complying with the terms of the PBGC
settlement, all issues in respect of such matters were resolved.
However, despite the settlement with the PBGC, the intermediate
appellate court proceeded to consider the PBGCs earlier
appeal and issued a ruling dated March 31, 2005 affirming
the Bankruptcy Courts rulings regarding distress
termination of all such plans. In July 2005, the Company and the
PBGC reached an agreement, which was approved by the Bankruptcy
Court in September 2005, under which the PBGC agreement
previously approved by the Bankruptcy Court was amended to
permit the PBGC to further appeal the intermediate appellate
court ruling. Under the terms of the amended PBGC agreement, if
the PBGC were to prevail in the further appeal, all aspects of
the previously approved PBGC agreement would remain the same. On
the other hand, under the amended agreement, if the intermediate
appellate court ruling was upheld on further appeal, the PBGC
would be required to: (a) approve the distress termination
of the remaining defined benefit pension plans; and
(b) reduce the amount of the administrative claim to $11.0
(from $14.0). Under the amended agreement, both the Company and
the PBGC agreed to take up no further appeals. Pending a final
resolution of this matter, the Companys settlement with
the PBGC remained in full force and effect. Upon consummation of
the two separate plans of liquidation (collectively, the
Liquidating Plans) in December 2005, the $11.0
minimum was paid to the PBGC.
In July 2006, the United States Third Circuit Court of Appeals
affirmed the intermediate appellate courts ruling
upholding the Bankruptcy Courts finding that the factual
requirements for distress termination of all defined benefit
plans had been met. Accordingly, four of the five remaining
plans likely will be terminated during the fourth quarter of
2006, effective as of October 10, 2006 and replaced by
defined contribution plans similar to the Hourly DB Plans
described in Note 7. As a result of the July 2006 ruling,
the $3.0 of previously recorded administrative claim included in
the Companys opening balance sheet was credited to Other
operating charges (credits), net in July 2006 (see
Note 10). The expected termination of the plans is expected
to have an immaterial impact on the Companys operating
results as the plan obligations were adjusted to fair value in
fresh start accounting.
The indenture trustee for KACCs senior subordinated notes
appealed the Bankruptcy Courts order approving the
settlement with the PBGC. In March 2006, the first level
appellate court affirmed the Bankruptcy Courts approval of
the settlement with the PBGC.
Other Contingencies. The Company and its
subsidiaries are involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters related
to past or present operations. While uncertainties are inherent
in the final outcome of such matters, and it is presently
impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of
such uncertainties and the
26
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
incurrence of such costs should not have a material adverse
effect on the Companys consolidated financial position,
results of operations, or liquidity.
Commitment and contingencies of the Predecessor are discussed in
Note 19.
|
|
9.
|
Derivative
Financial Instruments and Related Hedging Programs (affecting
both the successor and predecessor)
|
In conducting its business, the Company uses various
instruments, including forward contracts and options, to manage
the risks arising from fluctuations in aluminum prices, energy
prices and exchange rates. The Company has historically entered
into derivative transactions from time to time to limit its
exposure resulting from (1) its anticipated sales of
primary aluminum and fabricated aluminum products, net of
expected purchase costs for items that fluctuate with aluminum
prices, (2) the energy price risk from fluctuating prices
for natural gas used in its production process, and
(3) foreign currency requirements with respect to its cash
commitments with foreign subsidiaries and affiliates. As the
Companys hedging activities are generally designed to
lock-in a specified price or range of prices, realized gains or
losses on the derivative contracts utilized in the hedging
activities (excluding the impact of
mark-to-market
fluctuations on those contracts discussed below) generally
offset at least a portion of any losses or gains, respectively,
on the transactions being hedged.
The Companys share of primary aluminum production from
Anglesey is approximately 150,000,000 pounds annually. Because
the Company purchases alumina for Anglesey at prices linked to
primary aluminum prices, only a portion of the Companys
net revenues associated with Anglesey are exposed to price risk.
The Company estimates the net portion of its share of Anglesey
production exposed to primary aluminum price risk to be
approximately 100,000,000 pounds annually (before considering
income tax effects).
As stated above, the Companys pricing of fabricated
aluminum products is generally intended to lock-in a conversion
margin (representing the value added from the fabrication
process(es)), and to pass metal price risk on to its customers.
However, in certain instances the Company does enter into firm
price arrangements. In such instances, the Company does have
price risk on its anticipated primary aluminum purchase in
respect of the customers order. Total fabricated products
shipments during the nine months ended September 30, 2005,
the period from January 1, 2006 to July 1, 2006 and
the period from July 1, 2006 through September 30,
2006 that contained fixed price terms were (in millions of
pounds) 109.6, 103.9 and 49.1, respectively.
During the last three years the volume of fabricated products
shipments with underlying primary aluminum price risk were at
least as much as the Companys net exposure to primary
aluminum price risk at Anglesey. As such, the Company considers
its access to Anglesey production overall to be a
natural hedge against any fabricated products firm
metal-price risk. However, since the volume of fabricated
products shipped under firm prices may not match up on a
month-to-month
basis with expected Anglesey-related primary aluminum shipments,
the Company may use third party hedging instruments to eliminate
any net remaining primary aluminum price exposure existing at
any time.
At September 30, 2006, the fabricated products business
held contracts for the delivery of fabricated aluminum products
that have the effect of creating price risk on anticipated
purchases of primary aluminum during the last quarter of 2006
and for the period 2007 2010 totaling approximately
(in millions of pounds): 2006: 69.0, 2007: 116.0, 2008: 94.0,
2009: 71.0 and 2010: 72.0.
27
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys material
derivative positions at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Carrying/
|
|
|
|
|
|
Contracts
|
|
|
Market
|
|
Commodity
|
|
Period
|
|
(mmlbs)
|
|
|
Value
|
|
|
Aluminum
|
|
|
|
|
|
|
|
|
|
|
Option sale contracts
|
|
1/11 through 12/11
|
|
|
48.9
|
|
|
$
|
3.7
|
|
Fixed priced purchase contracts
|
|
10/06 through 12/07
|
|
|
50.5
|
|
|
|
(1.2
|
)
|
Fixed priced sales contracts
|
|
1/07 through 12/09
|
|
|
44.1
|
|
|
|
(.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Carrying/
|
|
|
|
|
|
Contracts
|
|
|
Market
|
|
Foreign Currency
|
|
Period
|
|
(mm)
|
|
|
Value
|
|
|
Pounds Sterling
|
|
|
|
|
|
|
|
|
|
|
Option sales contracts
|
|
10/06 through 12/07
|
|
|
52.5
|
|
|
$
|
.1
|
|
Fixed priced purchase contracts
|
|
10/06 through 12/07
|
|
|
52.5
|
|
|
|
6.2
|
|
Euro Dollars
|
|
|
|
|
|
|
|
|
|
|
Fixed priced purchase contracts
|
|
10/06 through 1/08
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Carrying/
|
|
|
|
|
|
|
Contracts
|
|
|
Market
|
|
Energy
|
|
Period
|
|
|
(mmbtu)
|
|
|
Value
|
|
|
Natural gas
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed priced purchase contracts(a)
|
|
|
10/06 through 3/08
|
|
|
|
1,390,000
|
|
|
$
|
(2.6
|
)
|
|
|
|
(a) |
|
When the hedges in place as of September 30, 2006 are
combined with price limits in the Companys physical supply
agreement, the Companys exposure to increases in natural
gas prices has been substantially limited for approximately 76%
of the natural gas purchases for October 2006 through December
2006 and approximately 31% of the natural gas purchases for
January 2007 through March 2007 and 14% of natural gas purchases
for April 2007 through June 2007. |
As more fully discussed in Notes 2 and 15, the Company
currently reflects changes in the market value of its derivative
instruments in Net income (rather than deferring such
gains/losses to the date of the underlying transactions to which
the related hedges occur). Included in Net income for the period
from July 1, 2006 through September 30, 2006 and the
nine months ended September 30, 2006, were realized losses
of $3.1 and $.1 respectively, and unrealized gains(losses) of
$(.6) and $5.5, respectively. Included in Net income for the
three and nine months ended September 30, 2005 were
realized losses of $.5 and $1.8 and unrealized losses of $1.0
and $4.5, respectively.
|
|
10.
|
Other
Operating Charges (Credits), Net
|
Other operating charges (credits), net include an adjustment of
approximately $3.0 in the period from July 1, 2006 to
September 30, 2006 to decrease long-term liabilities in
respect of the resolution of a pre-emergence
contingency related to a PBGC matter that was pending at the
opening balance sheet date (see Note 8
Corporate). Other operating charges (credits), net for the
period from January 1, 2006 to July 1, 2006 include
the settlement of a pre-petition claim of $.9 (Fabricated
products business unit). Other operating charges (credits), net
for the three and nine months ended September 30, 2005,
included charges totaling $.3 and $5.9, respectively, associated
with the 2004 portion of the Companys defined contribution
plans, which were implemented in March 2005 (see
Note 7 Fabricated products business unit; $.2
for the three months and $5.4 for the nine months and Corporate:
$.1 for the three months and $.5 for the nine months). Other
operating charges (credits), net for the nine months ended
28
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2005, also included a charge totaling $.6
related to termination of the Houston, Texas administrative
office lease in connection with the combination of the Corporate
headquarters into the existing Fabricated products headquarters.
|
|
11.
|
Segment
and Geographical Area Information
|
The Companys primary line of business is the production of
fabricated aluminum products. In addition, the Company owns a
49% interest in Anglesey, which owns an aluminum smelter in
Holyhead, Wales. Historically, the Company, through its wholly
owned subsidiary, KACC, operated in all principal sectors of the
aluminum industry including the production and sale of bauxite,
alumina and primary aluminum in domestic and international
markets. However, as previously disclosed, as a part of the
Companys reorganization efforts, the Company sold
substantially all of its commodities operations. The balances
and results in respect of such operations are considered
discontinued operations (see Note 14). The amounts
remaining in Primary aluminum relate primarily to the
Companys interests in and related to Anglesey and the
Companys primary aluminum hedging-related activities.
The Companys continuing operations are organized and
managed by product type and include two operating segments of
the aluminum industry and the corporate segment. The two
aluminum industry segments are: Fabricated products and Primary
aluminum. The Fabricated products business unit sells
value-added products such as heat treat aluminum sheet and
plate, extrusions and forgings which are used in a wide range of
industrial applications, including for automotive, aerospace and
general engineering end-use applications. The Primary aluminum
business unit produces commodity grade products as well as
value-added products such as ingot and billet, for which the
Company receives a premium over normal commodity market prices
and conducts hedging activities in respect of the Companys
exposure to primary aluminum price risk. The accounting policies
of the segments are the same as those described in Note 2.
Business unit results are evaluated internally by management
before any allocation of corporate overhead and without any
charge for income taxes, interest expense or Other operating
charges (credits), net. See Note 15 of Notes to
Consolidated Financial Statements in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2005 for further
information regarding segments.
29
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financial information by operating segment, excluding
discontinued operations, for the three and nine months ended
September 30, 2006 and 2005, is as follows:
Three
Months Ended September 30, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
Three Months
|
|
|
|
through
|
|
|
|
Predecessor
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products
|
|
$
|
281.6
|
|
|
|
$
|
|
|
|
$
|
235.9
|
|
Primary Aluminum
|
|
|
49.8
|
|
|
|
|
|
|
|
|
35.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
331.4
|
|
|
|
$
|
|
|
|
$
|
271.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products(1)
|
|
$
|
29.1
|
|
|
|
$
|
|
|
|
$
|
25.7
|
|
Primary Aluminum
|
|
|
2.8
|
|
|
|
|
|
|
|
|
5.2
|
|
Corporate and Other
|
|
|
(13.1
|
)
|
|
|
|
|
|
|
|
(10.9
|
)
|
Other Operating Charges (Credits),
Net Note 10
|
|
|
2.9
|
|
|
|
|
|
|
|
|
(.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
|
|
$
|
21.7
|
|
|
|
$
|
|
|
|
$
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products
|
|
$
|
2.7
|
|
|
|
$
|
|
|
|
$
|
4.9
|
|
Corporate and Other
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.8
|
|
|
|
$
|
|
|
|
$
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Canada
|
|
|
.4
|
|
|
|
|
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
.4
|
|
|
|
$
|
|
|
|
$
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Nine
Months Ended September 30, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
Predecessor
|
|
|
Nine Months
|
|
|
|
through
|
|
|
|
Period from
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
January 1, 2006
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
to July 1, 2006
|
|
|
2005
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products
|
|
$
|
281.6
|
|
|
|
$
|
590.9
|
|
|
$
|
707.7
|
|
Primary Aluminum
|
|
|
49.8
|
|
|
|
|
98.9
|
|
|
|
108.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
331.4
|
|
|
|
$
|
689.8
|
|
|
$
|
815.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products(1)
|
|
$
|
29.1
|
|
|
|
$
|
61.2
|
|
|
$
|
66.3
|
|
Primary Aluminum
|
|
|
2.8
|
|
|
|
|
12.4
|
|
|
|
13.4
|
|
Corporate and Other
|
|
|
(13.1
|
)
|
|
|
|
(20.3
|
)
|
|
|
(27.7
|
)
|
Other Operating Charges (Credits),
Net Note 10
|
|
|
2.9
|
|
|
|
|
(.9
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
|
|
$
|
21.7
|
|
|
|
$
|
52.4
|
|
|
$
|
45.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products
|
|
$
|
2.7
|
|
|
|
$
|
9.7
|
|
|
$
|
14.8
|
|
Corporate and Other
|
|
|
.1
|
|
|
|
|
.1
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.8
|
|
|
|
$
|
9.8
|
|
|
$
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
|
|
|
|
$
|
.2
|
|
|
$
|
|
|
Canada
|
|
|
.4
|
|
|
|
|
1.0
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
.4
|
|
|
|
$
|
1.2
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating results for the period from July 1, 2006 through
September 30, 2006 include a LIFO inventory benefit of
$3.3. Operating results for the period from January 1, 2006
to July 1, 2006 include a LIFO inventory charge of $21.7. |
|
(2) |
|
Income taxes paid exclude foreign income tax paid by
discontinued operations of $6.5 and $16.9, respectively, for the
three and nine months ended September 30, 2005. |
31
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
PREDECESSOR
|
|
12.
|
Summary
of Significant Accounting Policies
|
The accompanying unaudited consolidated financial statements of
the Predecessor were prepared on a going concern
basis in accordance with
SOP 90-7,
and do not include the impacts of the Plan including adjustments
relating to recorded asset amounts, the resolution of
liabilities subject to compromise, or the cancellation of the
interests of the Companys pre-emergence stockholders.
In most instances, but not all, the accounting policies of the
Predecessor were the same or similar to those of the Successor.
Where accounting policies differed or the Predecessor applied
methodologies differently to its financial statement information
than that which is used in preparing and presenting Successor
financial statement information, discussion has been added to
this Report in the appropriate section of the Successor notes.
For a recap of the Predecessors significant accounting
policies, see Note 2 of Notes to Consolidated Financial
Statements in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005.
|
|
13.
|
Reorganization
Proceedings
|
Background. Kaiser, KACC, and 24 of
KACCs subsidiaries filed separate voluntary petitions in
the Bankruptcy Court for reorganization under Chapter 11 of
the Code; the Company, KACC and 15 of KACCs subsidiaries
(the Original Debtors) filed in the first quarter of
2002 and nine additional KACC subsidiaries (the Additional
Debtors) filed in the first quarter of 2003. The Company,
KACC and the KACC subsidiaries continued to manage their
businesses in the ordinary course as
debtors-in-possession
subject to the control and administration of the Bankruptcy
Court. The Original Debtors and the Additional Debtors are
collectively referred to herein as the Debtors. For
purposes of this Report the term Filing Date means
with respect to any Debtor, the date on which such Debtor filed
its Chapter 11 proceeding.
