e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2006
Commission file number 0-52105
KAISER ALUMINUM
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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94-3030279
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(State of
Incorporation)
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(I.R.S. Employer
Identification No.)
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27422 PORTOLA PARKWAY,
SUITE 350,
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92610-2831
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FOOTHILL RANCH,
CALIFORNIA
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(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(949) 614-1740
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Class
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Name of Exchange on Which Registered
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Common Stock, par value
$0.01 par value
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Nasdaq Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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
Act). Yes o No þ
As of June 30, 2006, there were 79,671,531 shares of
the common stock of the registrant outstanding and the aggregate
market value of the registrants common stock held by
non-affiliates, based upon the average bid and asked price of
the Common Stock as reported by the OTC Bulletin Board
maintained by the National Association of Securities Dealers,
Inc. for June 30, 2006 (which was the last day of the
registrants most recently completed second fiscal
quarter), was less than $1 million. Pursuant to the
registrants plan of reorganization, upon the
registrants emergence from chapter 11 on July 6,
2006, all of the shares of common stock outstanding immediately
prior thereto were cancelled without consideration and the
registrant issued 20,000,000 shares of new common stock.
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes þ No o
As of February 28, 2007, there were 20,524,904 shares
of new Common Stock of the registrant outstanding.
Documents Incorporated By Reference. Certain portions of the
registrants definitive proxy statement related to the
registrants 2007 annual meeting of stockholders to be
filed not later than 120 days after the close of the
registrants fiscal year are incorporated by reference into
Part III of this Report on
Form 10-K.
TABLE OF
CONTENTS
In this Report, all references to Kaiser,
we, us, the Company and
our refer to Kaiser Aluminum Corporation and its
subsidiaries, unless the context otherwise requires or where
otherwise indicated.
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PART I
Forward-Looking
Statements
This Annual Report on
Form 10-K
contains statements which constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear
throughout this Report, including this Item 1.
Business Business Operations,
Item 1A. Risk Factors, and Item 7.
Managements Discussion and Analysis of Financial
Conditions and Results of Operations. These
forward-looking statements can be identified by the use of
forward-looking terminology such as believes,
expects, may, estimates,
will, should, plans, or
anticipates, or the negative of the foregoing or
other variations or comparable terminology, or by discussions of
strategy.
Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may vary from
those in the forward-looking statements as a result of various
factors. These factors include: the effectiveness of
managements strategies and decisions; general economic and
business conditions, including cyclicality and other conditions
in the aerospace and other end markets we serve; developments in
technology; new or modified statutory or regulatory
requirements; changing prices and market conditions; and other
factors discussed in Item 1A. Risk Factors and
elsewhere in this Report.
Readers are urged to consider these factors carefully in
evaluating any forward-looking statements and are cautioned not
to place undue reliance on these forward-looking statements. The
forward-looking statements included herein are made only as of
the date of this Report, and we undertake no obligation to
update any information contained in this Report or to publicly
release any revisions to any forward-looking statements that may
be made to reflect events or circumstances that occur, or that
we become aware of, after the date of this Report.
Availability
of Information
We will make available our Annual Reports on From
10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and amendments to those reports, filed or furnished pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of
1934, free of charge through our Internet website at
www.kaiseraluminum.com under the heading Investor
Relations as soon as reasonably practicable after we
electronically file such material with or furnish it to the
Securities and Exchange Commission.
Business
Overview
We are an independent fabricated aluminum products manufacturing
company with 2006 net sales of approximately
$1.4 billion. We were founded in 1946 and operate 10
production facilities in the United States and one in Canada. We
manufacture rolled, extruded, drawn and forged aluminum products
within three end use categories consisting of aerospace and high
strength products (which we refer to as Aero/HS products),
general engineering products (which we refer to as GE products)
and custom automotive and industrial products (which we refer to
as Custom products).
We produced and shipped approximately 523 million pounds of
fabricated aluminum products in 2006 which comprised 85% of our
total net sales. We have long-standing relationships with our
customers, which include leading aerospace companies, automotive
suppliers and metal distributors. We strive to tightly integrate
the management of our fabricated products operations across
multiple production facilities, product lines and target markets
in order to maximize the efficiency of product flow to our
customers. In our served markets, we seek to be the supplier of
choice by pursuing
best-in-class
customer satisfaction and offering a broad product portfolio.
In order to capitalize on the significant growth in demand for
high quality heat treat aluminum plate products in the market
for Aero/HS products, in the third quarter of 2005 we began a
major expansion at our Trentwood facility in Spokane,
Washington. We anticipate that the Trentwood expansion will
significantly increase our aluminum plate production capacity
and enable us to produce thicker gauge aluminum plate. The
$105 million expansion is being completed in phases. One
new heat treat furnace became fully operational in the fourth
quarter of 2006. A
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second such furnace is expected to become fully operational
during the first quarter of 2007 and a third such furnace is
expected to become operational in early 2008. A new heavy gauge
stretcher, which will enable us to produce thicker gauge
aluminum plate, is also expected to become operational in early
2008.
In addition to our core fabricated products operations, we have
a 49% ownership interest in Anglesey Aluminium Limited (which we
refer to as Anglesey), a company that owns an
aluminum smelter based in Holyhead, Wales. Anglesey has produced
in excess of 300 million pounds of primary aluminum for
each of the last three fiscal years, of which 49% is available
to us. During 2006, sales of our portion of Angleseys
output represented 15% of our total net sales. Because we also
purchase primary aluminum for our fabricated products at market
prices, Angleseys production acts as a natural hedge for
our fabricated products operations. See Item 1A. Risk
Factors The expiration of the power agreement for
Anglesey may adversely affect our cash flows and affect our
hedging programs for a discussion regarding the potential
closure of Anglesey, which could occur as soon as 2009.
Between the first quarter of 2002 and the first quarter of 2003,
Kaiser and 25 of our then-existing subsidiaries filed voluntary
petitions for relief in the United States Bankruptcy Court for
the District of Delaware ( which we refer to as the
Bankruptcy Court) under chapter 11 of the
United States Bankruptcy Code (which we refer to as the
Bankruptcy Code). Pursuant to our Second Amended
Plan of Reorganization (which we refer to as our
Plan), we emerged from chapter 11 bankruptcy on
July 6, 2006 ( which we refer to as the Effective
Date). Our Plan allowed us to shed significant legacy
liabilities, including long-term indebtedness, pension
obligations, retiree medical obligations and liabilities
relating to asbestos and other personal injury claims. In
addition, prior to our emergence from chapter 11
bankruptcy, we sold all of our interests in bauxite mining
operations, alumina refineries and aluminum smelters, other than
our interest in Anglesey, in order to focus on our fabricated
aluminum products business, which we believe has a stronger
competitive position and presents greater opportunities for
growth.
Business
Operations
Fabricated
Products Business Unit
Overview. Our fabricated products business
unit produces rolled, extruded, drawn, and forged aluminum
products used principally for aerospace and defense, automotive,
consumer durables, electronics, electrical, and machinery and
equipment end-use applications. In general, the fabricated
products business unit manufactures products in one of three
broad categories: Aero/HS products; GE products; and Custom
products. During 2004, 2005 and 2006, our eleven North American
fabricated products manufacturing facilities produced and
shipped approximately 459, 482 and 523 million pounds of
fabricated aluminum products, respectively, which accounted for
approximately 86%, 86% and 85% of our total net sales for 2004,
2005 and 2006, respectively.
Types of
Products Produced
The aluminum fabricated products market is broadly defined as
the markets for flat-rolled, extruded, drawn, forged and cast
aluminum products, which are used in a variety of end-use
applications. We participate in certain portions of the markets
for flat-rolled, extruded/drawn and forged products focusing on
highly engineered products for aerospace and high strength,
general engineering and custom automotive and industrial
applications. The portions of markets in which we participate
accounted for approximately 20% of total North American
shipments of aluminum fabricated products in 2006.
Aerospace and High Strength Products. Our
Aero/HS products include high quality heat treat plate and
sheet, as well as cold finish bar, seamless drawn tube and
billet that are manufactured to demanding specifications for the
global aerospace and defense industries. These industries use
our products in applications that demand high tensile strength,
superior fatigue resistance properties and exceptional
durability even in harsh environments. For instance, aerospace
manufacturers use high-strength alloys for a variety of
structures that must perform consistently under extreme
variations in temperature and altitude. Our Aero/HS products are
used for a wide variety of end uses. We make aluminum plate and
tube for aerospace applications, and we manufacture a variety of
specialized rod and bar products that are incorporated in goods
as diverse as baseball bats and racecars. The aerospace and
defense markets consumption of fabricated aluminum
products is driven by overall levels of industrial production,
cyclical airframe build rates and defense spending, as well as
the potential availability of competing materials such as
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composites. Demand growth is expected to increase for thick
plate with growth in monolithic construction of
commercial and other aircraft. In monolithic construction,
aluminum plate is heavily machined to form the desired part from
a single piece of metal (as opposed to creating parts using
aluminum sheet, extrusions or forgings that are affixed to one
another using rivets, bolts or welds). In addition to commercial
aviation demand, military applications for heat treat plate and
sheet include aircraft frames and skins and armor plating to
protect ground vehicles from explosive devices. Products sold
for Aero/HS applications represented 31% of our 2006 fabricated
products shipments. Aero/HS net sales in 2006 were approximately
38% of our 2006 fabricated products net sales.