The Original Debtors found it necessary to file the
Chapter 11 proceedings primarily because of liquidity and
cash flow problems of the Company and its subsidiaries that
arose in late 2001 and early 2002. The Company was facing
significant near-term debt maturities at a time of unusually
weak aluminum industry business conditions, depressed aluminum
prices and a broad economic slowdown that was further
exacerbated by the events of September 11, 2001. In
addition, the Company had become increasingly burdened by
asbestos litigation and growing legacy obligations for retiree
medical and pension costs. The confluence of these factors
created the prospect of continuing operating losses and negative
cash flows, resulting in lower credit ratings and an inability
to access the capital markets. The Chapter 11 proceedings
filed by the Additional Debtors were commenced, among other
reasons, to protect the assets held by these Debtors against
possible statutory liens that might have arisen and been
enforced by the PBGC.
Reorganizing Debtors; Entities Containing the Fabricated
Products and Certain Other Operations. On
February 6, 2006, the Bankruptcy Court entered an order
(the Confirmation Order) confirming the Plan, On
May 11, 2006, the District Court for the District of
Delaware entered an order affirming the Confirmation Order and
adopting the Bankruptcy Courts findings of fact and
conclusions of law regarding confirmation of the Plan. On
July 6, 2006, the Plan became effective and was
substantially consummated, whereupon the Company emerged from
Chapter 11.
Pursuant to the Plan, on the Effective Date, the pre-emergence
ownership interests in the Company were cancelled without
consideration and all material pre-petition claims against the
Company, KACC and their remaining debtor subsidiaries, including
claims in respect of debt, pension and post-retirement medical
obligations,
32
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and asbestos and other tort liabilities (totaling approximately
$4.4 billion in the June 30, 2006 consolidated
financial statements), were resolved as follows:
(a) Claims in Respect of Retiree Medical Obligations.
Pursuant to settlements reached with representatives of hourly
and salaried retirees:
|
|
|
|
|
an aggregate of 11,439,900 shares of the Companys
Common Stock were delivered to the Hourly VEBA trust and
entities that prior to the Effective Date acquired from the
Union VEBA rights to receive a portion of such shares (see
Note 7); and
|
|
|
|
an aggregate of 1,940,100 shares of Common Stock were
delivered to the Salaried Retiree VEBA trust and entities that
prior to the Effective Date acquired from the Salaried Retiree
VEBA rights to receive a portion of such shares (see
Note 7).
|
(b) Priority Claims and Secured Claims. All pre-petition
priority claims, pre-petition priority tax claims and
pre-petition secured claims were paid in full in cash.
(c) Unsecured Claims. With respect to pre-petition
unsecured claims (other than the personal injury claims
specified below):
|
|
|
|
|
all pre-petition unsecured claims of the PBGC against the
Companys Canadian debtor affiliates were satisfied by the
delivery of 2,160,000 shares of Common Stock and $2.5 in
cash; and
|
|
|
|
all pre-petition general unsecured claims against the Company,
KACC and their remaining debtor subsidiaries, other than
Canadian debtor subsidiaries, including claims of the PBGC and
holders of public debt, were satisfied by the issuance of
4,460,000 shares of Common Stock to a third-party
disbursing agent, with such shares to be delivered to the
holders of such claims in accordance with the terms of the Plan
(to the extent that such claims do not constitute convenience
claims that have been or will be satisfied with cash payments).
Of such 4,460,000 shares of Common Stock, approximately
331,000 shares were being initially held by the third-party
disbursing agent as a reserve pending resolution of disputed
claims; to the extent a holder of a disputed claim is not
entitled to shares reserved in respect of such claim, such
shares will be distributed to holders of allowed claims.
|
(d) Personal Injury Claims. Certain trusts (the PI
Trusts) were formed to receive distributions from the
Company, assume responsibility from the Company for personal
injury liabilities (including those resulting from alleged
pre-petition exposures to asbestos, silica and coal tar pitch
volatiles and noise-induced hearing loss), and to make payments
in respect of such personal injury claims. The Company
contributed to the PI Trusts:
|
|
|
|
|
the rights with respect to proceeds associated with personal
injury-related insurance recoveries that were reflected on the
Companys financial statements at June 30, 2006 as a
receivable having a value of $963.3 (see Note 19);
|
|
|
|
$13.0 in cash, less approximately $.3 advanced prior to the
Effective Date, which was paid on the Effective Date;
|
|
|
|
the stock of a subsidiary whose primary assets was approximately
145 acres of real estate located in Louisiana and the
rights as lessor under a lease agreement for such real property
that produces modest rental income; and
|
|
|
|
75% of a pre-petition general unsecured claim against KACC in
the amount of $1.1 billion entitling certain of the PI
Trusts to a share of the 4,460,000 shares of Common Stock
distributed to unsecured claimholders.
|
The PI Trusts assumed all liability and responsibility for the
past, pending and future personal injury claims resulting from
alleged pre-petition exposures to asbestos, silica and coal tar
pitch volatile, and pending noise
33
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
induced hearing loss personal injury claims. As of the Effective
Date, injunctions were entered prohibiting any person from
pursuing any claims against the Company or any of its affiliates
in respect of such matters.
Cash payments on the Effective Date for priority and secured
claims, payments to the PI Trusts, bank and professional fees
totaled approximately $29.0 and were funded using existing cash
resources.
Liquidating Debtors. As previously disclosed
in prior periods, the Company generated net cash proceeds of
approximately $686.8 from the sale of its interests in and
related to Queensland Alumina Limited (QAL) and
Alumina Partners of Jamaica (Alpart). The
Companys interests in and related to QAL and Alpart were
owned by certain subsidiaries of KACC (the Liquidating
Subsidiaries) that were subsidiary guarantors of the
KACCs senior and senior subordinated notes. Throughout
2005, the proceeds were held in separate escrow accounts pending
distribution to the creditors of the Liquidating Subsidiaries.
On December 20, 2005, the Bankruptcy Court entered an order
confirming the Liquidating Plans for the Liquidating
Subsidiaries. On December 22, 2005, the Liquidating Plans
became effective and all restricted cash and other assets held
on behalf of or by the Liquidating Subsidiaries, consisting
primarily of approximately $686.8 of net cash proceeds from the
sale of interests in and related to QAL and Alpart, were
transferred to a trustee for subsequent distribution to holders
of claims against the Liquidating Subsidiaries in accordance
with the terms of the Liquidating Plans. In connection with the
Liquidating Plans, the Liquidating Subsidiaries were dissolved
and their corporate existence was terminated.
When the Liquidating Plans became effective, substantially all
amounts were to be paid to (or received by) KACC from/to the
creditors of the Liquidating Subsidiaries pursuant to the
Intercompany Settlement Agreement (the Intercompany
Agreement), other than certain payments of alternative
minimum tax paid by the Company. The Company expects to receive
any amounts ultimately determined to be due from the KAAC/KFC
Plan during the latter part of 2006 in connection with the
completion of its 2005 tax return (see Note 6). The
Intercompany Agreement also resolved substantially all pre- and
post-petition intercompany claims among the Debtors.
The effectiveness of the Liquidating Plans and the dissolution
of the Liquidating Subsidiaries did not resolve a dispute
between the holders of KACCs senior notes and the holders
of KACCs senior subordinated notes regarding their
respective entitlement to certain of the proceeds from the sales
by the Liquidating Subsidiaries of interests in QAL and Alpart
(the Senior Note-Sub Note Dispute). On
December 22, 2005, the Bankruptcy Court issued a decision
in connection with the Senior Note-Sub Note Dispute,
finding (in favor of the senior notes) that the senior
subordinated notes were contractually subordinate to the senior
notes in regard to certain subsidiary guarantors (particularly
the Liquidating Subsidiaries) and that certain parties were not
due certain reimbursements. The Bankruptcy Courts ruling
has been appealed. The Company cannot predict, however, the
ultimate resolution of the Senior Note-Sub Note Dispute on
appeal, when any such resolution will occur, or what impact any
such outcome will have on distributions to affected note holders
under the Liquidating Plans. However, given the Companys
now completed emergence from the Chapter 11, the Company
does not have any continuing liability in respect of the Senior
Note-Sub Note Dispute.
Classification of Liabilities as Liabilities Not
Subject to Compromise Versus Liabilities Subject to
Compromise. Liabilities not subject to compromise
include the following:
(1) liabilities incurred after the date each entity filed
for reorganization (i.e., its Filing Date);
(2) pre-Filing Date liabilities that were expected to be
paid in full, including priority tax and employee claims and
certain environmental liabilities; and
(3) pre-Filing Date liabilities that were approved for
payment by the Bankruptcy Court and that were expected to be
paid (in advance of a plan of reorganization) over the next
twelve-month period in the ordinary course of business,
including certain employee related items (salaries, vacation and
medical benefits), claims subject to a currently existing
collective bargaining agreements, and certain postretirement
medical and other costs associated with retirees.
34
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Liabilities subject to compromise refer to all other pre-Filing
Date liabilities of the Debtors.
The amounts subject to compromise at June 30, 2006 and
December 31, 2005 consisted of the following items:
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006(1)
|
|
|
2005(1)
|
|
|
Accrued postretirement medical
obligation (Note 18)
|
|
$
|
1,005.6
|
|
|
$
|
1,017.0
|
|
Accrued asbestos and certain other
personal injury liabilities (Note 19)
|
|
|
1,115.0
|
|
|
|
1,115.0
|
|
Assigned intercompany claims for
benefit of certain creditors
|
|
|
1,131.5
|
|
|
|
1,131.5
|
|
Debt (Note 7 of Notes to
Consolidated Financial Statements in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2005)
|
|
|
847.6
|
|
|
|
847.6
|
|
Accrued pension benefits
(Note 18)
|
|
|
625.5
|
|
|
|
626.2
|
|
Unfair labor practice settlement
(Note 19)
|
|
|
175.0
|
|
|
|
175.0
|
|
Accounts payable
|
|
|
31.6
|
|
|
|
29.8
|
|
Accrued interest
|
|
|
44.7
|
|
|
|
44.7
|
|
Accrued environmental liabilities
(Note 19)
|
|
|
29.4
|
|
|
|
30.7
|
|
Other accrued liabilities
|
|
|
36.7
|
|
|
|
37.2
|
|
Proceeds from sale of commodity
interests
|
|
|
(654.6
|
)
|
|
|
(654.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,388.0
|
|
|
$
|
4,400.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The above amounts exclude $73.5 at June 30, 2006 and $68.5
at December 31, 2005 of liabilities subject to compromise
related to discontinued operations. Approximately $42.1 of the
excluded amounts at June 30, 2006 and December 31,
2005 relate to a claim settled in the fourth quarter of 2005
(see Note 3 of Notes to Consolidated Financial Statements
in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005). The balance of the
amounts at June 30, 2006 and December 31, 2005 were
primarily accounts payable. |
Reorganization Items. Reorganization items are
expense or income items that were incurred or realized by the
Company because it was in reorganization. These items include,
but are not limited to, professional fees and similar types of
expenses incurred directly related to the reorganization
proceedings, loss accruals or gains or losses resulting from
activities of the reorganization process, and interest earned on
cash accumulated by the Debtors because they were not paying
their pre-Filing Date liabilities. For the three and nine months
ended September 30, 2006 and 2005, reorganization items
were as follows:
Three
Months Ended September 30, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Three Months
|
|
|
|
Predecessor
|
|
|
Ended
|
|
|
|
July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Gain on Plan implementation and
fresh start
|
|
$
|
(3,113.1
|
)
|
|
$
|
|
|
Professional fees
|
|
|
5.0
|
|
|
|
8.7
|
|
Interest income
|
|
|
|
|
|
|
(.5
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,108.1
|
)
|
|
$
|
8.2
|
|
|
|
|
|
|
|
|
|
|
35
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Nine
Months Ended September 30, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
Nine Months
|
|
|
|
Predecessor
|
|
|
January 1, 2006
|
|
|
Ended
|
|
|
|
July 1,
|
|
|
to July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Gain on Plan implementation and
fresh start
|
|
$
|
(3,113.1
|
)
|
|
$
|
(3,113.1
|
)
|
|
$
|
|
|
Professional fees
|
|
|
5.0
|
|
|
|
21.2
|
|
|
|
29.2
|
|
Interest income
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
(1.3
|
)
|
Other
|
|
|
|
|
|
|
.2
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,108.1
|
)
|
|
$
|
(3,093.1
|
)
|
|
$
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, approximately $15.0 of professional fees
were accrued (included in Other accrued liabilities) pending
Bankruptcy Court approval to pay such amounts. Approximately
$7.9 of the professional fees had been paid as of
September 30, 2006. It is anticipated that legal and
certain other costs related to the Companys emergence from
Chapter 11 will continue for a period of time after the
Effective Date and such costs, when incurred, will be included
in Selling, administrative, research and development, and
general expenses. Additionally, certain professionals were
contractually due certain success fees due upon the
Companys emergence from Chapter 11 and Bankruptcy
Court approval. Approximately $5.0 of such amounts were borne by
the Company and were recorded in connection with emergence and
fresh start accounting.
Financial
Information. SOP 90-7
requires separate disclosure of Debtors and non-Debtors amounts.
Substantially all of the financial information at June 30,
2006 and December 31, 2005 and for the periods then ended
included in the consolidated financial statements relates to the
Debtors. As a result, condensed combined balance sheet
information of the non-Debtor subsidiaries included in the
consolidated financial statements as of June 30, 2006 and
December 31, 2005 and condensed combined income statement
and cash flows information of the non-Debtor subsidiaries for
the three and six months ended June 30, 2006 and 2005 is
not presented because such amounts were not significant.
|
|
14.
|
Discontinued
Operations
|
As part of the Companys plan to divest certain of its
commodity assets, as more fully discussed in Note 13, the
Company sold its interests in and related to Alpart, KACCs
Gramercy, Louisiana alumina refinery (Gramercy),
Kaiser Jamaica Bauxite Company (KJBC), Volta
Aluminium Company Limited (Valco), and KACCs
Mead, Washington aluminum smelter and certain related property
(the Mead Facility) in 2004 and, as discussed below,
sold its interests in and related to QAL in April 2005. All of
the foregoing commodity assets are collectively referred to as
the Commodity Interests. In accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), the assets,
liabilities, operating results and gains from sale of the
Commodity Interests have been reported as discontinued
operations in the accompanying financial statements.
On April 1, 2005, the Company sold its interests in and
related to QAL for net cash proceeds totaling approximately
$401.4. The buyer also assumed KACCs obligations for
approximately $60.0 of QAL debt (see Note 3 of Notes to
Consolidated Financial Statements in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2005) and KACCs
obligation to pay its proportionate share (20%) of debt,
operating expenses and certain other costs of QAL. In connection
with the sale, the Company also paid a termination fee of $11.0.
After considering transaction costs (including the termination
fee and a $7.7 deferred charge associated with a
back-up bid
fee), the transaction resulted in a gain, net of estimated
income tax of $7.9, of approximately $366.2. As described in
Note 13, a substantial majority of the proceeds from the
sale of the Companys interests in and related to QAL were
held in escrow for the benefit of the creditors under the
liquidating trust for the KAAC/KFC Plan until the KAAC/KFC Plan
was confirmed by the Bankruptcy Court and became effective in
December 2005.
36
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under SFAS No. 144, only those assets, liabilities and
operating results that are being sold or discontinued are
treated as discontinued operations. In the case of
the sale of Gramercy and the Mead Facility, the buyers did not
assume such items as accrued workers compensation, pension or
postretirement benefit obligations in respect of the former
employees of these facilities. As discussed more fully in
Note 13, these retained obligations were resolved in the
context of the Plan.
The carrying amounts of the liabilities in respect of the
Companys interest in and related to the sold Commodity
Interests as of September 30, 2006 and December 31,
2005 are included in the accompanying Consolidated Balance
Sheets for the periods ended September 30, 2006 and
December 31, 2005. Income statement information in respect
of the Companys interest in and related to the sold
Commodity Interests for the three and nine months ended
September 30, 2006 and 2005 included in income from
discontinued operations was as follows:
Three
Months Ended September 30, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
Three Months
|
|
|
|
through
|
|
|
|
Predecessor
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
Net Sales
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
Gain on sales of commodity assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
7.3
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
Nine
Months Ended September 30, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Period from
|
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
July 1, 2006
|
|
|
|
Period from
|
|
|
Nine Months
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
to July 1,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
Net sales
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
42.9
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
21.4
|
|
Gain on sales of commodity assets
|
|
|
|
|
|
|
|
|
|
|
|
365.6
|
|
Income before income taxes
|
|
|
|
|
|
|
|
4.3
|
|
|
|
398.9
|
|
Net income
|
|
|
|
|
|
|
|
4.3
|
|
|
|
386.9
|
|
During the second quarter of 2006, the Company recorded a $5.0
charge as a result of an agreement between the Company and the
Bonneville Power Administration (BPA) related to a
rejected electric power contract (see Note 19). This amount
is included in Discontinued operations for the six months ended
June 30, 2006.
During the first quarter of 2006, the Company received a $7.5
payment from an insurer in settlement of certain residual claims
the Company had in respect of a 2000 incident at its Gramercy,
Louisiana alumina refinery (which was sold in 2004). This amount
is included in Discontinued operations for the nine months ended
September 30, 2006.
Activity during the three month and nine months ended
September 30, 2005 consisted almost exclusively of the
Companys interests in and related to QAL, which was sold
on April 1, 2005, and related hedging activity.
37
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Restated
2005 Quarterly Data
|
During March 2006, the Company determined that its previously
issued financial statements for the quarters ended
March 31, 2005, June 30, 2005 and September 30,
2005 should be restated for two items: (1) VEBA-related
payments made during the first nine months of 2005 should have
been recorded as a reduction of the pre-petition retiree medical
obligations rather than as a current operating expense and
(2) as more fully discussed in Note 2, the Company
determined that its derivative financial instrument transactions
did not qualify for hedge (deferral) treatment and should have
been
marked-to-market
in operating results. The effect of the restatement related to
the VEBA payments was to decrease operating expenses by $6.7,
$5.7 and $5.7 in the first, second and third quarters of 2005,
respectively with an offsetting decrease in Liabilities subject
to compromise at March 31, 2005, June 30, 2005 and
September 30, 2005. The net effect of the restatement
related to the derivative transactions was to increase operating
expenses by $2.0, $1.5 and $1.0 in the first, second and third
quarters of 2005, respectively, with an offsetting increase in
OCI at March 31, 2005, June 30, 2005 and
September 30, 2005, respectively. There was no net impact
on the Companys cash flows as a result of either
restatement.
38
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables show the full income statement affects of
the restatements on the three and nine months ended
September 30, 2005, as well as the changes in balance sheet
and cash flow statement line items as of and for the nine months
ended September 30, 2005.
Statements
of Consolidated Income Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
Net sales
|
|
$
|
271.6
|
|
|
$
|
271.6
|
|
|
$
|
815.9
|
|
|
$
|
815.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
233.7
|
|
|
|
233.5
|
|
|
|
710.0
|
|
|
|
710.9
|
|
Depreciation and amortization
|
|
|
4.9
|
|
|
|
4.9
|
|
|
|
15.0
|
|
|
|
15.0
|
|
Selling, administration, research
and development, and general
|
|
|
17.7
|
|
|
|
13.2
|
|
|
|
52.4
|
|
|
|
38.0
|
|
Other operating charges, net
|
|
|
.3
|
|
|
|
.3
|
|
|
|
6.5
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
256.6
|
|
|
|
251.9
|
|
|
|
783.9
|
|
|
|
770.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15.0
|
|
|
|
19.7
|
|
|
|
32.0
|
|
|
|
45.5
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (excluding
unrecorded interest expense)
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
|
|
(4.2
|
)
|
|
|
(4.2
|
)
|
Reorganization items
|
|
|
(8.2
|
)
|
|
|
(8.2
|
)
|
|
|
(25.3
|
)
|
|
|
(25.3
|
)
|
Other net
|
|
|
(.5
|
)
|
|
|
(.5
|
)
|
|
|
(1.5
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
discontinued operations
|
|
|
5.3
|
|
|
|
10.0
|
|
|
|
1.0
|
|
|
|
14.5
|
|
Provision for income taxes
|
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
|
|
(6.0
|
)
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
3.9
|
|
|
|
8.6
|
|
|
|
(5.0
|
)
|
|
|
8.5
|
|
Income from discontinued operations
|
|
|
8.0
|
|
|
|
8.0
|
|
|
|
386.9
|
|
|
|
386.9
|
|
Cumulative effect on years prior
to 2005 of adopting accounting for conditional asset retirement
obligations
|
|
|
|
|
|
|
|
|
|
|
(4.7
|
)
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11.9
|
|
|
$
|
16.6
|
|
|
$
|
377.2
|
|
|
$
|
390.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per
share Basic/Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
.05
|
|
|
$
|
.11
|
|
|
$
|
(.06
|
)
|
|
$
|
.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
.10
|
|
|
$
|
.10
|
|
|
$
|
4.85
|
|
|
$
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from cumulative effect on
years prior to 2005 of adopting accounting for conditional asset
retirement obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(.06
|
)
|
|
$
|
(.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.15
|
|
|
$
|
.21
|
|
|
$
|
4.73
|
|
|
$
|
4.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding (000):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic/Diluted
|
|
|
79,672
|
|
|
|
79,672
|
|
|
|
79,676
|
|
|
|
79,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated
Balance Sheets Unaudited
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
Liabilities subject to compromise
|
|
$
|
3,949.8
|
|
|
$
|
3,931.7
|
|
Stockholders equity
(deficit):
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
.8
|
|
|
|
.8
|
|
Additional capital
|
|
|
538.0
|
|
|
|
538.0
|
|
Accumulated deficit
|
|
|
(2,540.4
|
)
|
|
|
(2,526.8
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
(10.0
|
)
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(2,011.6
|
)
|
|
|
(1,993.5
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity (deficit)
|
|
$
|
1,938.2
|
|
|
$
|
1,938.2
|
|
|
|
|
|
|
|
|
|
|
Statements
of Consolidated Cash Flows Unaudited
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
377.1
|
|
|
$
|
390.7
|
|
Less net income from discontinued
operations
|
|
|
386.9
|
|
|
|
386.9
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations, including from cumulative effect of adopting change
in accounting in 2005
|
|
|
(9.8
|
)
|
|
|
3.8
|
|
(Decrease) increase in prepaid
expenses and other current assets
|
|
|
.3
|
|
|
|
7.1
|
|
Increase in other accrued
liabilities
|
|
|
(8.9
|
)
|
|
|
(11.8
|
)
|
Net cash impact of changes in
long-term assets and liabilities
|
|
|
2.6
|
|
|
|
(14.9
|
)
|
Net cash used by operating
activities
|
|
$
|
15.1
|
|
|
$
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The As previously reported amounts shown above
include the effect of the adoption of FIN 47 on
December 31, 2005 retroactive to the beginning of the year
as discussed in Note 2. Such retroactive application is
required by GAAP and is not considered a
restatement. The retroactive impact of the adoption
of FIN 47 was a charge of $4.7 in the first quarter of 2005
in respect of the cumulative effect upon adoption. |
See Note 16 of Notes to Consolidated Financial Statements
in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005 for additional
information regarding the restated 2005 quarterly data.
|
|
16.
|
Debt and
Credit Facilities
|
On February 1, 2006, and again on May 11, 2006, the
Bankruptcy Court approved amendments to the Companys
Secured Super-Priority
Debtor-In-Possession
Revolving Credit and Guaranty Agreement (the DIP
Facility) extending its expiration date ultimately to the
earlier of the Companys emergence from Chapter 11 or
August 31, 2006. The DIP Facility terminated on the
Effective Date.
Under the DIP Facility, which provided for a secured, revolving
line of credit, the Company, KACC and certain subsidiaries of
KACC were able to borrow amounts by means of revolving credit
advances and to have issued letters
40
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of credit (up to $60.0) in an aggregate amount equal to the
lesser of $200.0 or a borrowing base comprised of eligible
accounts receivable, eligible inventory and certain eligible
machinery, equipment and real estate, reduced by certain
reserves, as defined in the DIP Facility agreement. At
June 30, 2006, there were no outstanding borrowings under
the DIP Facility and there were outstanding letters of credit of
approximately $17.7 (which on the Effective Date were converted
to outstanding letters of credit under the Revolving Credit
Facility).
The DIP Facility, which was implemented during the first quarter
of 2005, replaced a post-petition credit facility (the
Replaced Facility) that the Company and KACC entered
into on February 12, 2002. The Replaced Facility was
amended a number of times during its term as a result of, among
other things, reorganization transactions, including disposition
of the Companys Commodity Interests.
During the first quarter of 2005, the Company deposited cash of
$13.3 as collateral for the Replaced Facility letters of credit
and deposited approximately $1.7 of collateral with the Replaced
Facility lenders until certain other banking arrangements were
terminated. As of June 30, 2006, all of the collateral for
the Replacement Facility letters of credit and the collateral
for other certain banking arrangements (of which $1.5 was
received during 2006) had been refunded to the Company.
For the six months ended June 30, 2006, the income tax
provision for continuing operations includes a foreign income
tax provision of approximately $7.0. The income tax provision
for continuing operations for the three and nine months ended
September 30, 2005 relates primarily to foreign income
taxes. The six months ended June 30, 2006 include an
approximate $1.0 benefit associated with a U.S. income tax
refund. While the Company considered the July 2006 emergence
from Chapter 11 for purposes of estimating impacts on the
effective tax rate, the Companys provisions for income
taxes as of June 30, 2006 did not include any direct
impacts from the Companys emergence from Chapter 11.
Such impact will be reflected in periods following emergence as
more fully discussed in Note 6.
As more fully discussed in Note 8 of Notes to the
Consolidated Financial Statements in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2005, in April 2006, the
Company, the PBGC and the VEBAs entered into an agreed order
that was approved by the Bankruptcy Court and that established a
specific protocol and set certain limits for pre-emergence
transfers of claims and rights to shares of Common Stock by the
PBGC and VEBAs in order to preserve the Companys net
operating loss carryforwards.
See Note 8 of Notes to Consolidated Financial Statements in
the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005 for additional
information regarding Deferred Tax Assets and Valuation
Allowances. In connection with the sale of the Companys
interests in and related to QAL, the Company made payments
totaling approximately $8.5 for AMT in the United States
(approximately $8.0 of Federal AMT and approximately $.5 of
state AMT). Such payments were made in the fourth quarter of
2005. Upon completion of the Companys 2005 Federal income
tax return, the Company determined that approximately $1.0 of
AMT was overpaid and was refundable. The Company applied for the
refund in the 2005 Federal income tax return filed in September
2006 and received the refund in October 2006. The Company
believes that remainder of the Federal AMT amounts paid in
respect of the sale of interests should, in accordance with the
Intercompany Agreement, be reimbursed to the Company from the
funds held by the liquidating trustee for the KAAC/KFC Plan.
However, at this point, as this has yet to be agreed, the
Company has not recorded a receivable for the amount. The
Company is still analyzing the amount of state AMT that may be
recoverable from the liquidating trustee for the KAAC/KFC Plan.
The Company expects to resolve the matter in late 2006 or early
2007.
|
|
18.
|
Employee
Benefit and Incentive Plans
|
The Company and its subsidiaries historically provided
(a) post-retirement health care and life insurance benefits
to eligible retired employees and their dependents and
(b) pension benefit payments to retirement plans.
41
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Substantially all employees became eligible for health care and
life insurance benefits if they reached retirement age while
still working for the Company or its subsidiaries. The Company
did not fund the liability for these benefits, which were
expected to be paid out of cash generated by operations. The
Company reserved the right, subject to applicable collective
bargaining agreements, to amend or terminate these benefits.
Retirement plans were generally non-contributory for salaried
and hourly employees and generally provided for benefits based
on formulas which considered such items as length of service and
earnings during years of service.
In January 2004, the Company filed motions with the Bankruptcy
Court to terminate or substantially modify post-retirement
medical obligations for both salaried and certain hourly
employees and for the distressed termination of substantially
all domestic hourly pension plans. The Company subsequently
concluded agreements with a committee appointed in the
Companys reorganization proceedings (see Note 1 of
Notes to Consolidated Financial Statements in the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2005) that represented
salaried employees and union representatives that represented
the vast majority of the Companys hourly employees. The
agreements provided for the termination of existing salaried and
hourly post-retirement medical benefit plans, and the
termination of existing hourly pension plans. Under the
agreements, salaried and hourly retirees were provided an
opportunity for continued medical coverage through COBRA or the
VEBAs and active salaried and hourly employees were provided
with an opportunity to participate in one or more replacement
pension plans
and/or
defined contribution plans. The agreements were approved by the
Bankruptcy Court, but were subject to certain conditions,
including Bankruptcy Court approval of the Intercompany
Agreement in a form acceptable to the Debtors and the official
committee of unsecured creditors appointed in the Companys
reorganization proceedings (see Note 1 of Notes to
Consolidated Financial Statements in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2005).
On June 1, 2004, the Bankruptcy Court entered an order,
subject to certain conditions including final Bankruptcy Court
approval of the Intercompany Agreement, authorizing the Company
to terminate its post-retirement medical plans as of
May 31, 2004 and to make advance payments to the VEBAs. As
previously disclosed, pending the resolution of all
contingencies in respect of the termination of the existing
post-retirement medical benefit plan, during the period
June 1, 2004 through December 31, 2004, the Company
continued to accrue costs based on the existing plan and treated
the VEBA contributions as a reduction of its liability under the
plan. However, because the Intercompany Agreement was approved
in February 2005 and all other contingencies had already been
met, the Company determined that the existing post retirement
medical plan should be treated as terminated as of
December 31, 2004.
The PBGC assumed responsibility for the Companys three
largest pension plans, which represented the vast majority of
the Companys net pension obligation including the
Companys Salaried Employees Retirement Plan (in December
2003), the Inactive Pension Plan (in July 2004) and the
Kaiser Aluminum Pension Plan (in September 2004). The Salaried
Employees Retirement Plan, the Inactive Pension Plan and the
Kaiser Aluminum Pension Plan are hereinafter collectively
referred to as the Terminated Plans. Pursuant to the
agreement with the PBGC, the Company and the PBGC agreed, among
other things, that: (a) the Company would continue to
sponsor the Companys remaining pension plans (which
primarily are in respect of hourly employees at four Fabricated
products facilities) and paid approximately $5.0 minimum funding
contribution for these plans in March 2005; (b) the PBGC
would have an allowed post-petition administrative claim of
$14.0, which was expected to be paid upon the consummation of a
plan of reorganization for the Company or the consummation of
the KAAC/KFC Plan, whichever came first; and (c) the PBGC
would have allowed pre-petition unsecured claims in respect of
the Terminated Plans in the amount of $616.0, which would be
resolved in the Companys plan or plans of reorganization
provided that the PBGCs cash recovery from proceeds of the
Companys sale of its interests in and related to Alpart
and QAL was limited to 32% of the net proceeds distributable to
holders of the Companys senior notes, senior subordinated
notes and the PBGC. However, certain contingencies arose in
respect of the settlement with the PBGC which were ultimately
resolved in the Companys favor. See
Note 8 Contingencies Regarding Settlement
with the PBGC.
42
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
Flow and Charges
Domestic Plans. During the first three years
of the Chapter 11 proceedings, the Company did not make any
further significant contributions to any of its domestic pension
plans. However, as discussed above in connection with the PBGC
settlement agreement, which was approved by the Bankruptcy Court
in January 2005, the Company paid approximately $5.0 in March
2005 and approximately $1.0 in July 2005 in respect of minimum
funding contributions for retained pension plans and paid $11.0
in respect of post-petition administrative claims of the PBGC
when the KAAC/KFC Plan became effective in December 2005. An
additional $3.0 was pending the resolution of the ongoing
litigation with the PBGC (see Note 8). Any other payments
to the PBGC were limited to recoveries under the Liquidating
Plans and the Plan.