General Engineering Products. GE products
consist primarily of standard catalog items sold to large metal
distributors. These products have a wide range of uses, many of
which involve further fabrication of these products for numerous
transportation and industrial end-use applications where
machining of plate, rod and bar is intensive. Our GE products
consist of 6000-series alloy rod, bar, tube, sheet, plate and
standard extrusions. The 6000-series alloy is an extrudable
medium-strength alloy that is heat treatable and extremely
versatile. Our GE products have a wide range of uses and
applications, many of which involve further fabrication of these
products for numerous transportation and other industrial end
uses. For example, our products are used in the specialized
manufacturing process for liquid crystal display screens, and we
produce aluminum sheet and plate that are used in the vacuum
chambers in which semiconductors are made. We also produce
aluminum plate that is used to further enhance military vehicle
protection. Our rod and bar products are manufactured into
rivets, nails, screws, bolts and parts of machinery and
equipment. Demand growth and cyclicality for GE products tend to
mirror broad economic patterns and industrial activity in North
America. Demand is also impacted by the destocking and
restocking of inventory in the full supply chain. Products sold
for GE applications represented 43% of our 2006 fabricated
products shipments. GE net sales in 2006 were approximately 39%
of our 2006 fabricated products net sales.
Custom Automotive and Industrial Products. Our
Custom products consist of extruded/drawn and forged aluminum
products for many North American automotive and industrial end
uses, including consumer durables, electrical, machinery and
equipment, automobile, light truck, heavy truck and truck
trailer applications. Examples of the wide variety of custom
products that we supply to the automotive industry are extruded
products for anti-lock braking systems, drawn tube for drive
shafts and forgings for suspension control arms and drive train
yokes. A significant portion of our other Custom product sales
in recent years has been for water heater anodes, truck trailers
and electrical/electronic exchangers. For some custom products,
we perform limited fabrication, including sawing and cutting to
length. Demand growth and cyclicality tend to mirror broad
economic patterns and industrial activity in North America, with
specific individual market segments such as automotive, heavy
truck and truck trailer applications tracking their respective
build rates. Products sold for custom automotive and industrial
applications represented 26% of our 2006 fabricated products
shipments. Custom automotive and industrial net sales in 2006
were approximately 23% of our 2006 fabricated products net sales.
End Markets In Which We Do Not Participate. We
have elected not to participate in certain end markets for
fabricated aluminum products, including beverage and food cans,
building and construction materials, and foil used for
packaging. We believe our chosen end markets present better
opportunities for sales growth and premium pricing of
differentiated products. The markets we have elected to
participate in represented approximately 5% of the North
American flat rolled products market and 55% of the North
American extrusion market in 2006.
Types of
Manufacturing Processes Employed
We utilize the following manufacturing processes to produce our
fabricated products:
Flat rolling. The traditional manufacturing
process for aluminum flat-rolled products uses ingot, a large
rectangular slab of aluminum, as the starter material. The ingot
is processed through a series of rolling operations, both hot
and cold. Finishing steps may include heat treatment, annealing,
coating, stretching, leveling or slitting to achieve the desired
metallurgical, dimensional and performance characteristics.
Aluminum flat-rolled products are manufactured using a variety
of alloy mixtures, a range of tempers (hardness), gauges
(thickness) and widths, and various coatings and finishes.
Flat-rolled aluminum semi-finished products are generally either
sheet (under 0.25 inches in thickness) or plate (up to
15 inches in thickness). The vast majority of the North
American market for aluminum flat-rolled products uses
common alloy material for construction and other
applications and beverage/food can sheet. However, these are
products and markets in
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which we have chosen not to participate. Rather, we have focused
our efforts on heat treat products. Heat treat
products are distinguished from common alloy products by higher
strength and other desired product attributes. The primary end
use of heat treat flat-rolled sheet and plate is for Aero/HS and
GE products.
Extrusion. The extrusion process typically
starts with a cast billet, which is an aluminum cylinder of
varying length and diameter. The first step in the process is to
heat the billet to an elevated temperature whereby the metal is
malleable. The billet is put into an extrusion press and pushed,
or extruded, through a die that gives the material the desired
two-dimensional cross section. The material is either quenched
as it leaves the press, or subjected to a post-extrusion heat
treatment cycle, to control the materials physical
properties. The extrusion is then straightened by stretching and
cut to length before being hardened in aging ovens. The largest
end uses of extruded products are in the construction, general
engineering and custom markets. Building and construction
products represents the single largest end-use market for
extrusions by a significant amount. However, we have chosen to
focus our efforts on GE and Custom products because we believe
we have strong production capability, well-developed technical
expertise and high product quality with respect to these
products.
Drawing. Drawing is a fabrication operation in
which extruded tubes and rods are pulled through a die, or
drawn. The purpose of drawing is to reduce the diameter and wall
thickness while improving physical properties and dimensions.
Material may go through multiple drawing steps to achieve the
final dimensional specifications. Aero/HS products is a primary
end-use market and is our focus.
Forging. Forging is a manufacturing process in
which metal is pressed, pounded or squeezed under great pressure
into high-strength parts known as forgings. Forged parts are
heat treated before final shipment to the customer. The end-use
applications are primarily in transportation, where high
strength-to-weight
ratios in products are valued. We focus our production on
certain types of automotive applications.
A description of the manufacturing processes and category of
products at each of our 11 production facilities is shown below:
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Manufacturing
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Location
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Process
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Types of Products
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Chandler, Arizona
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Drawing
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Aero/HS
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Greenwood, South Carolina
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Forging
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Custom
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Jackson, Tennessee
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Extrusion/Drawing
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Aero/HS, GE
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London, Ontario
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Extrusion
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Custom
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Los Angeles, California
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Extrusion
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GE, Custom
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Newark, Ohio
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Extrusion/Rod Rolling
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Aero/HS, GE
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Richland, Washington
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Extrusion
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Aero/HS, GE
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Richmond, Virginia
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Extrusion/Drawing
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GE, Custom
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Sherman, Texas
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Extrusion
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Custom
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Spokane, Washington
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Flat Rolling
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Aero/HS, GE
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Tulsa, Oklahoma
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Extrusion
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GE
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As can be seen in the table above, many of the facilities employ
the same basic manufacturing process and produce the same type
of end use products. Over the past several years, given the
similar economic and other characteristics at each location, we
have made a significant effort to more tightly integrate the
management of our fabricated products business unit across
multiple manufacturing locations, product lines, and target
markets to maximize the efficiency of product flow to customers.
Purchasing is centralized for a substantial portion of the
fabricated products business units primary aluminum
requirements in order to try to maximize price, credit and other
benefits. Because many customers purchase a number of different
products that are produced at different plants, there has also
been substantial integration of the sales force and its
management. The Company believes that integration of its
operations will allow the Company to capture efficiencies while
allowing the plant locations to remain highly focused.
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Raw
Materials
We purchase substantially all of the primary aluminum and
recycled and scrap aluminum used to make our fabricated products
from third-party suppliers. In a majority of the cases, we
purchase primary aluminum ingot and recycled and scrap aluminum
in varying percentages depending on various market factors
including price and availability. The price for primary aluminum
purchased for the fabricated products business unit is typically
based on the Average Midwest Transaction Price (or Midwest
Price), which typically ranges between $.03 to
$.075 per pound above the price traded on the London Metal
Exchange (or LME) depending on primary aluminum
supply/demand dynamics in North America. Recycled and scrap
aluminum are typically purchased at a modest discount to ingot
prices but can require additional processing. In addition to
producing fabricated aluminum products for sale to third
parties, certain of our production facilities provide one
another with billet, log or other intermediate material in lieu
of purchasing such items from third party suppliers. For
example, a substantial majority of the product from the
Richland, Washington facility is used as base input at the
Chandler, Arizona facility; the Sherman, Texas facility is
currently supplying billet and logs to the Tulsa, Oklahoma
facility; the Richmond, Virginia facility typically receives
some portion of its metal supply from either (or both of) the
London, Ontario or Newark, Ohio facilities; and the Newark, Ohio
facility also supplies billet and log to the Jackson, Tennessee
facility and extruded forge stock to the Greenwood, South
Carolina facility.
Pricing
The price we pay for primary aluminum, the principal raw
material for our fabricated aluminum products business, consists
of two components: the price quoted for primary aluminum ingot
on the LME, and the Midwest Transaction Premium, a premium to
LME reflecting domestic market dynamics as well as the cost of
shipping and warehousing. Because aluminum prices are volatile,
we manage the risk of fluctuations in the price of primary
aluminum through a combination of pricing policies, internal
hedging and financial derivatives. Our three principal pricing
mechanisms are as follows:
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Spot price. Some of our customers pay a
product price that incorporates the spot price of primary
aluminum in effect at the time of shipment to a customer. This
pricing mechanism typically allows us to pass commodity price
risk to the customer.
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Index-based price. Some of our customers pay a
product price that incorporates an index-based price for primary
aluminum such as Platts Midwest price for primary
aluminum. This pricing mechanism also typically allows us to
pass commodity price risk to the customer.
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Firm price. Some of our customers pay a firm
price. We bear commodity price risk on firm-price contracts,
which we normally hedge though a combination of financial
derivatives and production from Anglesey. For internal reporting
purposes, whenever the fabricated products business unit enters
into a firm price contract, it also enters into an
internal hedge with the primary aluminum business
unit, so that all the metal price risk resides in the primary
aluminum business unit. Results from internal hedging activities
between the two business units are eliminated in consolidation.
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Sales,
Marketing and Distribution
Industry sales margins for fabricated products fluctuate in
response to competitive and market dynamics. Sales are made
directly to customers by our sales personnel located in the
United States, Canada and Europe, and by independent sales
agents in Asia, Mexico and the Middle East. Our sales and
marketing efforts are focused on the markets for Aero/HS, GE,
and Custom products.
Aerospace and High Strength
Products. Approximately 50% of our Aero/HS
product shipments are sold to distributors with the remainder
sold directly to customers. Sales are made either under
contracts (with terms spanning from one year to several years)
or on an
order-by-order
basis. We serve this market with a North American sales force
focused on Aero/HS and GE products and direct sales
representatives in Western Europe. Key competitive dynamics for
Aero/HS products include the level of commercial aircraft
construction spending (which in turn is often subject to broader
economic cycles) and defense spending.
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General Engineering Products. A substantial
majority of our GE products are sold to large distributors in
North America, with orders primarily consisting of standard
catalog items shipped with a relatively short lead-time. We
service this market with a North American sales force focused on
GE and Aero/HS products. Key competitive dynamics for GE
products include product price, product-line breadth, product
quality, delivery performance and customer service.
Custom Automotive and Industrial Products. Our
Custom products are sold primarily to first tier automotive
suppliers and industrial end users. Sales contracts are
typically medium to long term in length. Almost all sales of
Custom products occur through direct channels using a North
American direct sales force that works closely with our
technical sales organization. Key demand drivers for our
automotive products include the level of North American light
vehicle manufacturing and increased use of aluminum in vehicles
in response to increasingly strict governmental standards for
fuel efficiency. Demand for industrial products is directly
linked to the strength of the U.S. industrial economy.
Customers
In 2006, our fabricated products business unit had approximately
600 customers. The largest, Reliance Steel & Aluminum,
and the five largest customers for fabricated products accounted
for approximately 18% and 41%, respectively, of our net sales in
2006. The loss of Reliance, as a customer, would have a material
adverse effect us. However, we believe that our relationship
with Reliance is good and the risk of loss of Reliance, as a
customer, is remote.
Research
and Development
We operate three research and development centers. Our Rolling
and Heat Treat Center and our Metallurgical Analysis Center are
both located at our Trentwood facility in Spokane, Washington.
The Rolling and Heat Treat Center has complete hot rolling, cold
rolling and heat treat capabilities to simulate, in small lots,
processing of flat-rolled products for process and product
development on an experimental scale. The Metallurgical Analysis
Center consists of a full metallographic laboratory and a
scanning electron microscope to support research development
programs as well as respond to plant technical service requests.
The third center, our Solidification and Casting Center, is
located in Newark, Ohio and has a short stroke experimental
caster with ingot cast rolling capabilities for the experimental
rolling mill and for extrusion billet used in plant extrusion
trials. Due to our research and development efforts, we have
been able to introduce products such as our unique
T-Form®
sheet which provides aerospace customers with high formability
as well as requisite strength characteristics.
Primary
Aluminum Business Unit
Our primary aluminum business unit, after excluding discontinued
operations, contains two primary elements: (a) activities
related to our interests in and related to Anglesey and
(b) primary aluminum hedging-related activities. Our
primary aluminum business unit accounted for approximately 14%,
14% and 15% of our total net sales for 2004, 2005 and 2006,
respectively.
Anglesey. We own a 49% interest in Anglesey,
which owns an aluminum smelter at Holyhead, Wales. Rio Tinto Plc
owns the remaining 51% ownership interest in Anglesey and has
day-to-day
operating responsibilities for Anglesey, although certain
decisions require unanimous approval of both shareholders.
Anglesey has produced in excess of 300 million pounds for
each of the last three fiscal years. We supply 49% of
Angleseys alumina requirements and purchase 49% of
Angleseys aluminum output, in each case based on a
market-related pricing formula. Anglesey produces billet,
rolling ingot and sow for the United Kingdom and European
marketplace. We sell our share of Angleseys output to a
single third party at market prices. The price received for
sales of production from Anglesey typically approximates the LME
price. We also realize a premium (historically between $.05 and
$.12 per pound above LME price depending on the product)
for sales of value- added products such as billet and rolling
ingot.
To meet our obligation to sell alumina to Anglesey in proportion
to our ownership percentage, we purchase alumina under contracts
that extend through 2007 at prices that are tied to market
prices for primary aluminum. We will need to secure a new
alumina contract for the period after 2007. We can give no
assurance regarding our ability
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to secure a source of alumina on comparable terms. If we are
unable to do so, the results of our primary aluminum operations
will be affected.
Anglesey operates under a power agreement that provides
sufficient power to sustain its operations at full capacity
through September 2009. The nuclear facility which supplies
power to Anglesey is scheduled to close operations in late 2010.
Angleseys ability to operate past September 2009 is
dependent upon finding adequate power at an acceptable purchase
price. We can give no assurance that Anglesey will be able to do
so. If Anglesey cannot obtain sufficient power, Angleseys
operations will likely be shut down. Given the potential for
future shutdown and related costs, dividends from Anglesey have
been suspended while Anglesey studies future cash requirements.
The shutdown process may involve significant costs to Anglesey
which would decrease or eliminate its ability to pay future
dividends. The process of shutting down operations may involve
transition complications which may prevent Anglesey from
operating at full capacity until the expiration of the power
agreement.
Hedging. Our pricing of fabricated aluminum
products, as discussed above, is generally intended to lock-in a
conversion margin (representing the value added from the
fabrication process(es)) and to pass metal price risk on to our
customers. However, in certain instances we do enter into firm
price arrangements. In such instances, we do have price risk on
our anticipated primary aluminum purchase in respect of the
customers order. Total fabricated products shipments
during 2004, 2005 and 2006 for which the Company had price risk
were (in millions of pounds) 119, 155, and 200 respectively.
For internal reporting purposes, whenever our fabricated
products business unit enters into a firm price contract, our
primary aluminum business unit and fabricated products business
unit segments enter into an internal hedge so that
all the metal price risk resides in our primary aluminum
business unit. Results from internal hedging activities between
the two segments eliminate in consolidation. As more fully
discussed in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk, during the last three
years, our net exposure to primary aluminum price risk at
Anglesey substantially offset the volume of fabricated products
shipments with underlying primary aluminum price risk. As such,
we consider our 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,
we may use third party hedging instruments to eliminate any net
remaining primary aluminum price exposure existing at any time.
Primary aluminum-related hedging activities are managed
centrally on behalf of our business segments to minimize
transaction costs, to monitor consolidated net exposures and to
allow for increased responsiveness to changes in market factors.
Hedging activities are conducted in compliance with a policy
approved by our board of directors, and hedging transactions are
only entered into after appropriate approvals are obtained from
our hedging committee (which includes our chief executive
officer and key financial officers).
Discontinued
Operations
Prior to 2004, we were a more significant producer of primary
aluminum and sold significant amounts of our alumina and primary
aluminum production in domestic and international markets. Our
strategy was to sell a substantial portion of the alumina and
primary aluminum available to us in excess of our internal
requirements to third parties. As part of our reorganization, we
made a strategic decision to sell all of our commodity-related
interests, other than our interests in and related to Anglesey,
as summarized below.