Prior to the Effective Date, the Company agreed to make the
following contributions to the VEBAs:
a) an amount not to exceed $36.0 and payable on emergence
from the Chapter 11 proceedings so long as the
Companys liquidity (i.e. cash plus borrowing availability)
was at least $50.0 after considering such payments; and
b) advances of $3.1 in June 2004 and $1.9 per month
thereafter until the Company emerged from the Chapter 11
proceedings. Any advances made pursuant to such agreement
constitute a credit toward the $36.0 maximum contribution due
upon emergence.
In October 2004, the Company entered into an amendment to the
USW agreement (see Note 19) to pay an additional $1.0
to the VEBAs in excess of the originally agreed $36.0
contribution described above, which amount was paid in March
2005. Under the terms of the amended agreement, the Company was
required to continue to make the monthly VEBA contributions as
long as it remained in Chapter 11, even if the sum of such
monthly payments exceeded the $37.0 maximum amount discussed
above. The monthly amounts paid during the Chapter 11
process in excess of the $37.0 limit will offset future variable
contribution requirements after emergence. The amended agreement
was approved by the Bankruptcy Court in February 2005.
VEBA-related payments prior to the Effective Date totaled
approximately $49.7. As a result, $12.7 was available to the
Company to offset future VEBA contributions of the Successor
(see Note 7).
Total charges associated with the VEBAs in 2006 prior to the
Effective Date and the year ended December 31, 2005 were
$11.4 and $23.8, respectively. These amounts were reflected as a
reduction of Liabilities subject to compromise.
Key Employee Retention Plan. Under the KERP,
approved by the Bankruptcy Court in September 2002, financial
incentives were provided to retain certain key employees during
the Chapter 11 proceedings. The KERP included six key
elements: a retention plan, a severance plan, a change in
control plan, a completion incentive plan, the continuation for
certain participants of an existing SERP and a long-term
incentive plan. Under the KERP:
|
|
|
|
|
Pursuant to the retention plan, retention payments were paid
between September 2002 and March 31, 2004, except that 50%
of the amounts payable to certain senior officers were withheld
until the Companys emergence from Chapter 11
proceedings or as otherwise agreed pursuant to the KERP (see
Note 7).
|
|
|
|
The severance and change in control plans generally provided for
severance payments of between nine months and three years of
salary and certain benefits, depending on the facts and
circumstances and the level of employee involved (see
Note 7).
|
|
|
|
The completion incentive plan lapsed without any amounts being
due.
|
|
|
|
The SERP generally provided additional non-qualified pension
benefits for certain active employees at the time that the KERP
was approved, who would suffer a loss of benefits based on
Internal Revenue Code limitations, so long as such employees
were not subsequently terminated for cause or voluntarily
terminated their employment prior to reaching their retirement
age.
|
43
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
The long-term incentive plan generally provided for incentive
awards to key employees based on an annual cost reduction
target. Payment of such long-term incentive awards generally
will be made: (a) 50% upon emergence and (b) 50% one
year from the date the Debtors emerged from the Chapter 11
proceedings. At September 30, 2006, approximately $3.4 was
accrued in respect of the KERP long-term incentive plan.
|
Foreign Plans. Contributions to foreign
pension plans (excluding those that are considered part of
discontinued operations see Note 14) were
nominal.
|
|
19.
|
Commitments
and Contingencies
|
Impact of Reorganization Proceedings. During
the Chapter 11 proceedings, substantially all pending
litigation, except certain environmental claims and litigation,
against the Debtors was stayed. Generally, claims against a
Debtor arising from actions or omissions prior to its Filing
Date were resolved pursuant to the Plan.
Environmental Contingencies. The Company and
KACC were subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches
of the environmental laws, and to claims and litigation based
upon such laws and regulations. KACC was also subject to a
number of claims under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the
Superfund Amendments Reauthorization Act of 1986
(CERCLA), and, along with certain other entities,
was named as a potentially responsible party for remedial costs
at certain third-party sites listed on the National Priorities
List under CERCLA.
Based on the Companys evaluation of these and other
environmental matters, the Company established an environmental
accrual, primarily related to potential solid waste disposal and
soil and ground water remediation matters, at June 30, 2006
of approximately $29.4. The accrual, which was included in
Liabilities subject to compromise (Note 13), related
primarily to non-owned locations and was resolved as part of the
Plan.
Asbestos and Certain Other Personal Injury
Claims. KACC was one of many defendants in a
number of lawsuits, some of which involved claims of multiple
persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to
asbestos or exposure to products containing asbestos produced or
sold by KACC or as a result of employment or association with
KACC. The lawsuits generally related to products KACC had not
sold for more than 20 years. As of the initial Filing Date,
approximately 112,000 asbestos-related claims were pending. The
Company also previously disclosed that certain other personal
injury claims had been filed in respect of alleged pre-Filing
Date exposure to silica and coal tar pitch volatiles
(approximately 3,900 claims and 300 claims, respectively).
Due to the reorganization proceedings, holders of asbestos,
silica and coal tar pitch volatile claims were stayed from
continuing to prosecute pending litigation and from commencing
new lawsuits against the Debtors. As a result, the Company did
not make any asbestos payments (or other payments) during the
pendency of the reorganization proceedings. However, the Company
continued to pursue insurance collections in respect of
asbestos-related amounts paid prior to its Filing Date and, as
described below, to negotiate insurance settlements and
prosecute certain actions to clarify policy interpretations in
respect of such coverage.
The following tables present historical information as of
June 30, 2006 and December 31, 2005 regarding
KACCs asbestos, silica and coal tar pitch
volatiles-related balances and cash flows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Liability
|
|
$
|
1,115.0
|
|
|
$
|
1,115.0
|
|
Receivable(1)
|
|
|
963.3
|
|
|
|
965.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151.7
|
|
|
$
|
149.5
|
|
|
|
|
|
|
|
|
|
|
44
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
The asbestos-related receivable was determined on the same basis
as the asbestos-related cost accrual. Amounts are stated in
nominal dollars and not discounted to present value as the
Company could not reasonably project the actual timing of
payments or insurance recoveries particularly in light of the
Plan. The Company believes that, as of June 30, 2006, it
had received all insurance recoveries that it was likely to
collect in respect of asbestos-related costs paid (see
Note 13). |
While a formal estimation process was never completed, the
Company believed it had obtained sufficient information to
project a range of likely asbestos and other tort-related costs.
The Company estimated that its total liability for asbestos,
silica and coal tar pitch volatile personal injury claims was
expected to be between approximately $1,100.0 and $2,400.0.
However, as previously disclosed, the Company did not think that
other constituents would necessarily agree with this cost range.
In particular, the Company was aware that certain informal
assertions made by representatives for the asbestos, silica and
coal tar pitch volatiles claimants suggested that the actual
liability might exceed, perhaps significantly, the top end of
the Companys expected range. While the Company could not
reasonably predict what the ultimate amount of such claims might
be determined to be, the Company believed that the minimum end
of the range was both probable and reasonably estimatable.
Accordingly, the Company reflected an accrued liability of
$1,115.0 for the minimum end of the expected range. All of such
amounts (which were included in Liabilities subject to
compromise) were resolved as a part of the Plan (see
Notes 1 and 13).
As previously disclosed, KACC believed it had insurance coverage
available that would recover a substantial portion of its
asbestos-related costs. However, the timing and amount of future
insurance recoveries were dependent on the resolution of
disputes regarding coverage under certain of the applicable
insurance policies through the process of negotiations or
further litigation. The Company previously stated that it
believed that substantial recoveries from the insurance carriers
were probable and had estimated the amount of remaining solvent
insurance coverage (before considering the contingent settlement
agreements discussed below) to be in the range of
$1,400.0 $1,500.0. Further, the Company previously
disclosed that, assuming that actual asbestos, silica and coal
tar pitch volatile costs were to be the $1,115.0 amount accrued
(as discussed above) the Company believed that it would be able
to recover from insurers amounts totaling approximately $965.0,
which amount was reflected as Personal injury-related
insurance recoveries receivable (reduced to $963.3 at
June 30, 2006 due to certain subsequent recoveries).
Throughout the reorganization process, the Company continued its
efforts with insurers to make clear the amount of insurance
coverage expected to be available in respect of asbestos, silica
and coal tar pitch personal injury claims. Part of such efforts
focused on certain litigation in San Francisco Superior
Court. The Companys efforts in this regard were also
intended to provide certainty as to the amounts available to the
PI Trusts and to resolve certain appeals by insurers to the
confirmation order in respect of the Plan.
Since the latter half of 2005, the Company entered into
conditional settlement agreements with insurers (all of which
were approved by the Bankruptcy Court) under which the insurers
agreed (in aggregate) to pay approximately $1,246.0 in respect
of substantially all coverage under certain policies having a
combined face value of approximately $1,460.0. Many of the
agreements provided for multi-year payouts and for some of the
settlement amounts to be accessed, claims would have to be made
against the PI Trusts that would aggregate well in excess of the
approximate $1,115.0 liability amount reflected by the Company
at June 30, 2006. One set of insurers paid approximately
$137.0 into a separate escrow account in November 2005. As of
June 30, 2006, the insurers had paid $250.0 into the escrow
accounts, a substantial portion of which related to the
conditional settlements. There are no remaining policies that
are expected to yield any material amounts for the benefit of
the Company or the PI Trusts.
The Company did not provide any accounting recognition for the
conditional settlement agreements in the June 30, 2006
financial statements given: (1) the conditional nature of
the settlements; (2) the fact that, if the Plan did not
become effective as of June 30, 2006, the Companys
interests with respect to the insurance policies covered by the
agreements were not impaired in any way; and (3) the
Company believed that collection of the approximate
45
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$963.3 amount of Personal injury-related insurance recovery
receivable was probable even if the conditional agreements were
ultimately approved. The Company also did not give any
accounting recognition to the amounts paid into escrow as KACC
had no interest in such amounts, but which amounts were
available for the ultimate settlement of KACCs
asbestos-related claims. Because the escrow accounts were under
the control of the escrow agents, the escrow accounts were not
included in the consolidated financial statements at
June 30, 2006. In addition, since neither the Company nor
KACC received any economic benefit or suffered any economic
detriment and were not relieved of any asbestos-related
obligation as a result of the receipt of the escrow funds,
neither the asbestos-related receivable nor the asbestos-related
liability was adjusted as a result of these transactions.
Hearing Loss Claims. During February 2004, the
Company reached a settlement in principle in respect of 400
claims, which alleged that certain individuals who were
employees of the Company, principally at a facility previously
owned and operated by KACC in Louisiana, suffered hearing loss
in connection with their employment. Under the terms of the
settlement, the claimants were allowed claims totaling up to
$15.8 (included in Liabilities subject to compromise, Other
accrued liabilities see Note 13). At emergence,
these claims were transferred to the PI Trusts along with
certain rights against certain insurance policies of the
Company. While the Company believed that the insurance policies
were of value, no amounts were reflected in the Companys
financial statements in respect of such policies as the Company
could not with the level of certainty necessary determine the
amount of recoveries that were probable.
During the Chapter 11 proceedings, the Company received
approximately 3,200 additional proofs of claim alleging
pre-petition injury due to noise induced hearing loss. It is not
known at this time how many, if any, of such claims have merit
or at what level such claims might qualify within the parameters
established by the above-referenced settlement in principle for
the 400 claims. However, under the Plan all such claims were
transferred, along with certain rights against certain insurance
policies, to the PI Trusts and resolved in that manner rather
than being settled prior to the Companys emergence from
the Chapter 11 proceedings.
Labor Matters. In January 2004, as part of its
settlement with the USW with respect to pension and retiree
medical benefits, KACC and the USW agreed to settle a case
pending before the National Labor Relations Board in respect of
certain unfair labor practice (ULP) claims made by
the USW in connection with a 1998 USW strike and subsequent
lock-out by KACC. Under the terms of the agreement, solely for
the purposes of determining distributions in connection with the
reorganization, an unsecured pre-petition claim in the amount of
$175.0 was allowed. Also, as part of the agreement, the Company
agreed to adopt a position of neutrality regarding the
unionization of any employees of the Company. The settlement was
approved by the Bankruptcy Court in February 2005. The Company
recorded a $175.0 non-cash charge in the fourth quarter of 2004
associated with the ULP settlement. The Companys
obligations in respect of the ULP claim were resolved on the
Effective Date.
Pacific Northwest Power Matters. As a part of
the reorganization process, the Company rejected a contract with
the BPA that provided power to fully operate the Trentwood
facility, as well as approximately 40% of the combined capacity
of KACCs former Mead and Tacoma aluminum smelting
operations, which had been curtailed since the last half of
2000. The BPA filed a proof of claim for approximately $75.0 in
connection with the contract rejection. The Company had
previously disclosed that the amount of the BPA claim would
ultimately be determined either through a negotiated settlement
or litigation. In June 2006, the Bankruptcy Court approved an
agreement between the Company and the BPA which resolved the
claim by granting the BPA an unsecured pre-petition claim
totaling approximately $6.1 (i.e., $5.0 in addition to $1.1 of
previously accrued pre-petition accounts payable). The Company
has reflected a non-cash charge for the incremental $5.0 amount
in the accompanying financial statements (in Discontinued
operations see Note 14). This claim was
resolved as a part of the Plan and will have no impact on the
Successor.
46
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Item should be read in conjunction with Part I,
Item 1, of this Report.
This Report contains statements which constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements appear in a number of places in this Report. Such
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 thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Readers
are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks
and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of
various factors. These factors include: the effectiveness of
managements strategies and decisions; general economic and
business conditions; developments in technology; new or modified
statutory or regulatory requirements; and changing prices and
market conditions. This Item and Part II, Item 1A.
Risk Factors in this Report, 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 the discussion of operating results below, certain items are
referred to as non-run-rate items. For purposes of each
discussion, non-run-rate items are items that, while they may
recur from period to period, are (1) particularly material
to results, (2) affect costs as a result of external market
factors, and (3) 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 benefit of the users of the
financial statements. Our intent is to allow users of the
financial statements to consider our results both in light of
and separately from fluctuations in underlying metal prices.
The following discussion gives effect to the restatement
discussed in Note 15 of Notes to Interim Consolidated
Financial Statements.
Emergence
from Reorganization Proceedings
As more fully discussed in Note 13 of Notes to Interim
Consolidated Financial Statements, during the past four years,
Kaiser Aluminum Corporation (Kaiser, KAC
or the Company), its wholly owned subsidiary, Kaiser
Aluminum & Chemical Corporation (KACC), and
24 of KACCs subsidiaries (collectively referred to herein
as the Debtors) operated under Chapter 11 of
the United States Bankruptcy Code (the Code) under
the supervision of the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court). For
purposes of this Report, the term Filing Date means,
with respect to any particular Debtor, the date on which such
Debtor filed its Chapter 11 proceedings.
As outlined in Notes 1 and 13 of Notes to Interim
Consolidated Financial Statements, Kaiser, KACC and the
subsidiaries which included all of the Companys core
fabricated products facilities and operations and a 49% interest
in Anglesey Aluminium Limited (Anglesey), which owns
a smelter in the United Kingdom, emerged from Chapter 11 on
July 6, 2006 (hereinafter referred to as the
Effective Date) pursuant to Kaisers Second
Amended Plan of Reorganization (the Plan). Pursuant
to the Plan, all material pre-petition debt, pension and
post-retirement medical obligations and asbestos and other tort
liabilities, along with other pre-petition claims (which in
total aggregated at June 30, 2006 to approximately
$4.4 billion on the June 30, 2006 financial
statements) were addressed and resolved. Pursuant to the Plan,
all of the equity interests of Kaisers pre-emergence
stockholders were cancelled without consideration. The equity of
the newly emerged Kaiser was issued and delivered to a
third-party disbursing agent for distribution to claimholders
pursuant to the Plan. See Note 13 of Notes to Interim
Consolidated Financial Statements for additional information on
Kaisers reorganization process and the Plan.
A balance sheet showing the effects from the implementation of
the Plan, adoption of fresh start accounting, and certain
related activities is included in Note 1 of Notes to
Interim Consolidated Financial Statements. It should be noted
that all financial statement information as of June 30,
2006 and for all prior periods relates to Kaiser before
emergence from Chapter 11. As a result, comparisons between
financial statement information after the Effective Date and
pre-confirmation historical financial statement information are
difficult to make.