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Entity/Facility
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Location
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Product
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Period of Disposition
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Queensland Alumina Limited
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Australia
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Alumina
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Second Quarter 2005
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Gramercy refinery
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Louisiana
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Alumina
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Fourth Quarter 2004
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Kaiser Jamaica Bauxite Company
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Jamaica
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Bauxite
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Fourth Quarter 2004
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Volta Aluminium Company Limited
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Ghana
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Primary Aluminum
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Fourth Quarter 2004
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Alumina Partners of Jamaica
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Jamaica
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Alumina
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Third Quarter 2004
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Mead Smelter
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Washington
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Primary Aluminum
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Second Quarter 2004
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We refer to Queensland Alumina Limited and Alumina Partners of
Jamaica herein as QAL and Alpart, respectively.
7
Segment
and Geographical Area Financial Information
The information set forth in Note 11 of Notes to
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data
regarding our segments and geographical areas in which we
operate is incorporated herein by reference.
Competition
The fabricated aluminum industry is highly competitive. We
concentrate our fabricating operations on selected products for
which we believe we have production capability, technical
expertise, high product quality, and geographic and other
competitive advantages. Competition in the sale of fabricated
aluminum products is driven by quality, availability, price and
service, including delivery performance. Our primary competition
in flat-rolled products is Alcoa, Inc. and Alcan Inc. In the
extrusion market, we compete with many regional participants as
well as larger firms with national reach such as the Sapa-Alcoa
joint venture, Norsk Hydro ASA and Indalex. Many of our
competitors are substantially larger, have greater financial
resources, and may have other strategic advantages, including
more efficient technologies or lower raw material and energy
costs.
Our fabricated aluminum products facilities are located in North
America. To the extent our competitors have production
facilities located outside North America, they may be able to
produce similar products at a lower cost. We may not be able to
adequately reduce cost to compete with these products. Increased
competition could cause a reduction in our shipment volume and
profitability or increase our expenditures, any one of which
could have a material adverse effect on our results of
operations.
In addition, our fabricated aluminum products compete with
products made from other materials, such as steel and
composites, for various applications, including aircraft
manufacturing. The willingness of customers to accept
substitutions for aluminum and the ability of large customers to
exert leverage in the marketplace to reduce the pricing for
fabricated aluminum products could adversely affect our results
of operations.
For the heat treat plate and sheet products, new competition is
limited by technological expertise that only a few companies
have developed through significant investment in research and
development. Further, use of plate and sheet in safety critical
applications make quality and product consistency critical
factors. Suppliers must pass a rigorous qualification process to
sell to airframe manufacturers. Additionally, significant
investment in infrastructure and specialized equipment is
required to supply heat treat plate and sheet.
Barriers to entry are lower for extruded and forged products,
mostly due to the lower required investment in equipment.
However, the products that we produce are somewhat
differentiated from the majority of products sold by
competitors. We maintain a competitive advantage by using
application engineering and advanced process engineering to
distinguish our company and our products. Our metallurgical
expertise and controlled manufacturing processes enable superior
product consistency and are difficult for competitors to offer,
limiting their ability to effectively compete in many of our
product niches.
Employees
At December 31, 2006, we employed approximately 2,425
persons, of which approximately 2,370 were employed in our
fabricated products business unit and approximately 55 were
employed in our corporate group, most of whom are located in our
offices in Foothill Ranch, California.
8
The table below shows each manufacturing location, the primary
union affiliation, if any, and the expiration date for the
current union contract.
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Contract
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Location
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Union
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Expiration Date
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Chandler, AZ
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Non-union
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Greenwood, SC
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Non-union
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Jackson, TN
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Non-union
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London, Ontario
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USW Canada
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Feb 2009
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Los Angeles, CA
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Teamsters
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May 2009
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Newark, OH
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USW
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Sept 2010
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Richland, WA
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Non-union
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Richmond, VA
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USW/IAM
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Nov 2010
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Sherman, TX
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IAM
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Dec 2007
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Spokane, WA
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USW
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Sept 2010
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Tulsa, OK
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USW
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Nov 2010
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As part of our chapter 11 reorganization, we entered into a
settlement with the United Steelworkers, or USW, regarding,
among other things, pension and retiree medical obligations.
Under the terms of the settlement, we agreed to adopt a position
of neutrality regarding the unionization of any of our employees.
Environmental
Matters
We are subject to numerous environmental laws and regulations
with respect to, among other things: air and water emissions and
discharges; the generation, storage, treatment, transportation
and disposal of solid and hazardous waste; and the release of
hazardous or toxic substances, pollutants and contaminants into
the environment. Compliance with these environmental laws is and
will continue to be costly.
Our operations, including our operations conducted prior to our
emergence from chapter 11 bankruptcy in July 2006, have
subjected, and may in the future subject, us to fines or
penalties for alleged breaches of environmental laws and to
obligations to perform investigations or clean up of the
environment. We may also be subject to claims from governmental
authorities or third parties related to alleged injuries to the
environment, human health or natural resources, including claims
with respect to waste disposal sites, the clean up of sites
currently or formerly used by us or exposure of individuals to
hazardous materials. Any investigation,
clean-up or
other remediation costs, fines or penalties, or costs to resolve
third-party claims may be costly and could have a material
adverse effect on our financial position, results of operations
and cash flows.
We have accrued, and will accrue as necessary, for costs
relating to the above matters that are reasonably expected to be
incurred based on available information. However, it is possible
that actual costs may differ, perhaps significantly, from the
amounts expected or accrued, and such differences could have a
material adverse effect on our financial position, results of
operations and cash flows. In addition, new laws or regulations
or changes to existing laws and regulations may occur, and we
cannot assure you as to the amount that we would have to spend
to comply with such new or amended laws and regulations or the
effects that they would have on our financial position, results
of operations and cash flows.
Emergence
From Reorganization Proceedings
Background. Between the first quarter of 2002
and the first quarter of 2003, Kaiser and 25 of our then
existing subsidiaries filed voluntary petitions for relief under
chapter 11 of the Bankruptcy Code. While in chapter 11
bankruptcy, we continued to manage our business in the ordinary
course as
debtors-in-possession
subject to the control and administration of the Bankruptcy
Court.
We and 16 of our subsidiaries filed the chapter 11
bankruptcy in the first quarter of 2002 primarily because of our
liquidity and cash flow problems that arose in late 2001 and
early 2002. We were facing significant near-term debt maturities
at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and
9
a broad economic slowdown that was further exacerbated by the
events of September 11, 2001. In addition, we 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.
In the first quarter of 2003, nine of our other subsidiaries
filed chapter 11 bankruptcy in order to protect the assets
held by those subsidiaries against possible statutory liens that
might have otherwise arisen and been enforced by the Pension
Benefit Guaranty Corporation (or the PBGC).
On December 20, 2005, the Bankruptcy Court entered an order
confirming two separate joint plans of liquidation for four of
our commodity-related subsidiaries. On December 22, 2005,
these plans of liquidation became effective and all restricted
cash and other assets held on behalf of or by the subsidiaries,
consisting primarily of approximately $686.8 million 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 subsidiaries in
accordance with the terms of the plans of liquidation. In
connection with the plans of liquidation, these four
subsidiaries were dissolved and their corporate existence was
terminated.
On February 6, 2006, the Bankruptcy Court entered an order
confirming the Plan for us and 21 of our subsidiaries that had
filed chapter 11 bankruptcy. 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 our Plan. On July 6, 2006, our Plan became
effective and was substantially consummated, whereupon we
emerged from chapter 11 bankruptcy.
Pursuant to our Plan, on July 6 2006, the pre-petition ownership
interests in Kaiser were cancelled without consideration and
approximately $4.4 billion of pre-petition claims against
us, including claims in respect of debt, pension and
postretirement medical obligations and asbestos and other tort
liabilities, were resolved as follows:
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Claims in Respect of Retiree Medical
Obligations. Pursuant to settlements reached with
representatives of hourly and salaried retirees in early 2004:
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an aggregate of 11,439,900 shares of our common stock were
delivered to the voluntary employees beneficiary
association trust, or VEBA, that provides benefits for certain
eligible retirees represented by certain unions and their
spouses and eligible dependants (which we refer to herein as the
Union VEBA) and entities that prior to July 6,
2006 acquired from the Union VEBA rights to receive a portion of
such shares; and
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an aggregate of 1,940,100 shares of our common stock were
delivered to the VEBA that provides benefits for certain other
eligible retirees and their surviving spouses and eligible
dependents (which we refer to herein as the Salaried
VEBA) and entities that prior to July 6, 2006
acquired from the Salaried VEBA rights to receive a portion of
such shares; and
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we became obligated to make certain contingent annual cash
payments of up to $20 million annually to the VEBAs that
fluctuate based on earnings, adjusted for certain cash flow
items (see Note 7 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data).
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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.
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Unsecured Claims. With respect to pre-petition
unsecured claims (other than the personal injury claims
specified below):
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all pre-petition unsecured claims of the PBGC against our
Canadian subsidiaries were satisfied by the delivery of
2,160,000 shares of common stock and $2.5 million in
cash; and
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all pre-petition general unsecured claims against us, other than
our Canadian subsidiaries, including claims of the PBGC and
holders of our public debt, were satisfied by the issuance of
4,460,000 shares of our 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 our 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
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common stock, approximately 197,000 shares are currently
being 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.
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Personal Injury Claims. Certain trusts (which
we refer to herein as the PI Trusts) were formed to
receive distributions from us, assume responsibility from us for
present and future asbestos personal injury claims, present and
future silica personal injury claims, present and future coal
tar pitch personal injury claims and present but not future
noise-induced hearing personal injury claims, and to make
payments in respect of such personal injury claims. We
contributed to the PI Trusts:
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the rights with respect to proceeds associated with personal
injury-related insurance recoveries reflected on our
consolidated financial statements at June 30, 2006 as a
receivable having a value of $963.3 million;
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$13 million in cash (less approximately $.3 million
advanced prior to July 6, 2006);
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the stock of a subsidiary whose primary asset 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
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75% of a pre-petition general unsecured claim against one of our
subsidiaries in the amount of $1,106 million, entitling the
PI Trusts to a share of the 4,460,000 shares of common
stock distributed to unsecured claimholders.
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The PI Trusts assumed all liability and responsibility for
present and future asbestos personal injury claims, present and
future silica personal injury claims, present and future coal
tar pitch personal injury claims and present but not future
noise-induced hearing personal injury claims. As of July 6,
2006, injunctions were entered prohibiting any person from
pursuing any claims against us or any of our affiliates in
respect of such matters.
In general, the rights afforded under our Plan and the treatment
of claims under our Plan are in complete satisfaction of and
discharge all claims arising on or before July 6, 2006.
However, our Plan does not limit any rights that the United
States of America or the individual states may have under
environmental laws to seek to enforce equitable remedies against
us, though we may raise any and all available defenses in any
action to enforce such equitable remedies. Further, with regard
to certain non-owned sites specified in the environmental
settlement agreement entered into in connection with our Plan as
to which we and the United States of America had not reached
settlement by the confirmation date, all our rights and defenses
and those of the United States of America are preserved and not
affected by our Plan. With respect to sites owned by us after
the confirmation date, specified categories of claims of the
United States of America and the individual states party to the
environmental settlement agreement are not discharged, impaired
or affected in any way by our Plan, and we maintain any and all
defenses to any such claims except for any defense alleging such
claims were discharged under our Plan.
Cash payments made on July 6, 2006 for priority and secured
claims, payments to the PI Trusts, bank and professional fees
totaled approximately $29 million and were funded using
existing cash resources.
Legal
Structure
In connection with our Plan, we restructured and simplified our
corporate structure. The result of the simplified corporate
structure is summarized as follows:
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We directly own 100% of the issued and outstanding shares of
capital stock of Kaiser Aluminum Investments Company, a newly
formed Delaware corporation (KAIC), which is
intended to function as an intermediate holding company.
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KAIC owns 49% of the ownership interests of Anglesey and 100% of
the ownership interests of each of:
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Kaiser Aluminum Fabricated Products, LLC, a newly formed
Delaware limited liability company (KAFP), which
holds the assets and liabilities associated with our fabricated
products business unit (excluding those assets and liabilities
associated with the London, Ontario facility);
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11
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Kaiser Aluminum Canada Limited, a newly formed Ontario
corporation (KACL), which holds the assets and
liabilities of our London, Ontario operations and certain former
KACC Canadian subsidiaries that were largely inactive;
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Kaiser Aluminum & Chemical Corporation, LLC, a newly
formed Delaware limited liability company (KACC,
LLC), which, as a successor by merger to Kaiser
Aluminum & Chemical Corporation, holds our remaining
non-operating assets and liabilities not assumed by KAFP;
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Kaiser Aluminium International, Inc., Trochus Insurance Co.,
Ltd., and Kaiser Bauxite Company.
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This Item may contain statements which constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. See
Item 1. Business Forward Looking
Statements for cautionary information with respect to such
forward-looking statements. Such cautionary information should
be read as applying to all forward-looking statements wherever
they appear in this Report. Forward-looking statements are not
guarantees of future performance and involve significant risks
and uncertainties. Actual results may vary from those in
forward-looking statements as a result of a number of factors
including those we discuss in this Item and elsewhere in this
Report.
In evaluating us or our common stock, you should carefully
consider the following risks. The risks described below are
those which we believe are the material risks we face. The
occurrence of any of the events discussed below could
significantly and adversely affect our business, prospects,
financial condition, results of operations and cash flows as
well as the trading price of our common stock.
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 Bankruptcy 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 investment in Kaiser may decline.
A
reader 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 chapter 11 plan of
reorganization, our Plan, on July 6, 2006, we are operating
our business under a new capital structure. In addition, we
adopted fresh start reporting in accordance with American
Institute of Certified Public Accountants Statement of Position
90-7, or SOP
90-7, Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code as of July 1, 2006. Because
SOP 90-7
requires us to account for our assets and liabilities at their
fair values as of the effectiveness of our Plan, 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
12
shipment volumes and profitability or increase our expenditures,
any one of which could have a material adverse effect on our
financial position, results of operations and cash flows.
We
depend on a core group of significant customers.
In 2006, our largest fabricated products customer, Reliance
Steel & Aluminum, accounted for approximately 18% of
our fabricated products net sales, and our five largest
customers accounted for approximately 41% of our fabricated
products net sales. If our existing relationships with
significant customers materially deteriorate or are terminated
and we are not successful in replacing lost business, our
financial position, results of operations and cash flows could
be materially and adversely affected. 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, 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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trade disputes involving countries in which we operate, service
customers or purchase raw materials.
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The
aerospace industry is cyclical and downturns in the aerospace
industry, including downturns resulting from acts of terrorism,
could adversely affect our revenues and
profitability.
We derive a significant portion of our revenue from products
sold to the aerospace industry, which is highly cyclical and
tends to decline in response to overall declines in industrial
production. As a result, our business is affected by overall
levels of industrial production and fluctuations in the
aerospace industry. The commercial aerospace industry is
historically driven by the demand from commercial airlines for
new aircraft. Demand for commercial aircraft is influenced by
airline industry profitability, trends in airline passenger
traffic, by the state of the U.S. and world economies and
numerous other factors, including the effects of terrorism. The
military aerospace cycle is highly dependent on U.S. and foreign
government funding; however, it is also driven by the effects of
terrorism, a changing global political environment,
U.S. foreign policy, regulatory changes, the retirement of
older aircraft and technological improvements to new aircraft
engines that increase reliability. The timing, duration and
13
severity of cyclical upturns and downturns cannot be predicted
with certainty. A future downturn or reduction in demand could
have a material adverse effect on our financial position,
results of operations and cash flows.
In addition, because we and other suppliers are expanding
production capacity to alleviate the current supply shortage for
heat treat aluminum plate, heat treat plate prices may
eventually begin to decrease as production capacity increases.
Although we have implemented cost reduction and sales growth
initiatives to minimize the impact on our results of operations
as heat treat plate prices return to more typical historical
levels, these initiatives may not be adequate and our financial
position, results of operations and cash flows may be adversely
affected.
A number of major airlines have also recently undergone or are
undergoing chapter 11 bankruptcy and continue to experience
financial strain from high fuel prices. Continued financial
instability in the industry may lead to reduced demand for new
aircraft that utilize our products, which could adversely affect
our financial position, results of operations and cash flows.
The aerospace industry suffered significantly in the wake of the
events of September 11, 2001, resulting in a sharp decrease
globally in new commercial aircraft deliveries and order
cancellations or deferrals by the major airlines. This decrease
reduced the demand for our Aero/HS products. While there has
been a recovery since 2001, the threat of terrorism and fears of
future terrorist acts could negatively affect the aerospace
industry and our financial position, results of operations and
cash flows.
Our
customers may reduce their demand for aluminum products in favor
of alternative materials.
Our fabricated aluminum products compete with products made from
other materials, such as steel and composites, for various
applications. For instance, the commercial aerospace industry
has used and continues to evaluate the further use of
alternative materials to aluminum, such as composites, in order
to reduce the weight and increase the fuel efficiency of
aircraft. The willingness of customers to accept substitutions
for aluminum or the ability of large customers to exert leverage
in the marketplace to reduce the pricing for fabricated aluminum
products could adversely affect the demand for our products,
particularly our aerospace and high strength products, and thus
adversely affect our financial position, results of operations
and cash flows.
Downturns
in the automotive industry could adversely affect our net sales
and profitability.