47
Note 2 of Notes to Interim Consolidated Financial
Statements also outlines Kaisers simplified corporate
structure following emergence.
Impacts
of Emergence From Chapter 11 on Financial
Statements
All financial statement information before July 1, 2006,
relates to the Company before emergence from Chapter 11
(sometimes referred to herein as the Predecessor).
The first set of financial statements that reflect financial
information relating to the Company after emergence (sometimes
referred to herein as the Successor) are the
financial statements for the quarter ended September 30,
2006. As more fully discussed below, there will be a number of
differences between the financial statements before and after
emergence that will make comparisons of future and past
financial information difficult which may make it more
difficult to assess of future prospects based on historical
performance.
As a result of the Companys emergence from
Chapter 11, the Company applied fresh start accounting to
its opening July 1, 2006 consolidated balance sheet as
required by generally accepted accounting principles
(GAAP). As such:
|
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The Company adjusted its balance sheet to equal the
reorganization value of the Company;
|
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|
The Company reset items such as accumulated depreciation,
accumulated deficit and accumulated other comprehensive income
(loss) to zero; and
|
|
|
|
The Company allocated the reorganization value to its individual
assets and liabilities based on their estimated fair value. Such
items as current liabilities, accounts receivable and cash
reflect values similar to those reported prior to emergence.
Items such as inventory, property, plant and equipment,
long-term assets and long-term liabilities were significantly
adjusted from amounts previously reported. As more fully
discussed in the Notes to the Companys Financial
Statements, these adjustments may adversely affect future
results.
|
A balance sheet showing the effects of the implementation of the
Companys plan of reorganization, adoption of fresh start
accounting and certain related activities is set forth in
Note 1 of Notes to Interim Financial Statements.
The Company also made some changes to its accounting policies
and procedures as part of the fresh start and emergence process.
In general, the Companys accounting policies are the same
as or similar to those historically used to prepare the
Companys financial statements. In certain cases, however,
the Company adopted different accounting principles for, or
applied methodologies differently to, its post emergence
financial statement information. For instance, the Company
changed its accounting methodologies with respect to inventory
accounting. While the Company is still accounting for
inventories on a last-in, first-out (LIFO) basis
after emergence, the Company is applying LIFO differently than
it did in the past. Specifically, the Company will view each
quarter on a standalone basis for computing LIFO; whereas, in
the past, the Company 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.
Additionally, certain items such as earnings per share and
Statement of Financial Accounting Standards
No. 123-R,
Share-Based Payment (see discussion in Note 2 of
Notes to Interim Consolidated Financial Statements), which had
few, if any, implications while the Company was in
Chapter 11, will have increased importance in the
Companys future financial statement information.
Results
of Operations
The Companys main line of business is the production and
sale of fabricated aluminum products. In addition, the Company
owns a 49% interest in Anglesey, which owns and operates an
aluminum smelter in Holyhead, Wales.
The Companys emergence from Chapter 11 and adoption
of fresh start accounting resulted in a new reporting entity for
accounting purposes. Although the Company emerged from
Chapter 11 on July 6, 2006, the Company adopted fresh
start accounting under the provisions of American Institute of
Certified Public Accountants Statement of Position 90-7
(SOP 90-7), Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, effective as of
the beginning of business on July 1, 2006. As such, it was
assumed that the emergence was completed instantaneously at the
beginning of business on July 1, 2006 so that all operating
activities during the three months
48
ended September 30, 2006 are reported as applying to the
new reporting entity. The Company believes that this is a
reasonable presentation as there were no material
non-Plan-related transactions between July 1, 2006 and
July 6, 2006.
The table below provides selected operational and financial
information on a consolidated basis (unaudited in
millions of dollars, except shipments and prices). The selected
operational and financial information after the Effective Date
are those of the Successor and are not comparable to those of
the Predecessor. However, for purposes of this discussion (in
the table below), the Successors results for the period
from July 1, 2006 through September 30, 2006 have been
combined with the Predecessors results for July 1,
2006 and are compared to the Predecessors results for the
three months ended September 30, 2005. In addition, the
Successors results for the period from July 1, 2006
through September 30, 2006 have been combined with the
Predecessors results for the period from January 1,
2006 to July 1, 2006 and are compared to the
Predecessors results for the nine months ended
September 30, 2005. Differences between periods due to
fresh start accounting are explained when material.
The following data should be read in conjunction with the
Companys interim consolidated financial statements and the
notes thereto contained elsewhere herein. See Note 15 of
Notes to Consolidated Financial Statements in the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2005 for further
information regarding segments. Interim results are not
necessarily indicative of those for a full year.
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|
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|
|
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Three Months Ended
|
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Nine Months Ended
|
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|
|
September 30,
|
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September 30,
|
|
|
|
2006
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|
|
2005
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|
2006
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|
|
2005
|
|
|
Shipments (millions of lbs):
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Fabricated Products
|
|
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126.2
|
|
|
|
120.7
|
|
|
|
399.7
|
|
|
|
365.2
|
|
Primary Aluminum
|
|
|
40.0
|
|
|
|
38.8
|
|
|
|
117.1
|
|
|
|
115.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166.2
|
|
|
|
159.5
|
|
|
|
516.8
|
|
|
|
480.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Realized Third Party Sales
Price (per pound):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products(1)
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$
|
2.23
|
|
|
$
|
1.95
|
|
|
$
|
2.18
|
|
|
$
|
1.94
|
|
Primary Aluminum(2)
|
|
$
|
1.25
|
|
|
$
|
.92
|
|
|
$
|
1.27
|
|
|
$
|
.93
|
|
Net Sales:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Fabricated Products
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$
|
281.6
|
|
|
$
|
235.9
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|
|
$
|
872.5
|
|
|
$
|
707.7
|
|
Primary Aluminum
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49.8
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|
|
|
35.7
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|
|
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148.7
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|
|
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108.2
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Net Sales
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$
|
331.4
|
|
|
$
|
271.6
|
|
|
$
|
1,021.2
|
|
|
$
|
815.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Segment Operating Income (Loss)(3):
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|
|
|
|
|
|
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|
|
|
|
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Fabricated Products(4)(6)
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$
|
29.1
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|
|
$
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25.7
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|
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$
|
90.3
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|
|
$
|
66.3
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Primary Aluminum(5)
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2.8
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|
|
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5.2
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15.2
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|
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13.4
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Corporate and Other
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(13.1
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)
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(10.9
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)
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(33.4
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)
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|
(27.7
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)
|
Other Operating (Charges) Credits,
Net(7)
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2.9
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|
(.3
|
)
|
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2.0
|
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
|
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$
|
21.7
|
|
|
$
|
19.7
|
|
|
$
|
74.1
|
|
|
$
|
45.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
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$
|
|
|
|
$
|
8.0
|
|
|
$
|
4.3
|
|
|
$
|
386.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization Items(8)
|
|
$
|
3,108.1
|
|
|
$
|
(8.2
|
)
|
|
$
|
3,093.1
|
|
|
$
|
(25.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income(3)
|
|
$
|
3,122.4
|
|
|
$
|
16.6
|
|
|
$
|
3,158,3
|
|
|
$
|
390.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures (excluding
discontinued operations)
|
|
$
|
11.6
|
|
|
$
|
11.8
|
|
|
$
|
39.7
|
|
|
$
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average realized prices for the Companys Fabricated
products business unit are subject to fluctuations due to
changes in product mix as well as underlying primary aluminum
prices and are not necessarily indicative of changes in
underlying profitability. See Part I, Item 1.
Business Business Operations in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2005. |
49
|
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(2) |
|
Average realized prices for the Companys Primary aluminum
business unit exclude hedging revenues. |
|
(3) |
|
As previously reported, the Company restated its operating
results for the three month and nine months ended
September 30, 2005. See Note 15 of Notes to Interim
Consolidated Financial Statements for information regarding the
restatement. |
|
(4) |
|
Operating results for the three months ended September 30,
2006 include a non-cash LIFO inventory benefit of
$3.3 million and metal losses of approximately
$2.7 million. Operating results for the nine months ended
September 30, 2006 include a net non-cash LIFO inventory
charge of $18.4 million and metal profits of approximately
$13.9 million. There were no LIFO charges or benefits in
the three or nine months ended September 30, 2005. Metal
profits (losses) in the three and nine months ended
September 30, 2005, were approximately $.3 million and
$ (2.3) million, respectively. |
|
(5) |
|
Primary Aluminum includes non-cash
mark-to-market
gains (losses) totaling $1.0 million and
$(1.0) million in the three months ended September 30,
2006 and 2005, respectively, and $8.1 million and
$(4.5) million in the nine months ended September 30,
2006 and 2005, respectively. For further discussion regarding
mark-to-market
matters, see Note 9 of Notes to Interim Consolidated
Financial Statements. |
|
(6) |
|
Fabricated Products includes non-cash
mark-to-market
losses totaling $1.6 million and $1.5 million in the
three month and year to date periods ended September 30,
2006. For further discussion regarding
mark-to-market
matters, see Note 9 of Notes to Interim Consolidated
Financial Statements. |
|
(7) |
|
See Note 10 of Notes to Interim Consolidated Financial
Statements for a discussion of the components of Other operating
charges and the business segment to which the items relate. |
|
(8) |
|
See Note 13 of Notes to Interim Consolidated Financial
Statements for a discussion of Reorganization items. |
Overview
Changes in global, regional, or country-specific economic
conditions can have a significant impact on overall demand for
aluminum-intensive fabricated products in the aerospace,
automotive, distribution, and packaging markets. Such changes in
demand can directly affect the Companys earnings by
impacting the overall volume and mix of such products sold.
Changes in primary aluminum prices also affect the
Companys Primary aluminum business unit and expected
earnings under any fixed price fabricated products contracts.
The Company manages the risk of fluctuations in the price of
primary aluminum through a combination of pricing policies,
internal hedges and financial derivatives. The Companys
operating results are also, albeit to a lesser degree, sensitive
to changes in prices for power and natural gas and changes in
certain foreign exchange rates. All of the foregoing have been
subject to significant price fluctuations over recent years. For
a discussion of the possible impacts of the reorganization on
the Companys sensitivity to changes in market conditions,
see Item 3. Quantitative and Qualitative Disclosures
About Market Risks, Sensitivity.
During the nine months ended September 30, 2005, the
average London Metal Exchange transaction price (LME
price) per pound of primary aluminum was $.83 per pound.
During the nine months ended September 30, 2006, the
average LME price per pound for primary aluminum was
approximately $1.14. At October 31, 2006, the LME price was
approximately $1.29 per pound.
Three
and Nine Months Ended September 30, 2006 Compared to Three
and Nine Months Ended September 30, 2005
Summary. The Company reported net income of
$3,122.4 million for the three months ended
September 30, 2006, compared to net income of
$16.6 million for the three months ended September 30,
2005. For the nine months ended September 30, 2006, the
Company reported net income of $3,158.3 million, compared
to net income $390.7 million for the same period in 2005.
Net income for the three and nine months ended
September 30, 2006 includes a non-cash gain of
$3,113.1 million related to the Plan implementation and
application of fresh start accounting. Net income for the nine
months ended September 30, 2005 includes
$365.6 million related to the gain on the sale of QAL and
favorable QAL operating results prior to its sale on
April 1, 2005. Both the three months and
50
year-to-date
periods in 2006 and 2005 include a number of non-run-rate items
that are more fully explained in the section below.
Net sales in the three months ended September 30, 2006
totaled $331.4 million compared to $271.6 in the three
months ended September 30, 2005. Net sales for the nine
months ended September 30, 2006 totaled
$1,021.2 million compared to $815.9 for the nine months
ended September 30, 2005. As more fully discussed below,
the increase in revenues is primarily the result of the increase
in the market price for primary aluminum and such increases do
not necessarily directly translate to increased profitability
because (a) a substantial portion of the business conducted
by the Fabricated Products business unit passes primary aluminum
prices on directly to customers and (b) as the
Companys hedging activities, while limiting the
Companys risk of losses, may limit the Companys
ability to participate in price increases.
Fabricated Aluminum Products. Net sales of
fabricated products increased by 19% to $281.6 million
during the third quarter of 2006 as compared to the same period
in 2005 primarily due to a 14% increase in average realized
prices and a 5% increase in shipments. For the nine month period
ended September 30, 2006, net sales of fabricated products
increased by 23% to $872.5 million as compared to the same
period in 2005, primarily due to a 12% increase in average
realized prices and a 9% increase in shipments. The increase in
the average realized prices primarily reflects higher underlying
primary aluminum prices. The increase in volume in 2006 was led
by aerospace and defense-related shipments. Shipments improved
for all broad product lines in the 2006 nine-month period.
Operating income for the third quarter of 2006 of
$29.1 million was approximately $3.4 million higher
than the third quarter of 2005. Operating income for the quarter
ended September 30, 2006 included an approximate
$5 million favorable impact (as compared to prior year)
from higher shipments, stronger conversion prices (representing
the value added from the fabrication process) and favorable
scrap raw material costs. Energy costs were similar in both
periods. Major maintenance costs in the third quarter of 2006
were higher than 2005 by approximately $1.8 million,
primarily reflecting lower spending during the first six months
of 2006, and cost performance was modestly below the prior year.
Depreciation expense in the three months ended
September 30, 2006 was approximately $2.2 lower than in the
prior year as a result of the adoption of fresh start
accounting. Despite sound underlying operating performance,
operating income for the three months ended September 30,
2006 was not substantially higher than operating income in the
three months ended September 30, 2005 as the prior year
quarter had a particularly strong mix of aerospace products, had
increased volumes that had been delayed from the second quarter
of 2005, and as the third quarter of 2005 generally began to
reflect the further improvement in the aerospace/high strength
markets that have continued through the first nine months of
2006.
Operating income for both quarterly periods include certain
items management considers non-run-rate items. For the quarter
ended September 30, 2006, these non-run-rate items had an
approximately $1 million adverse effect, which is
approximately $1.3 million worse than the comparable prior
year period. The major non-run rate items include:
|
|
|
|
|
Metal losses in the third quarter of 2006 were approximately
$2.7 million (before considering LIFO), which is
approximately $3 million worse than the prior year period.
|
|
|
|
A third quarter 2006 non-cash LIFO inventory benefit of
$3.3 million. There was no LIFO charge or benefit in the
quarter ended September 30, 2005.
|
|
|
|
Mark-to-market
charges on energy hedging were approximately $1.6 million
in the third quarter of 2006. During the third quarter of 2005,
there were no
mark-to-market
charges.
|
Operating income for the nine months ended September 30,
2006 of $90.3 million was approximately $24 million
higher than the prior year period. Operating income for the
year-to-date
period also included an approximate $28 million of
favorable impact compared to the prior year from higher
shipments, stronger conversion prices and favorable scrap raw
material costs. Higher energy prices had an approximate
$4 million adverse impact on the
year-to-date
2006 period versus 2005, but a majority of this impact was
offset by favorable cost performance. Major maintenance costs
during the first nine months of 2006 were comparable to the same
period in 2005. Depreciation and amortization in the nine months
ended September 30, 2006 was approximately
$2.2 million lower than the prior year period as a result
of the adoption of fresh start accounting.
51
Both nine-month periods include non-run-rate items. These items
which are listed below, had a combined approximate
$6.0 million adverse impact on the
year-to-date
2006 period, which is approximately $3.7 million worse than
the comparable prior year period:
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|
|
|
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Metal profits in the nine months ended September 30, 2006
(before considering LIFO implications) of approximately
$13.9 million, which is approximately $16.2 million
better than the prior year.
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|
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A non-cash LIFO inventory charge of $18.4 million. There
were no LIFO charges or benefits in the 2005 period.
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Mark-to-market
charges on energy hedging in the nine months ended
September 30, 2006 were approximately $1.5 million.