The demand for many of our general engineering and custom
products is dependent on the production of automobiles, light
trucks and heavy duty vehicles in North America. The automotive
industry is highly cyclical, as new vehicle demand is dependent
on consumer spending and is tied closely to the overall strength
of the North American economy. The North American automotive
industry is facing costly inventory corrections which could
adversely affect our net sales and profitability. Recent
production cuts announced by General Motors Corporation, Ford
Motor Company and DaimlerChrysler AG, as well as cutbacks in
heavy duty truck production, may adversely affect the demand for
our products. If the financial condition of these auto
manufacturers continues to be unsteady or if any of the three
seek restructuring or relief through bankruptcy proceedings, the
demand for our products may decline, adversely affecting our net
sales and profitability. Any decline in the demand for new
automobiles, particularly in the United States, could have a
material adverse effect on our financial position, results of
operations and cash flows. Seasonality experienced by the
automotive industry in the third and fourth quarters of the
calendar year also affects our financial position, results of
operations and cash flows.
Because
our products are often components of our customers
products, reductions in demand for our products may be more
severe than, and may occur prior to reductions in demand for,
our customers products.
Our products are often components of the end-products of our
customers. Customers purchasing our fabricated aluminum
products, such as those in the cyclical automotive and aerospace
industries, generally require significant lead time in the
production of their own products. Therefore, demand for our
products may increase prior to demand for our customers
products. Conversely, demand for our products may decrease as
our customers anticipate a downturn in their respective
businesses. As demand for our customers products begins to
soften, our customers typically reduce or eliminate their demand
for our products and meet the reduced demand for their products
using their own inventory without replenishing that inventory,
which results in a reduction in demand for our products that
14
is greater than the reduction in demand for their products. This
amplified reduction in demand for our products in the event of a
downswing in our customers respective businesses may
adversely affect our financial position, results of operations
and cash flows.
Our
business is subject to unplanned business interruptions which
may adversely affect our performance.
The production of fabricated aluminum products is subject to
unplanned events such as explosions, fires, inclement weather,
natural disasters, accidents, transportation interruptions and
supply interruptions. Operational interruptions at one or more
of our production facilities, particularly interruptions at our
Trentwood facility in Spokane, Washington where our production
of plate and sheet is concentrated, could cause substantial
losses in our production capacity. Furthermore, because
customers may be dependent on planned deliveries from us,
customers that have to reschedule their own production due to
our delivery delays may be able to pursue financial claims
against us, and we may incur costs to correct such problems in
addition to any liability resulting from such claims. Such
interruptions may also harm our reputation among actual and
potential customers, potentially resulting in a loss of
business. To the extent these losses are not covered by
insurance, our financial position, results of operations and
cash flows may be adversely affected by such events.
Covenants
and events of default in our debt instruments could limit our
ability to undertake certain types of transactions and adversely
affect our liquidity.
Our revolving credit facility and term loan facility contain
negative and financial covenants and events of default that may
limit our financial flexibility and ability to undertake certain
types of transactions. For instance, we are subject to negative
covenants that restrict our activities, including restrictions
on creating liens, engaging in mergers, consolidations and sales
of assets, incurring additional indebtedness, providing
guaranties, engaging in different businesses, making loans and
investments, making certain dividends, debt and other restricted
payments, making certain prepayments of indebtedness, engaging
in certain transactions with affiliates and entering into
certain restrictive agreements. If we fail to satisfy the
covenants set forth in our revolving credit facility and term
loan facility or another event of default occurs under these
facilities, the maturity of the loans could be accelerated or,
in the case of the revolving credit facility, we could be
prohibited from borrowing for our working capital needs. If the
loans are accelerated and we do not have sufficient cash on hand
to pay all amounts due, we could be required to sell assets, to
refinance all or a portion of our indebtedness or to obtain
additional financing. Refinancing may not be possible and
additional financing may not be available on commercially
acceptable terms, or at all. If we cannot borrow under the
revolving credit facility to meet our working capital needs, we
would need to seek additional financing, if available, or
curtail our operations.
We
depend on our subsidiaries for cash to meet our obligations and
pay any dividends.
We are a holding company. Our subsidiaries conduct all of our
operations and own substantially all of our assets.
Consequently, our cash flow and our ability to meet our
obligations or pay dividends to our stockholders depend upon the
cash flow of our subsidiaries and the payment of funds by our
subsidiaries to us in the form of dividends, tax sharing
payments or otherwise. Our subsidiaries ability to make
any payment will depend on their earnings, the terms of their
indebtedness (including the revolving credit facility and term
loan facility), tax considerations and legal restrictions.
We may
not be able to successfully implement our productivity and cost
reduction initiatives.
We have undertaken and may continue to undertake productivity
and cost reduction initiatives to improve performance, including
deployment of company-wide business improvement methodologies,
such as our production system, the Kaiser Production System,
which involves the integrated utilization of application and
advanced process engineering and business improvement
methodologies such as lean enterprise, total productive
maintenance and six sigma. We cannot assure you that these
initiatives will be completed or beneficial to us or that any
estimated cost saving from such activities will be realized.
Even if we are able to generate new efficiencies successfully in
the short to medium term, we may not be able to continue to
reduce cost and increase productivity over the long term.
15
Our
profitability could be adversely affected by increases in the
cost of raw materials.
The price of primary aluminum has historically been subject to
significant cyclical price fluctuations, and the timing of
changes in the market price of aluminum is largely
unpredictable. Although our pricing of fabricated aluminum
products is generally intended to pass the risk of price
fluctuations on to our customers, we may not be able to pass on
the entire cost of such increases to our customers or offset
fully the effects of higher costs for other raw materials, which
may cause our profitability to decline. There will also be a
potential time lag between increases in prices for raw materials
under our purchase contracts and the point when we can implement
a corresponding increase in price under our sales contracts with
our customers. As a result, we may be exposed to fluctuations in
raw materials prices, including aluminum, since, during the time
lag, we may have to bear the additional cost of the price
increase under our purchase contracts. If these events were to
occur, they could have a material adverse effect on our
financial position, results of operations and cash flows.
Furthermore, we are party to arrangements based on fixed prices
that include the primary aluminum price component, so that we
bear the entire risk of rising aluminum prices, which may cause
our profitability to decline. In addition, an increase in raw
materials prices may cause some of our customers to substitute
other materials for our products, adversely affecting our
results of operations due to both a decrease in the sales of
fabricated aluminum products and a decrease in demand for the
primary aluminum produced at Anglesey.
We are responsible for selling alumina to Anglesey in proportion
to our ownership percentage at a predetermined price. Such
alumina currently is purchased under contracts that extend
through 2007 at prices that are tied to primary aluminum prices.
We will need to secure a new alumina contract for the period
after 2007. We cannot assure you that we will be able to secure
a source of alumina at comparable prices. If we are unable to do
so, our financial position, results of operations and cash flows
associated with our primary aluminum business segment may be
adversely affected.
The
price volatility of energy costs may adversely affect our
profitability.
Our income and cash flows depend on the margin above fixed and
variable expenses (including energy costs) at which we are able
to sell our fabricated aluminum products. The volatility in
costs of fuel, principally natural gas, and other utility
services, principally electricity, used by our production
facilities affect operating costs. Fuel and utility prices have
been, and will continue to be, affected by factors outside our
control, such as supply and demand for fuel and utility services
in both local and regional markets. The daily closing price of
the front-month futures contract for natural gas per million
British thermal units as reported on NYMEX ranged between $4.57
and $8.75 in 2004, between $5.79 and $15.38 in 2005 and between
$4.20 and $10.63 in 2006. Typically, electricity prices
fluctuate with natural gas prices which increases our exposure
to energy costs. Future increases in fuel and utility prices may
have an adverse effect on our financial position, results of
operations and cash flows.
Our
hedging programs may limit the income and cash flows we would
otherwise expect to receive if our hedging program were not in
place.
From time to time in the ordinary course of business, we may
enter into hedging transactions to limit our exposure to price
risks relating to primary aluminum prices, energy prices and
foreign currency. To the extent that these hedging transactions
fix prices or exchange rates and the prices for primary aluminum
exceed the fixed or ceiling prices established by these hedging
transactions or energy costs or foreign exchange rates are below
the fixed prices, our income and cash flows will be lower than
they otherwise would have been.
The
expiration of the power agreement for Anglesey may adversely
affect our cash flows and affect our hedging
programs.
The agreement under which Anglesey receives power expires in
September 2009, and the nuclear facility which supplies such
power is scheduled to cease operations in late 2010. As of the
date of this Report, Anglesey has not identified a source from
which to obtain sufficient power to sustain its operations on
reasonably acceptable terms thereafter, and we cannot assure you
that Anglesey will be able to do so. If, as a result,
Angleseys aluminum production is curtailed or its costs
are increased, our cash flows may be adversely affected. In
addition, any decrease in Angleseys production would
reduce or eliminate the natural hedge against rising
primary
16
aluminum prices created by our participation in the primary
aluminum market and, accordingly, we may deem it appropriate to
increase our hedging activity to limit exposure to such price
risks, potentially adversely affecting our financial position,
results of operations and cash flows.