During the third quarter of 2005, there were no
mark-to-market
charges.
|
Segment operating results for 2006 and 2005 include gains
(losses) on intercompany hedging activities with the primary
aluminum business unit totaling $6.7 million and
$31.5 million for the quarter and nine month periods ended
September 30, 2006 and $.9 million and
$3.4 million for the quarter and nine month periods ended
September 30, 2005. These amounts eliminate in
consolidation. Segment operating results for the nine month
period ended September 30, 2005, exclude defined
contribution savings plan charges of approximately
$5.4 million (see Note 10 of Notes to Interim
Consolidated Financial Statements).
The Company has begun to obtain production from the first
furnace that was being added as a part of the $105 million
expansion project at the Companys Trentwood facility. The
Company currently expects that furnace to reach full production
in the fourth quarter of 2006. A second furnace that is a part
of the Trentwood expansion has begun production and is expected
to ramp up to full production no later than early 2007. The
third furnace expansion and the addition of the stretcher, which
will enable the Company to produce heavier gauge plate products,
are both expected to be on-line by early 2008. The additional
production capacity from the first two furnace expansions should
provide the opportunity for increased aerospace and
defense-related shipments beginning in the fourth quarter of
2006 and should help offset the potential for lackluster
automotive-related shipments due to the current decline in
automotive sales.
Primary aluminum. During the three and nine
months ended September 30, 2006, third party net sales of
primary aluminum increased 39% and 37%, respectively, compared
to the same periods in 2005. The increases were almost entirely
attributable to the increases in average realized primary
aluminum prices.
The following table recaps (in millions of dollars) the major
components of segment operating results for the current and
prior year periods as well as the primary factors leading to
such differences. Many of such factors that are indicated as
being related to product mix, market factors, pricing, etc. are
items that are subject to significant fluctuation from period to
period and are largely impacted by items outside
managements control. See Part II, Item 1A. Risk
Factors in this Report.
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Year-to-Date
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3Q06 vs. 3Q05
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2006 vs. 2005
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Operating
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Better
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Operating
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Better
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Component
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Income
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(Worse)
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Income
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(Worse)
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Factor
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Sales of production from Anglesey
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$
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11
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$
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3
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$
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38
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$
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15
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Market price for primary aluminum
|
Internal hedging with Fabricated
Products
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|
(7
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)
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(6
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)
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(32
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)
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(29
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)
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Eliminates in consolidation
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Derivative settlements
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(2
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)
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(1
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)
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1
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3
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Impacted by positions and market
prices
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Mark-to-market
on derivative instruments
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1
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2
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8
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13
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Impacted by positions and market
prices
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$
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3
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$
|
(2
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)
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$
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15
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$
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2
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The improvement in Anglesey-related results, as well as the
offsetting adverse internal hedging results, in the three and
nine months ended September 30, 2006 over the 2005 periods
was driven primarily by increases in primary aluminum market
prices. The primary aluminum market-driven improvement in
Anglesey-related
52
operating results were offset by an approximate 15% contractual
increase in Angleseys power costs beginning in 2006 (an
adverse change of approximately $1 million per quarter).
Also, beginning in the second quarter of 2006, the
Anglesey-related results are adversely affected (versus
2005) by a 20% increase in contractual alumina costs
related to a new alumina purchase contract that runs through
2007. Power and alumina costs, in general, represent
approximately two-thirds of Angleseys costs, and as such,
future results will be adversely affected by these changes.
Further, the nuclear plant that supplies Anglesey its power is
currently slated for decommissioning in late 2010. For Anglesey
to be able to operate past September 2009 when its current power
contract expires, Anglesey will have to secure a new or
alternative power contract at prices that make its operation
viable. No assurances can be provided that Anglesey will be
successful in this regard.
In addition, given the potential for future shutdown and related
costs, the Company expects that dividends from Anglesey may be
suspended or curtailed either temporarily or permanently while
Anglesey studies future cash requirements. Dividends over the
past five years have fluctuated substantially depending on
various operational and market factors. During the nine months
ended September 30, 2006 and the last five years, cash
dividends received were as follows (in millions of dollars):
2006 $11.7, 2005 $9.0,
2004 $4.5, 2003 $4.3, 2002
$6.0 and 2001 $2.8.
Corporate and Other. Corporate operating
expenses represent corporate general and administrative expenses
that are not allocated to the Companys business segments.
Corporate operating expenses for the three months ended
September 30, 2006 were approximately $2.3 million
higher than the comparable period in 2005. The increase in
expenses was primarily due to higher incentive compensation
accruals of approximately $4.0 million, including an
approximate $2.3 million non-cash charge associated with
the granting of vested and non-vested shares of the
Companys Common Stock at emergence as more fully discussed
in Notes 2 and 7 of Notes to Interim Consolidated Financial
Statements. This increase was offset by a general decline in
other corporate operating expenses.
Corporate operating expenses for the nine months ended
September 30, 2006 were approximately $5.7 million
higher than the comparable period in 2005. Incentive
compensation accruals were approximately $5.0 million
higher than in 2005, including the $2.2 million non-cash
charge (discussed above) associated with the vested and
non-vested stock grants. Additionally, the Company incurred
certain costs it considered largely non-run-rate, including
$1.8 million of preparation costs related to the
Sarbanes-Oxley Act of 2002 (SOX), $.7 million
of higher post emergence tax service/preparation costs and
$1.1 million of costs associated with certain computer
upgrades. The remaining change in the
year-to-date
period ended September 30, 2006 primarily reflects lower
salary and other costs related to the movement toward a post
emergence structure.
Once the activity of the Companys emergence (which will
continue through the balance of 2006 and perhaps early 2007) and
incremental SOX adoption-related activities are complete, the
Company expects there will be a substantial decline in Corporate
and other costs.
Corporate operating results for 2005, discussed above, exclude
defined contribution savings plan charges of approximately
$.5 million (see Note 10 of Notes to Interim
Consolidated Financial Statements).
Discontinued Operations. Operating results
from discontinued operations for the nine months ended
September 30, 2006 consist of a $7.5 million payment
from an insurer for certain residual claims the Company had in
respect of the 2000 incident at its Gramercy, Louisiana alumina
facility, which was sold in 2004, and the $1.1 million
surcharge refund related to certain energy surcharges, which
have been pending for a number of years, offset, in part, by a
$5.0 million charge resulting from an agreement between the
Company and the Bonneville Power Administration for a rejected
electric power contract (see Note 14 of Notes to Interim
Consolidated Financial Statements). Operating results from
discontinued operations for the nine months ended
September 30, 2005 include the $365.6 million gain on
the sale of the Companys interests in and related to
Queensland Aluminum Limited (QAL) and the favorable
operating results of the Companys interests in and related
to QAL, which were sold as of April 1, 2005.
Reorganization Items. Reorganization items
increased substantially in the three and nine months ended
September 30, 2006 as compared to the same periods in 2005
as a result of the non-cash gain on the implementation of the
Plan and application of fresh start accounting of approximately
$3,113.1 in the third quarter of 2006. See Notes 1 and 13
of Notes to Interim Consolidated Financial Statements.
53
Liquidity
and Capital Resources
As a result of the filing of the Chapter 11 proceedings,
claims against the Debtors for principal and accrued interest on
secured and unsecured indebtedness existing on their Filing Date
were stayed while the Debtors continued business operations as
debtors-in-possession,
subject to the control and supervision of the Bankruptcy Court.
See Note 1 and 13 of Notes to Interim Consolidated
Financial Statements for additional discussion of the
Chapter 11 proceedings.
Operating Activities. During the first nine
months of 2006, Successor Fabricated products operating
activities provided approximately $29 million of cash and
Predecessor Fabricated products operating activities provided
approximately $13 million of cash. These amounts compare
with the first nine months of 2005 when the Predecessor
Fabricated products operating activities provided approximately
$67 million of cash. Cash provided by Fabricated products
in 2006 was primarily due to improved operating results offset
in part by increased working capital. The increase in working
capital cash requirements in 2006 is primarily the result of the
impact of higher primary aluminum prices and increased demand
for fabricated aluminum products on inventories and accounts
receivable, which is only partially offset by increases in
accounts payable. Cash provided by Fabricated products in 2005
was primarily due to improved operating results associated with
improving demand for fabricated aluminum products. Working
capital change in 2005 was modest. The foregoing analysis of
Fabricated products cash flow excludes consideration of pension
and retiree cash payments made by the Company on behalf of
current and former employees of the Fabricated products
facilities. Such amounts are part of the legacy
costs that the Company internally categorizes as a corporate
cash outflow. See Corporate and other operating activities below.
During the first nine months of 2006, the Successor operating
activities used approximately $14 million of and the
Predecessor operating activities provided $36 million of
cash flows attributable to the Companys interests in and
related to Anglesey. During the first nine months of 2005, the
Predecessor operating activities provided approximately
$17 million of cash flows attributable to the
Companys interests in and related to Anglesey.
Successor corporate and other operating activities (including
all of the Companys legacy costs) used
approximately $12 million and Predecessor corporate and
other operating activities used approximately $70 million
of cash during the first nine months of 2006. Predecessor
corporate and other operating activities in the first nine
months of 2005 used $82 million. Cash outflows for
Corporate and other operating activities in the first nine
months of 2006 and 2005 included: (a) approximately
$12 million and $18 million, respectively, in respect
of retiree medical obligations and voluntary employee
beneficiary associations (VEBA) funding for all
former and current operating units; (b) payments for
reorganization costs of approximately $16 million and
$30 million, respectively; and (c) payments in respect
of General and Administrative costs totaling approximately
$30 million and $20 million, respectively. Cash
outflows for Corporate and other operating activities for 2006
also included payments pursuant to plan reorganization of
approximately $25 million.
In the first nine months of 2006, Predecessor discontinued
operation activities provided $9 million of cash compared
to $13 million in the first nine months of 2005. Cash
provided by Discontinued operations in 2006 consisted of, as
discussed above, the proceeds from an $8 million payment
from an insurer and a $1 million refund from commodity
interests energy vendors. Cash provided in the first nine months
of 2005 consisted of favorable operating results of
QAL offset, in part, by foreign tax payments of
$10 million.
Investing Activities. Total capital
expenditures for Fabricated products were $38.7 million and
$20.1 million for the nine months ended September 30,
2006 and 2005, respectively. Total capital expenditures for
Fabricated products are currently expected to be in the
$65 million to $75 million range for 2006 and in the
$60 million to $70 million range for 2007. The higher
level of capital spending in 2006 and 2007 as compared to other
recent periods primarily reflects incremental investments,
particularly at the Companys Trentwood facility in
Spokane, Washington. The Company initially announced a
$75 million expansion project and, in August 2006,
announced a follow-on investment of an additional
$30 million. The investments are being made primarily for
new equipment and furnaces that will enable the Company to
supply heavy gauge heat treat stretched plate to the aerospace
and general engineering markets and provide incremental
capacity. Approximately $45 million of such cost was
incurred through the third quarter of 2006 (since the inception
of the project during 2005). Besides the Trentwood facility
expansion, the Companys remaining capital spending in 2006
and 2007 will be spread among all manufacturing locations with a
significant portion being at the Spokane, Washington facility. A
majority of the
54
remaining capital spending is expected to reduce operating
costs, improve product quality or increase capacity. However, no
other individual project of significant size has been committed
at this time.
The level of capital expenditures may be adjusted from time to
time depending on the Companys business plans, price
outlook for metal and other products, the Companys ability
to maintain adequate liquidity and other factors. Continuing
sales growth and positive market factors may result in the
Company increasing its capital spending over the 2006 and 2007
period from the amounts described above. However, no assurances
can be provided in this regard.
New Financing Facilities. On the Effective
Date, the Company and certain subsidiaries of the Company
entered into a $200.0 million Revolving Credit Facility
with a group of lenders, of which up to a maximum of
$60 million may be utilized for letters of credit. Under
the Revolving Credit Facility, the Company is able to borrow (or
obtain letters of credit) from time to time in an aggregate
amount equal to the lesser of $200 million and a borrowing
base comprised of eligible accounts receivable, eligible
inventory and certain eligible machinery, equipment and real
estate, reduced by certain reserves, all as specified in the
Revolving Credit Facility. The Revolving Credit Facility has a
five-year term and matures in July 2011, at which time all
principal amounts outstanding thereunder will be due and
payable. Borrowings under the Revolving Credit Facility bear
interest at a rate equal to either a base prime rate or LIBOR,
at the Companys option, plus a specified variable
percentage determined by reference to the then remaining
borrowing availability under the Revolving Credit Facility. The
Revolving Credit Facility may, subject to certain conditions and
the agreement of lenders thereunder, be increased up to
$275 million at the request of the Company.
Concurrently with the execution of the Revolving Credit
Facility, the Company also entered into a Term
Loan Facility that provides for a $50 million term
loan and is guaranteed by the Company and certain of its
domestic operating subsidiaries. The Term Loan Facility was
fully drawn on August 4, 2006. The Term Loan Facility
has a five-year term and matures in July 2011, at which time all
principal amounts outstanding thereunder will be due and
payable. Borrowings under the Term Loan Facility bear
interest at a rate equal to either a premium over a base prime
rate or LIBOR, at the Companys option.
Amounts owed under each of the Revolving Credit Facility and the
Term Loan Facility may be accelerated upon the occurrence of
various events of default set forth in each such agreement,
including, without limitation, the failure to make principal or
interest payments when due, and breaches of covenants,
representations and warranties set forth in each agreement.
The Revolving Credit Facility is secured by a first priority
lien on substantially all of the assets of the Company and
certain of its domestic operating subsidiaries that are also
borrowers thereunder. The Term Loan Facility is secured by a
second lien on substantially all of the assets of the Company
and the Companys domestic operating subsidiaries that are
the borrowers or guarantors thereof.
Both credit facilities place restrictions on the ability of the
Company and certain of its subsidiaries to, among other things,
incur debt, create liens, make investments, pay dividends, sell
assets, undertake transactions with affiliates and enter into
unrelated lines of business.
The Company currently believes that the cash and cash
equivalents, cash flows from operations and cash available under
the Revolving Credit Facility will provide sufficient working
capital to allow the Company to meet its obligations. During
July 2006, the Company borrowed and repaid $8.6 million
under the Revolving Credit Facility. At October 31, 2006,
there were no borrowings outstanding under the Revolving Credit
Facility, there were approximately $15.9 million of
outstanding letters of credit under the Revolving Credit
Facility and there was $50 million outstanding under the
Term Loan Facility.
Capital
Structure.
Successor: On the Effective Date, pursuant to
the Plan, all equity interests in the Company outstanding
immediately prior to the Effective Date were cancelled without
consideration. On the Effective Date, pursuant to the Plan, the
Company issued 20,000,000 new shares of its Common Stock to a
third-party disbursing agent for distribution in accordance with
the Plan. A total of 8,809,900 shares, or approximately
44.0%, were distributed to the VEBA trust that provides benefits
for eligible retirees of the Company represented by certain
unions and their
55
surviving spouses and eligible dependents (the Union
VEBA). Trusts established under the Plan that assume
responsibility for certain tort claims, including asbestos
personal injury claims received approximately 1,199,171, or
approximately 6%, of the shares of Common Stock issued pursuant
to the Plan. Based on information currently available to the
Company, except as set forth above, no person or entity received
more than 5% of the shares of Common Stock distributed pursuant
to the Plan. As discussed in Note 6 of Notes to Interim
Consolidated Financial Statements, there are restrictions on the
transfer of Common Stock. In addition, under the Revolving
Credit Facility and the Term Loan Facility, there are
restrictions on the purchase of new Common Stock by the Company
and limitations on dividends.
Predecessor: Prior to the Effective Date,
MAXXAM Inc. (MAXXAM) and one of its wholly owned
subsidiaries collectively owned approximately 63% of the
Companys common stock, with the remaining approximately
37% of the Companys common stock being publicly held.
However, as discussed in Note 13 of Notes to Interim
Consolidated Financial Statements, pursuant to the Plan, all
equity interests in the Company outstanding immediately prior to
the Effective Date were cancelled without consideration upon the
Companys emergence from Chapter 11 on the Effective
Date.
New
Accounting Pronouncements
The section New Accounting Pronouncements from
Note 2 of Notes to Interim Consolidated Financial
Statements is incorporated herein by reference.
Critical
Accounting Policies
Critical accounting policies fall into two broad categories. The
first type of critical accounting policies includes those that
are relatively straight forward in their application, but which
can have a significant impact on the reported balances and
operating results (such as revenue recognition policies,
inventory accounting methods, etc). The first type of critical
accounting policies is outlined in Note 2 of Notes to
Interim Consolidated Financial Statements and is not addressed
below. The second type of critical accounting policies includes
those that are both very important to the portrayal of the
Companys financial condition and results, and require
managements most difficult, subjective
and/or
complex judgments. Typically, the circumstances that make these
judgments difficult, subjective
and/or
complex have to do with the need to make estimates about the
effect of matters that are inherently uncertain. The critical
accounting policies of the Company after emergence from
Chapter 11 will, in some cases, be different from those
before emergence (as many of the significant judgments affecting
the financial statements related to matters/items directly a
result of the Chapter 11 proceedings or related to
liabilities that were resolved pursuant to the Plan). See the
Notes to Interim Consolidated Financial Statements for
discussion of possible differences.
While the Company believes that all aspects of its financial
statements should be studied and understood in assessing its
current (and expected future) financial condition and results,
the Company believes that the accounting policies that warrant
additional attention include:
1. Application of fresh start accounting.
Upon emergence from Chapter 11, the Company applied
fresh start accounting to its consolidated financial
statements as required by
SOP 90-7.
As such, in July 2006, the Company adjusted its
stockholders equity to equal the reorganization value of
the entity at emergence. Additionally, items such as accumulated
depreciation, accumulated deficit and accumulated other
comprehensive income (loss) were reset to zero. The Company
allocated the reorganization value to its individual assets and
liabilities based on their estimated fair value at the emergence
date based, in part, on information from a third party
appraiser. Such items as current liabilities, accounts
receivable and cash reflected values similar to those reported
prior to emergence. Items such as inventory, property, plant and
equipment, long-term assets and long-term liabilities were
significantly adjusted from amounts previously reported. Because
fresh start accounting was adopted at emergence and because of
the significance of liabilities subject to compromise that were
relieved upon emergence, meaningful comparisons between the
historical financial statements and the financial statements
from and after emergence are difficult to make.
56
2. The Companys judgments and estimates with respect
to commitments and contingencies.
Valuation of legal and other contingent claims is subject to a
great deal of judgment and substantial uncertainty. Under
generally accepted accounting standards (GAAP),
companies are required to accrue for contingent matters in their
financial statements only if the amount of any potential loss is
both probable and the amount (or a range) of
possible loss is estimatable. In reaching a
determination of the probability of an adverse ruling in respect
of a matter, the Company typically consults outside experts.
However, any such judgments reached regarding probability are
subject to significant uncertainty. The Company may, in fact,
obtain an adverse ruling in a matter that it did not consider a
probable loss and which, therefore, was not accrued
for in its 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. Further, in estimating the
amount of any loss, in many instances a single estimation of the
loss may not be possible. Rather, the Company 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.
3. The Companys judgments and estimates in respect of
its employee defined benefit plans.
Defined benefit pension and post retirement medical obligations
included in the consolidated financial statements at
June 30, 2006 and at prior dates are based on assumptions
that were subject to variation from
year-to-year.
Such variations could have caused the Companys estimate of
such obligations to vary significantly. Restructuring actions
relating to the Companys exit from most of its commodities
businesses (such as the indefinite curtailment of the Mead
smelter) also had a significant impact on such amounts.
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. 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 went up, so did the net projected
obligation. Conversely, if the rate of increase was assumed to
be smaller, the projected obligation declined.
4. The Companys judgments and estimates in respect to
environmental commitments and contingencies.
The Company is 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 the Companys
evaluation of environmental matters, the Company has established
environmental accruals, primarily related to potential solid
waste disposal and soil and groundwater remediation matters.
These environmental accruals represent the Companys
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 the Companys assessment of
the likely remediation action to be taken. However, making
estimates of possible environmental remediation costs is subject
to inherent uncertainties. As additional facts are developed and
definitive remediation plans and necessary regulatory approvals
for implementation of remediation are established or alternative
technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental
accruals.
See Note 8 of Notes to Interim Consolidated Financial
Statements for additional information in respect of
environmental contingencies.
57
5. Companys judgments and estimates in respect of
conditional asset retirement obligations.
Companies are required to estimate incremental costs for special
handling, removal and disposal costs of materials that may or
will give rise to conditional asset retirement obligations
(CAROs) and then discount the expected costs back to
the current year using a credit adjusted risk free rate. 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.
As more fully discussed in Note 2 of Notes to Interim
Consolidated Financial Statements, the Company has evaluated its
exposures to CAROs and determined that it has CAROs at several
of its facilities. The vast majority of such CAROs consist of
incremental costs that would be associated with the removal and
disposal of asbestos (all of which is believed to be fully
contained and encapsulated within walls, floors, ceilings or
piping) of certain of the older facilities if such facilities
were to undergo major renovation or be demolished. No plans
currently exist for any such renovation or demolition of such
facilities and the Companys current assessment is that the
most probable scenarios are that no such CARO would be triggered
for 20 or more years, if at all. Nonetheless, the Company
recorded an estimated CARO liability of approximately
$2.7 million at December 31, 2005 and such amount will
increase substantially over time.
The estimation of CAROs is subject to a number of inherent
uncertainties including: (a) the timing of when any such
CARO may be incurred, (b) the ability to accurately
identify all materials that may require special handling,
treatment, etc., (c) the ability to reasonably estimate the
total incremental special handling and other costs, (d) the
ability to assess the relative probability of different
scenarios which could give rise to a CARO, and (e) other
factors outside a companys control including changes in
regulations, costs, interest rates, etc. As such, actual costs
and the timing of such costs may vary significantly from the
estimates, judgments and probable scenarios considered by the
Company, which could, in turn, have a material impact on the
Companys future financial statements.
6. Recoverability of recorded asset values.
Under GAAP, assets to be held and used are evaluated for
recoverability differently than assets to be sold or disposed
of. Assets to be held and used are evaluated based on their
expected undiscounted future net cash flows. So long as the
Company reasonably expects that such undiscounted future net
cash flows for each asset will exceed the recorded value of the
asset being evaluated, no impairment is required. However, if
plans to sell or dispose of an asset or group of assets meet a
number of specific criteria, then, under GAAP, such assets
should be considered held for sale/disposition and their
recoverability should be evaluated, based on expected
consideration to be received upon disposition. Sales or
dispositions at a particular time will be affected by, among
other things, the existing industry and general economic
circumstances as well as the Companys own circumstances,
including whether or not assets will (or must) be sold on an
accelerated or more extended timetable. Such circumstances may
cause the expected value in a sale or disposition scenario to
differ materially from the realizable value over the normal
operating life of assets, which would likely be evaluated on
long-term industry trends.
7. Income Tax Provisions in Interim Periods.
In accordance with GAAP, financial statements for interim
periods are to include an income tax provision based on the
effective tax rate expected to be incurred in the current year.
Accordingly, estimates and judgments must be made by the Company
(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
carryforwards 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. For purposes of
preparing the September 30, 2006 unaudited financial
statements, the Company has considered its actual operating
results in the first nine months of 2006 as well as its
forecasts for the balance of the year. Based on this and other
available information, the Company currently forecasts that it
will not generate U.S. taxable income for the full year.
However, among other things, should (i) actual results
58
for the balance of 2006 vary from that in the nine months of
2006 and the Companys forecasts due to one or more of the
factors cited above or in Part II, Item 1A. Risk
Factors in this Report, (ii) income be distributed
differently than expected among tax jurisdictions,
(iii) one or more material events or transactions occur
which were not contemplated, (iv) other uncontemplated
transactions occur, or (v) certain expected deductions,
credits or carryforwards not be available, it is possible that
the effective tax rate for 2006 could vary materially from the
assessments used to prepare the September 30, 2006 interim
consolidated financial statements included elsewhere herein.
Additionally, following emergence, the Companys tax
provision will be affected by the impacts of Plan and by the
application of fresh start reporting. See Note 6 of Notes
to Interim Consolidated Financial Statements for additional
discussion of these matters.
8. Predecessor Reporting While in Reorganization.
The interim consolidated financial statements as of and for the
six month period ended June 30, 2006, were prepared on a
going concern basis in accordance with
SOP 90-7
and did not include the impacts of the Plan including
adjustments relating to recorded asset amounts, the resolution
of liabilities subject to compromise and the cancellation of the
interests of stockholders as of June 30, 2006. Adjustments
related to the Plan materially affected the consolidated
financial statements included elsewhere in this Report as more
fully shown in the opening July 1, 2006 balance sheet
presented in Note 1 of Notes to Interim Consolidated
Financial Statements.
In addition, during the course of the Chapter 11
proceedings, there were material impacts including:
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Additional pre-Filing Date claims were identified through the
proof of claim reconciliation process and arose in connection
with actions taken by the Debtors in the Chapter 11
proceedings. For example, while the Debtors considered rejection
of the Bonneville Power Administration (BPA)
contract to be in the Companys best long-term interests,
the rejection resulted in an approximate $75.0 million
claim by the BPA. In the second quarter of 2006, an agreement
between the Company and the BPA was approved by the Bankruptcy
Court under which the claim was settled for a pre-petition claim
of $6.1 million.
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The amount of pre-Filing Date claims ultimately allowed by the
Bankruptcy Court in respect of contingent claims and benefit
obligations were materially different from the amounts reflected
in the Companys consolidated financial statements.
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As more fully discussed below, changes in business plans
precipitated by the Chapter 11 proceedings resulted in
significant charges associated with the disposition of assets.
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Contractual
Obligations and Commercial Commitments
The following summarizes the Companys significant
contractual obligations at September 30, 2006 (dollars in
millions):
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|
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Payments Due in
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Less Than
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2-3
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4-5
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More Than
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Contractual Obligations
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Total
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1 Year
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Years
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Years
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5 Years
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Long-term debt
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$
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50.0
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$
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$
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$
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50.0
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$
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Operating leases
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7.4
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2.6
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3.1
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1.6
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.1
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Total cash contractual obligations
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$
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57.4
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$
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2.6
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$
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3.1
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$
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51.6
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$
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.1
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The following paragraphs summarize the Companys
off-balance sheet arrangements.
As of September 30, 2006, outstanding letters of credit
under the Revolving Credit Facility were approximately
$17.7 million, substantially all of which expire within
approximately twelve months. The letters of credit relate
primarily to insurance, environmental and other activities.
The Company has agreements to supply alumina to and to purchase
aluminum from Anglesey, a 49.0%-owned entity that owns and
operates an aluminum smelter in Holyhead, Wales. Both the
alumina sales agreement and primary aluminum purchase agreement
are tied to primary aluminum prices.
59
Employee benefit plans include the following:
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A commitment to provide one or more defined contribution plan(s)
as a replacement for the five defined benefit pension plans for
hourly bargaining unit employees at four of the Companys
production facilities and one inactive operation (the
Hourly DB Plans). The Hourly DB Plans at the four
production facilities will, as more fully discussed in Note 7 of
Notes to Interim Consolidated Financial Statements, likely be
terminated during the fourth quarter of 2006, effective as of
October 10, 2006, pursuant to a court ruling received in
July 2006. It is anticipated that the replacement defined
contribution plans for the production facilities will provide
for an annual contribution of one dollar per hour worked by
bargaining unit employee and, in certain instances, will provide
for certain matching of contributions.
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A defined contribution savings plan for hourly bargaining unit
employees (the Hourly DC Plan) at all of the
Companys other production facilities (not covered by the
Hourly DB Plans). Pursuant to the terms of Hourly DC Plan, the
Company will be required to make annual contributions to the
Steelworkers Pension Trust on the basis of one dollar per United
Steelworker (USW) employee hour worked at two
facilities. The Company will also be required to make
contributions to a defined contribution savings plan for active
USW employees that will range from eight hundred dollars to
twenty-four hundred dollars per employee per year, depending on
the employees age. Similar defined contribution savings
plans have been established for non-USW hourly employees subject
to collective bargaining agreements. The Company currently
estimates that contributions to all such plans will range from
$3.0 million to $6.0 million per year.
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A defined contribution savings plan for salaried and
non-bargaining unit hourly employees (the Salaried DC
Plan) providing for a match of certain contributions made
by employees plus a contribution of between 2% and 10% of their
salary depending on their age and years of service.
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An annual variable cash contribution to two VEBAs. The amount to
be contributed to the VEBAs will be 10% of the first
$20.0 million of annual cash flow (as defined; in general
terms, the principal element 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 million.
Such annual payments will not exceed $20.0 million and will
also be limited (with no carryover to future years) to the
extent that the payments would cause the Companys
liquidity to be less than $50.0 million. Such amounts will
be determined on an annual basis and payable no later than
March 31 of the following year. However, the Company has
the ability to offset amounts that would otherwise be due to the
VEBAs with approximately $12.7 million of excess
contributions made to the VEBAs prior to the Effective Date.
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The following table shows (in millions of dollars) the estimated
amount of variable VEBA payments that would occur at differing
levels of earnings before depreciation, interest, income taxes
(EBITDA) and cash payments in respect of, among
other items, interest, income taxes and capital expenditures.
The table below does not consider the liquidity limitation, the
$12.7 million of advances available to the Company to
offset
60
VEBA obligations as they become due and certain other factors
that could impact the amount of variable VEBA payments due and,
therefore, should be considered only an estimate and subject to
change.
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Cash Payments for
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Capital Expenditures, Income Taxes, Interest Expense, etc.
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EBITDA
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$25.0
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$50.0
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$75.0
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$100.0
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$ 20.0
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$
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$
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$
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$
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40.0
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1.5
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60.0
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5.0
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1.0
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80.0
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9.0
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4.0
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.5
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100.0
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13.0
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8.0
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3.0
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120.0
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17.0
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12.0
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7.0
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2.0
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140.0
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20.0
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16.0
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11.0
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6.0
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160.0
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20.0
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20.0
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15.0
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10.0
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180.0
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20.0
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20.0
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19.0
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14.0
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200.0
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20.0
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20.0
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20.0
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18.0
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A short term incentive compensation plan for management payable
in cash which is based primarily on earnings, adjusted for
certain safety and performance factors. Most of the
Companys locations have similar programs for both hourly
and salaried employees.
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A stock-based long-term incentive plan for key managers. As more
fully discussed in Note 7 of Notes to Interim Consolidated
Financial Statements, an initial, emergence-related award was
made under this program. Additional awards are expected to be
made in future years.
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In connection with the sale of the Companys interests in
and related to the Gramercy, Louisiana facility and Kaiser
Jamaica Bauxite Company, the Company indemnified the buyers
against losses suffered by the buyers that result from any
breaches of certain seller representations and warranties up to
$5 million. Upon the closing of the transaction, such
amount was recorded in long-term liabilities in the accompanying
financial statements. A claim for the full amount of the
indemnity has been made. In October 2006, the claimant filed a
revised report to indicate that its claim was approximately
$2 million and has separately filed for summary judgment in
respect to its claim. The Company continues to evaluate the
claim and, as such, has no basis or enough information to revise
the accrual. The indemnity expired with respect to additional
claims in October 2006.
During the third quarter of 2005 and August 2006, the Company
placed orders for certain equipment
and/or
services intended to augment the Companys heat treat and
aerospace capabilities at the Companys Trentwood facility
in Spokane, Washington in respect of which the Company expects
to become obligated for costs likely to total in the range of
$105 million, approximately $45 million of such cost
was incurred in 2005 and through the third quarter of 2006. The
balance is expected to be incurred primarily over the remainder
of 2006 and 2007, with the majority of the remaining costs being
incurred in 2007.
At September 30, 2006, there was still approximately
$7.1 million of accrued, but unpaid professional fees that
have been approved for payment by the Bankruptcy Court.
Additionally, certain professionals had success fees
due upon the Companys emergence from Chapter 11.
Approximately $5 million of such amounts were borne by the
Company and were recorded in connection with emergence and fresh
start accounting.