If Anglesey cannot obtain sufficient power, Angleseys
operations will likely be shut down. Given the potential for
future shut down and related costs, dividends from Anglesey have
been suspended temporarily while Anglesey studies future cash
requirements. The shut down may involve significant costs to
Anglesey which would decrease or eliminate its ability to pay
dividends. The process of shutting down operations may involve
transition complications which may prevent Anglesey from
operating at full capacity until the expiration of the power
contract. As a result, our financial position, results of
operations and cash flows may be negatively affected even before
the September 2009 expiration of the power contract.
Our
ability to keep key management and other personnel in place and
our ability to attract management and other personnel may affect
our performance.
We depend on our senior executive officers and other key
personnel to run our business. The loss of any of these officers
or other key personnel could materially and adversely affect our
operations. Competition for qualified employees among companies
that rely heavily on engineering and technology is intense, and
the loss of qualified employees or an inability to attract,
retain and motivate additional highly skilled employees required
for the operation and expansion of our business could hinder our
ability to improve manufacturing operations, conduct research
activities successfully or develop marketable products.
Our
production costs may increase and we may not sustain our sales
and earnings if we fail to maintain satisfactory labor
relations.
A significant number of our employees are represented by labor
unions under labor contracts with varying durations and
expiration dates. We may not be able to renegotiate our labor
contracts when they expire on satisfactory terms or at all. A
failure to do so may increase our costs or cause us to limit or
halt operations before a new agreement is reached. In addition,
our existing labor agreements may not prevent a strike or work
stoppage, and any work stoppage could have a material adverse
effect on our financial position, results of operations and cash
flows.
Our
business is regulated by a wide variety of health and safety
laws and regulations and compliance may be costly and may
adversely affect our results of operations.
Our operations are regulated by a wide variety of health and
safety laws and regulations. Compliance with these laws and
regulations may be costly and could have a material adverse
effect on our results of operations. In addition, these laws and
regulations are subject to change at any time, and we can give
you no assurance as to the effect that any such changes would
have on our operations or the amount that we would have to spend
to comply with such laws and regulations as so changed.
Environmental
compliance, clean up and damage claims may decrease our cash
flow and adversely affect our results of
operations.
We are subject to numerous environmental laws and regulations
with respect to, among other things: air and water emissions and
discharges; the generation, storage, treatment, transportation
and disposal of solid and hazardous waste; and the release of
hazardous or toxic substances, pollutants and contaminants into
the environment. Compliance with these environmental laws is and
will continue to be costly.
Our operations, including our operations conducted prior to our
emergence from chapter 11 bankruptcy, have subjected, and
may in the future subject, us to fines or penalties for alleged
breaches of environmental laws and to obligations to perform
investigations or clean up of the environment. We may also be
subject to claims from governmental authorities or third parties
related to alleged injuries to the environment, human health or
natural resources, including claims with respect to waste
disposal sites, the clean up of sites currently or formerly used
by us or exposure of individuals to hazardous materials. Any
investigation,
clean-up or
other remediation costs, fines or
17
penalties, or costs to resolve third-party claims may be costly
and could have a material adverse effect on our financial
position, results of operations and cash flows.
We have accrued, and will accrue, for costs relating to the
above matters that are reasonably expected to be incurred based
on available information. However, it is possible that actual
costs may differ, perhaps significantly, from the amounts
expected or accrued, and such differences could have a material
adverse effect on our financial position, results of operations
and cash flows. In addition, new laws or regulations or changes
to existing laws and regulations may occur, and we cannot assure
you as to the amount that we would have to spend to comply with
such new or amended laws and regulations or the effects that
they would have on our financial position, results of operations
and cash flows.
Other
legal proceedings or investigations or changes in the laws and
regulations to which we are subject may adversely affect our
results of operations.
In addition to the environmental matters described above, we may
from time to time be involved in, or be the subject of,
disputes, proceedings and investigations with respect to a
variety of matters, including matters related to health and
safety, personal injury, employees, taxes and contracts, as well
as other disputes and proceedings that arise in the ordinary
course of business. It could be costly to defend against these
claims or any investigations involving them, whether meritorious
or not, and legal proceedings and investigations could divert
managements attention as well as operational resources,
negatively affecting our financial position, results of
operations and cash flows. It could also be costly to make
payments on account of any such claims.
Additionally, as with the environmental laws and regulations to
which we are subject, the other laws and regulations which
govern our business are subject to change at any time, and we
cannot assure you as to the amount that we would have to spend
to comply with such laws and regulations as so changed or
otherwise as to the effect that any such changes would have on
our operations.
Product
liability claims against us could result in significant costs or
negatively affect our reputation and could adversely affect our
results of operations.
We are sometimes exposed to warranty and product liability
claims. We cannot assure you that we will not experience
material product liability losses arising from such claims in
the future. We generally maintain insurance against many product
liability risks but we cannot assure you that our coverage will
be adequate for liabilities ultimately incurred. In addition, we
cannot assure you that insurance will continue to be available
to us on terms acceptable to us. A successful claim that exceeds
our available insurance coverage could have a material adverse
effect on our financial position, results of operations and cash
flows.
Our
Trentwood expansion project may not be completed as
scheduled.
We are currently in the process of a $105 million expansion
of production capacity and gauge capability at our Trentwood
facility. While the project is currently on schedule to be
completed in 2008, with substantially all costs being incurred
in 2006 and 2007, our ability to fully complete this project,
and the timing and costs of doing so, are subject to various
risks associated with all major construction projects, many of
which are beyond our control, including technical or mechanical
problems. If we are unable to fully complete this project or if
the actual costs for this project exceed our current
expectations, our financial position, results of operations and
cash flows would be adversely affected. In addition, we have
contracts currently in place expected to be fulfilled with
production from the expanded facility. If completion of the
expansion is significantly delayed or the expansion is not fully
completed, we may not be able to meet shipping deadlines on time
or at all, which would adversely affect our results of
operations, may lead to litigation and may damage our
relationships with these customers and our reputation generally.
We may
not be able to successfully execute our strategy of growth
through acquisitions.
A component of our growth strategy is to acquire fabricated
products assets in order to complement our product portfolio.
Our ability to do so will be dependent upon a number of factors,
including our ability to identify acceptable acquisition
candidates, consummate acquisitions on favorable terms,
successfully integrate acquired
18
assets, obtain financing to fund acquisitions and support our
growth and many other factors beyond our control. Risks
associated with acquisitions include those relating to:
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diversion of managements time and attention from our
existing business;
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challenges in managing the increased scope, geographic diversity
and complexity of operations;
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difficulties in integrating the financial, technological and
management standards, processes, procedures and controls of the
acquired business with those of our existing operations;
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liability for known or unknown environmental conditions or other
contingent liabilities not covered by indemnification or
insurance;
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greater than anticipated expenditures required for compliance
with environmental or other regulatory standards or for
investments to improve operating results;
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difficulties in achieving anticipated operational improvements;
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incurrence of additional indebtedness to finance acquisitions or
capital expenditures relating to acquired assets; and
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issuance of additional equity, which could result in further
dilution of the ownership interests of existing stockholders.
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We may not be successful in acquiring additional assets, and any
acquisitions that we do consummate may not produce the
anticipated benefits or may have adverse effects on our
financial position, results of operations and cash flows.
In our
2005
Form 10-K,
we have reported one material weakness relating to hedge
accounting in our internal control over financial reporting,
which resulted in the restatement of our financial statements,
and one significant deficiency.
During the first quarter of 2006 as part of the reporting and
closing process relating to the preparation of our
December 31, 2005 financial statements, we concluded that
our controls and procedures were not effective as of
December 31, 2005 because due to a material weakness in
internal control over financial reporting existed relating to
our accounting for derivative financial instruments. A material
weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that
a material misstatement of our annual or interim financial
statements would not be prevented or detected. We concluded that
our procedures relating to hedging transactions were not
designed effectively and that our documentation did not comply
with certain accounting rules, thus requiring us to account for
our derivatives on a
mark-to-market
basis. While we are working to modify our documentation and
requalify certain derivative transactions for treatment as
hedges, and have engaged outside experts to perform periodic
reviews, we cannot assure you that such improved controls will
prevent any or all instances of non-compliance. 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, to reflect
mark-to-market
accounting. See Part II, Item 9A, Controls and
Procedures in this Report for more information. Until we
requalify our derivatives for hedge accounting treatment, we
will not consider this matter to be fully remediated.