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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The Companys operating results are sensitive to changes in
the prices of alumina, primary aluminum and fabricated aluminum
products, and also depend to a significant degree upon the
volume and mix of all products sold. As discussed more fully in
Notes 3 and 13 of Notes to Interim Consolidated Financial
Statements, the Company historically has utilized derivative
transactions to lock-in a specified price or range of prices for
certain products which it sells or consumes in its production
process and to mitigate the Companys exposure to changes
in foreign currency exchange rates.
61
Sensitivity
Primary Aluminum. The Companys share of
primary aluminum production from Anglesey is approximately
150 million pounds annually. Because the Company purchases
alumina for Anglesey at prices linked to primary aluminum
prices, only a portion of the Companys net revenues
associated with Anglesey are exposed to price risk. The Company
estimates the net portion of its share of Anglesey production
exposed to primary aluminum price risk to be approximately
100 million pounds annually (before considering income tax
effects).
As stated above, the Companys pricing of fabricated
aluminum products is generally intended to lock-in a conversion
margin (representing the value added from the fabrication
process(es) ) and to pass metal price risk on to its customers.
However, in certain instances the Company does enter into firm
price arrangements. In such instances, the Company does have
price risk on its anticipated primary aluminum purchase in
respect of the customers order. Total fabricated products
shipments during the nine months ended September 30, 2005;
the period from January 1, 2006 to July 1, 2006 and
the period from July 1, 2006 through September 30,
2006 for which the Company had price risk were (in millions of
pounds) 109.6, 103.9 and 49.1, respectively.
During the last three years the volume of fabricated products
shipments with underlying primary aluminum price risk were at
least as much as the Companys net exposure to primary
aluminum price risk at Anglesey. As such, the Company considers
its access to Anglesey production overall to be a
natural hedge against any fabricated products firm
metal-price risk. However, since the volume of fabricated
products shipped under firm prices may not match up on a
month-to-month
basis with expected Anglesey-related primary aluminum shipments,
the Company may use third party hedging instruments to eliminate
any net remaining primary aluminum price exposure existing at
any time.
At September 30, 2006, the fabricated products business
held contracts for the delivery of fabricated aluminum products
that have the effect of creating price risk on anticipated
primary aluminum purchases during the fourth quarter of 2006 and
for the period 2007 2010 totaling approximately (in
millions of pounds): 2006: 69, 2007: 116, 2008: 94, 2009: 71 and
2010: 72.
Foreign Currency. The Company from time to
time will enter into forward exchange contracts to hedge
material cash commitments for foreign currencies. After
considering the completed sales of the Companys commodity
interests, the Companys primary foreign exchange exposure
is the Anglesey-related commitment that the Company funds in
Great Britain Pound Sterling (GBP). The Company
estimates that, before consideration of any hedging activities,
a US $0.01 increase (decrease) in the value of the GBP
results in an approximate $.5 million (decrease) increase
in the Companys annual pre-tax operating income.
Energy. The Company is exposed to energy price
risk from fluctuating prices for natural gas. The Company
estimates that, before consideration of any hedging activities,
each $1.00 change in natural gas prices (per mcf) impacts the
Companys annual pre-tax operating results by approximately
$4.0 million.
The Company from time to time in the ordinary course of business
enters into hedging transactions with major suppliers of energy
and energy-related financial investments. As of October 1,
2006, the Company had fixed price purchase contracts which cap
the average price the Company would pay for natural gas so that,
when combined with price limits in the physical gas supply
agreement, the Companys exposure to increases in natural
gas prices has been substantially limited for approximately 76%
of the natural gas purchases from October 2006 through December
2006, 31% of natural gas purchases from January 2007 through
March 2007, and 14% of natural gas purchases from April 2007
through June 2007.
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Item 4.
|
Controls
and Procedures
|
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934, as amended
(the Exchange Act), is processed, recorded,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and
that such information is accumulated and communicated to
management, including the principal executive officer and
principal financial officer, to allow for timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of
62
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Evaluation of Disclosure Controls and
Procedures. An evaluation of the effectiveness of
the design and operation of the Companys disclosure
controls and procedures was performed as of the end of the
period covered by this Report under the supervision of and with
the participation of the Companys management, including
the principal executive officer and principal financial officer.
Based on that evaluation, the Companys principal executive
officer and principal financial officer concluded that the
Companys disclosure controls and procedures were not
effective for the reasons described below.
During the final reporting and closing process relating to our
first quarter of 2005, we evaluated the accounting treatment for
the VEBA payments and concluded that such payments should be
presented as a period expense. As more fully discussed in
Note 16 of the Notes to Consolidated Financial Statements
in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005, during our reporting
and closing process relating to the preparation of the
December 31, 2005 financial statements and analyzing the
appropriate post-emergence accounting treatment for the VEBA
payments, the Company concluded that the VEBA payments made in
2005 should have been presented as a reduction of pre-petition
retiree medical obligations rather than as a period expense.
While the incorrect accounting treatment employed relating to
the VEBA payments did indicate that a deficiency in the
Companys internal controls over financial reporting
existed at December 31, 2005, such deficiency was fully
remediated during the final reporting and closing process in
connection with the preparation of the December 31, 2005
financial statements and, accordingly, did not exist at the end
of subsequent periods.
During the first quarter of 2006 as part of the final reporting
and closing process relating to the preparation of the
December 31, 2005 financial statements, the Company
concluded that our controls and procedures were not effective as
of the end of the period covered by that report because a
material weakness in internal control over financial reporting
existed relating to our accounting for derivative financial
instruments under Statement of Financial Accounting Standards
133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133).
Specifically, we lacked sufficient technical expertise as to the
application of SFAS 133, and our procedures relating to
hedging transactions were not designed effectively such that
each of the complex documentation requirements for hedge
accounting treatment set forth in SFAS No. 133 were
evaluated appropriately. More specifically, the Companys
documentation did not comply with SFAS No. 133 in
respect to the Companys methods for testing and supporting
that changes in the market value of the hedging transactions
would correlate with fluctuations in the value of the forecasted
transaction to which they relate. The Company believed that the
derivatives it was using would qualify for the
short-cut method whereby regular assessments of
correlation would not be required. However, it ultimately
concluded that, while the terms of the derivatives were
essentially the same as the forecasted transaction, they were
not identical and, therefore, the Company should have done
certain mathematical computations to prove the ongoing
correlation of changes in value of the hedge and the forecasted
transaction.
Management has concluded that, had the Company completed its
documentation in strict compliance with SFAS No. 133,
the derivative transactions would have qualified for
hedge (e.g. deferral) treatment. The rules provide
that, once de-designation has occurred, the Company can modify
its documentation and re-designate the derivative transactions
as hedges and, if appropriately documented,
re-qualify the transactions for prospectively deferring changes
in market fluctuations after such corrections are made.
The Company is working to modify its documentation and to
re-qualify open and post 2005 derivative transactions for
treatment as hedges. Specifically, the Company will, as a part
of the re-designation process, modify the documentation in
respect of all its derivative transactions to require the
long form method of testing and supporting
correlation. The Company also intends to have outside experts
review its revised documentation once completed and to use such
experts to perform reviews of documentation in respect of any
new forms of documentation on future transactions and to do
periodic reviews to help reduce the risk that other instances of
non-compliance with SFAS No. 133 will occur. However,
as SFAS No. 133 is a complex document and different
interpretations are possible, absolute assurances cannot be
provided that such improved controls will prevent any/all
instances of non-compliance.
63
As a result of the material weakness, we restated our financial
statements for the quarters ended March 31, 2005,
June 30, 2005 and September 30, 2005. In light of
these restatements, our management, including our principal
executive officer and principal financial officer, determined
that this deficiency constituted a material weakness in our
internal control over financial reporting at December 31,
2005. Having identified the material weakness prior to the end
of the first quarter of 2006, we changed our accounting for
derivative instruments from hedge treatment to
mark-to-market
treatment in our financial statements for first quarter of 2006
and subsequent periods in order to comply with GAAP. While we
believe this change in our accounting for derivative instruments
technically resolves the material weakness from a GAAP
perspective, the Company believes that hedge accounting
treatment is more desirable than
mark-to-market
accounting treatment and, accordingly, the Company will not,
from its own perspective, consider this matter to be fully
remediated until it completes all the steps outlined above and
requalifies its derivatives for hedge accounting treatment under
GAAP.
Changes in Internal Controls Over Financial
Reporting. The Company did not have any change in
its internal controls over financial reporting during the third
quarter of 2006 that has materially affected, or is reasonably
likely to affect, its internal controls over financial
reporting. However, as more fully described below, the Company
does not currently believe its internal control environment is
as strong as it has been in the past.
The Company relocated its corporate headquarters from Houston,
Texas to Foothill Ranch, California, where the Fabricated
Products business unit, the Companys core business, is
headquartered. Staff transition occurred starting in late 2004
and was ongoing primarily during the first half of 2005. A small
core group of Houston corporate personnel were retained
throughout 2005 to supplement the Foothill Ranch staff and
handle certain of the remaining
Chapter 11-related
matters. During the second half of 2005, the monthly and
quarterly accounting, financial reporting and consolidation
processes were thought at that time to have functioned
adequately.
As previously announced, in January 2006, the Companys
Vice President (VP) and Chief Financial Officer
(CFO) resigned. His decision to resign was based on
a personal relationship with another employee, which the Company
determined to be inappropriate. The resignation was in no way
related to the Companys internal controls, financial
statements, financial performance or financial condition. The
Company formed the Office of the CFO and split the
CFOs duties between the Companys Chief Executive
Officer and two long tenured financial officers, the
VP-Treasurer and VP-Controller. In February 2006, a person with
a significant corporate accounting role resigned. This
persons duties were split between the VP-Controller and
other key managers in the corporate accounting group. The
Company also used certain former personnel to augment the
corporate accounting team. In May 2006, the Company hired a new
CFO, and over recent months, the Company has upgraded its
corporate accounting and financial staffs with respect to
certain key roles.
The relocation and changes in personnel described above have
made the 2005 year-end and 2006 accounting and reporting
processes more difficult due to the combined loss of the two
individuals and reduced amounts of institutional knowledge in
the new corporate accounting group. For these reasons, while the
Company applied its normal internal controls over financial
reporting in the preparation of this Report, the Company notes
that the level of assurance it has with respect to its internal
controls over financial reporting is not as strong as it has
been in past periods.
PART II
OTHER INFORMATION
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Item 1.
|
Legal
Proceedings
|
Reference is made to Part I, Item 3, Legal
Proceedings in the Companys
Form 10-K
for the year ended December 31, 2005 for information
concerning material legal proceedings with respect to the
Company.
Reorganization
Proceedings
Notes 1, 13 and 18 of Notes to Interim Consolidated
Financial Statements are incorporated herein by reference.
Pursuant to the Plan, all asbestos personal injury claims were
resolved and will have no continuing effects on the Company
after emergence.
64
Other
Environmental Matters
The Company is working with regulatory authorities and
performing studies and remediation pursuant to several consent
orders with the State of Washington relating to the historical
use of oils containing PCBs at our Trentwood facility in
Spokane, Washington before 1978. During April 2004, the Company
was served with a subpoena for documents and was notified by
Federal authorities that they are investigating certain
environmental compliance issues with respect to the
Companys Trentwood facility in the State of Washington.
This investigation is ongoing. The Company believes it currently
is in compliance in all material respects with all applicable
environmental law and requirements at the facility. The Company
intends to defend any claims or charges, if any which may
result, vigorously. The Company cannot, however, assess what, if
any, impact this matter may have on the Companys financial
statements.
Item 1A. Risk
Factors.
As a part of the Companys emergence-related activities,
the Company reviewed the risk factors included in the
Predecessors Annual Report on
Form 10-K
for the year ended December 31, 2005 and undertook to
update such risk factors for the Companys post emergence
facts and circumstances. The Companys updated risk factors
are set forth below and replace the risk factors presented in
the 2005
Form 10-K.
We
recently emerged from Chapter 11 bankruptcy, have sustained
losses in the past and may not be able to maintain
profitability.
Because we recently emerged from Chapter 11 bankruptcy and
have in the past sustained losses, we cannot assure you that we
will be able to maintain profitability in the future. We sought
protection under Chapter 11 of the Code in February 2002.
We emerged from bankruptcy as a reorganized entity on
July 6, 2006. Prior to and during this reorganization, we
incurred substantial net losses, including net losses of
$788.3 million, $746.8 million and $753.7 million
in the fiscal years ended December 31, 2003, 2004 and 2005,
respectively. If we cannot maintain profitability, the value of
an investors investment in the Company may decline.
An
investor may not be able to compare our historical financial
information to our future financial information, which will make
it more difficult to evaluate an investment in our
company.
As a result of the effectiveness of our plan of reorganization
on July 6, 2006, we are operating our business under a new
capital structure. In addition, we adopted fresh start
accounting in accordance with American Institute of Certified
Public Accountants Statements of
Position 90-7
(SOP-7), Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code as of July 1,
2006. Because
SOP 90-7
requires us to account for our assets and liabilities at their
fair values as of the effectiveness of our plan of
reorganization, our financial condition and results of
operations from and after July 1, 2006 will not be
comparable in some material respects to the financial condition
or results of operations reflected in our historical financial
statements at dates or for periods prior to July 1, 2006.
This may make it difficult to assess our future prospects based
on historical performance.
We
operate in a highly competitive industry which could adversely
affect our profitability.
The fabricated products segment of the aluminum industry is
highly competitive. Competition in the sale of fabricated
aluminum products is based upon quality, availability, price and
service, including delivery performance. Many of our competitors
are substantially larger than we are and have greater financial
resources than we do, and may have other strategic advantages,
including more efficient technologies or lower raw material and
energy costs. Our facilities are primarily located in North
America. To the extent that our competitors have production
facilities located outside North America, they may be able to
produce similar products at a lower cost. We may not be able to
adequately reduce costs 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.
65
We
depend on a core group of significant customers.
In 2005 and for the nine months ended September 30, 2006,
our largest fabricated products customer, Reliance
Steel & Aluminum, accounted for approximately 11% and
19%, respectively, of our fabricated products net sales, and our
five largest customers accounted for approximately 33% and 42%,
respectively, of our fabricated products net sales. The increase
in the percentage of our net sales to our largest fabricated
products customer is the result of Reliance acquiring one of our
other top five customers in the second quarter of 2006. Sales to
Reliance and the other customer (on a combined basis) accounted
for approximately 19% of our net sales in 2005 and for the nine
months ended September 30, 2006. 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. The loss of
Reliance as a customer could have a material adverse effect on
our financial position, results of operations and cash flows. In
addition, a significant downturn in the business or financial
condition of any of our significant customers could materially
and adversely affect our financial position, results of
operations and cash flows.
Some of our current and former international customers,
particularly automobile manufacturers in Europe and Japan, were
reluctant to do business with us while we underwent
Chapter 11 bankruptcy reorganization, presumably because of
their unfamiliarity with U.S. bankruptcy laws and the
uncertainty about the strength of our business. Although we
believe our emergence from Chapter 11 bankruptcy should
mitigate such reluctance, we can give no assurance that this
will be the case.
Our
industry is very sensitive to foreign economic, regulatory and
political factors that may adversely affect our
business.
We import primary aluminum from, and manufacture fabricated
products used in, foreign countries. We also own 49% of Anglesey
Aluminium Limited (Anglesey), which owns and
operates an aluminum smelter in the United Kingdom. We purchase
alumina to supply to Anglesey and we purchase aluminum from
Anglesey for sale to a third party in the United Kingdom.
Factors in the politically and economically diverse countries in
which we operate or have customers or suppliers, including
inflation, fluctuations in currency and interest rates,
competitive factors, civil unrest and labor problems, could
affect our financial position, results of operations and cash
flows. Our financial position, results of operations and cash
flows could also be adversely affected by:
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acts of war or terrorism or the threat of war or terrorism;
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government regulation in the countries in which we operate,
service customers or purchase raw materials;
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the implementation of controls on imports, exports or prices;
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the adoption of new forms of taxation;
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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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