We also concluded that the appropriate post-emergence accounting
treatment for payments made in 2005 to the voluntary
employees beneficiary association trusts, or VEBAs,
created in connection with our chapter 11 reorganization
required presentation of VEBA payments as a reduction of
pre-petition retiree medical obligations rather than as a period
expense, as we had concluded in prior quarters. Our prior
treatment of VEBA payments was identified as a significant
deficiency in our internal control over financial reporting at
December 31, 2005. We corrected this deficiency during the
preparation of our December 31, 2005 financial statements
and, accordingly, such deficiency did not exist at the end of
the subsequent periods.
Although we believe we have or will address these issues with
the remedial measures that we have implemented or plan to
implement, the measures we have taken to date and any future
measures may not be effective, and we may not be able to
implement and maintain effective internal control over financial
reporting in the future. In addition, other deficiencies in our
internal controls may be discovered in the future.
19
Any failure to correct the material weakness or to implement new
or improved controls, or difficulties encountered in their
implementation, could cause us to fail to meet our reporting
obligations or result in material misstatements in our financial
statements. Any such failure also could affect the ability of
our management to certify that our internal controls are
effective when it provides an assessment of our internal control
over financial reporting, and could affect the results of our
independent registered public accounting firms attestation
report regarding our managements assessment. Inferior
internal controls and further related restatements could also
cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading
price of our stock.
We
will be exposed to risks relating to evaluations of controls
required by Section 404 of the
Sarbanes-Oxley
Act of 2002.
We are required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 by no later than December 31,
2007. We are in the process of evaluating our internal controls
systems to allow management to report on, and our independent
auditors to audit, our internal controls over financial
reporting. We will be performing the system and process
evaluation and testing (and any necessary remediation) required
to comply with the management certification and auditor
attestation requirements of Section 404. However, we cannot
be certain as to the timing of completion of our evaluation,
testing and remediation actions or the impact of the same on our
operations. Furthermore, upon completion of this process, we may
identify control deficiencies of varying degrees of severity
under applicable Securities and Exchange Commission, or SEC, and
Public Company Accounting Oversight Board rules and regulations
that remain unremediated. We will be required to report, among
other things, control deficiencies that constitute a
material weakness or changes in internal controls
that, or are reasonably likely to, materially affect internal
controls over financial reporting. A material
weakness is a control deficiency, or combination of
significant deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. If we
fail to implement the requirements of Section 404 in a
timely manner, we might be subject to sanctions or investigation
by regulatory authorities such as the SEC or by NASDAQ.
Additionally, failure to comply with Section 404 or the
report by us of a material weakness may cause investors to lose
confidence in our financial statements and our stock price may
be adversely affected. If we fail to remedy any material
weakness, our financial statements may be inaccurate, we may not
have access to the capital markets, and our stock price may be
adversely affected.
We may
not be able to adequately protect proprietary rights to our
technology.
Our success will depend in part upon our proprietary technology
and processes. Although we attempt to protect our intellectual
property through patents, trademarks, trade secrets, copyrights,
confidentiality and nondisclosure agreements and other measures,
these measures may not be adequate to protect such intellectual
property, particularly in foreign countries where the laws may
offer significantly less intellectual property protection than
is offered by the laws of the United States. In addition, any
attempts to enforce our intellectual property rights, even if
successful, could result in costly and prolonged litigation,
divert managements attention and adversely affect income
and cash flows. Failure to adequately protect our intellectual
property may adversely affect our results of operations as our
competitors would be able to utilize such property without
having had to incur the costs of developing it, thus potentially
reducing our relative profitability. Furthermore, we may be
subject to claims that our technology infringes the intellectual
property rights of another. Even if without merit, those claims
could result in costly and prolonged litigation, divert
managements attention and adversely affect our income and
cash flows. In addition, we may be required to enter into
licensing agreements in order to continue using technology that
is important to our business. However, we may be unable to
obtain license agreements on acceptable terms, which could
negatively affect our financial position, results of operations
and cash flows.
We may
not be able to utilize all of our net operating loss
carry-forwards.
We have net operating loss carry-forwards and other significant
U.S. tax attributes that we believe could offset otherwise
taxable income in the United States. We believe that these tax
attributes could together offset in the range of $975 to
$1,050 million of otherwise taxable income. This matter
will, however, not be better determinable until the completion
of our 2006 income tax return analysis during mid/late 2007. The
amount of net operating loss carry-
20
forwards available in any year to offset our net taxable income
will be reduced or eliminated if we experience a change of
ownership as defined in the Internal Revenue Code. We have
entered into a stock transfer restriction agreement with our
largest stockholder, a VEBA that provides benefits for certain
eligible retirees represented by certain unions and their
spouses and eligible dependents (which we refer to as the Union
VEBA) and our certificate of incorporation prohibits and voids
certain transfers of our common stock in order to reduce the
risk that a change of ownership will jeopardize our net
operating loss carry-forwards. Because U.S. tax law limits
the time during which carry-forwards may be applied against
future taxes, we may not be able to take full advantage of the
carry-forwards for federal income tax purposes. In addition, the
tax laws pertaining to net operating loss carry-forwards may be
changed from time to time such that the net operating loss
carry-forwards may be reduced or eliminated. If the net
operating loss carry-forwards become unavailable to us or are
fully utilized, our future income will not be shielded from
federal income taxation, thereby reducing funds otherwise
available for general corporate purposes.
Our
current common stock has a limited trading history and a small
public float which may limit development of a market for our
common stock and increase the likelihood of significant
volatility in the market for our common stock.
In order to reduce the risk that any change in our ownership
would jeopardize the preservation of our U.S. federal income tax
attributes, including net operating loss carry-forwards, for
purposes of Sections 382 and 383 of the Internal Revenue
Code, upon emergence from chapter 11 bankruptcy, we entered
into a stock transfer restriction agreement with our largest
stockholder, the Union VEBA, and amended and restated our
certificate of incorporation to include restrictions on
transfers involving 5% ownership. These transfer restrictions
could hinder development of an active market for our common
stock. In addition, the market price of our common stock may be
subject to significant fluctuations in response to numerous
factors, including variations in our annual or quarterly
financial results or those of our competitors, changes by
financial analysts in their estimates of our future earnings,
substantial amounts of our common stock being sold into the
public markets upon the expiration of share transfer
restrictions, which expire in July 2016, or upon the occurrence
of certain events relating to U.S. tax benefits available under
section 382 of the Internal Revenue Code, conditions in the
economy in general or in the fabricated aluminum products
industry in particular or unfavorable publicity.
Our
net sales, operating results and profitability may vary from
period to period, which may lead to volatility in the trading
price of our stock.
Our financial and operating results may be significantly below
the expectations of public market analysts and investors and the
price of our common stock may decline due to the following
factors:
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volatility in the spot market for primary aluminum and energy
costs;
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our annual accruals for variable payment obligations to the
Union VEBA and another VEBA that provides benefits for certain
other eligible retirees and their surviving spouses and eligible
dependents (which we refer to as the Salaried VEBA);
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non-cash charges including
last-in,
first-out, or LIFO, inventory charges and impairments;
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global economic conditions;
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unanticipated interruptions of our operations for any reason;
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variations in the maintenance needs for our facilities;
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unanticipated changes in our labor relations; and
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cyclical aspects impacting demand for our products.
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Our
annual variable payment obligation to the Union VEBA and
Salaried VEBA are linked with our profitability, which means
that not all of our earnings will be available to our
stockholders.
We are obligated to make annual payments to the Union VEBA and
Salaried VEBA calculated based on our profitability and
therefore not all of our earnings will be available to our
stockholders. The aggregate amount of our
21
annual payments to these VEBAs is capped, however, at
$20 million and is subject to other limitations. As a
result of these payment obligations, our earnings and cash flows
may be reduced.
A
significant percentage of our stock is held by the Union VEBA
which may exert significant influence over us.
The Union VEBA currently owns 26.7% of our common stock. As a
result, the Union VEBA has significant influence over matters
requiring stockholder approval, including the composition of our
board of directors. Further, to the extent that the Union VEBA
and other substantial stockholders were to act in concert, they
could potentially control any action taken by our stockholders.
This concentration of ownership could also facilitate or hinder
proxy contests, tender offers, open market purchase programs,
mergers or other purchases of our common stock that might
otherwise give stockholders the opportunity to realize a premium
over the then prevailing market price of our common stock or
cause the market price of our common stock to decline. We cannot
assure you that the interests of our major stockholders will not
conflict with our interests or the interests of our other
investors.
The
USW has director nomination rights through which it may
influence us, and USW interests may not align with our interests
or the interests of our other investors.
Pursuant to an agreement, the United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union, AFL-CIO, CLC, or USW, has been
granted rights to nominate 40% of the candidates to be submitted
to our stockholders for election to our board of directors. As a
result, the directors nominated by the USW may have a
significant voice in the decisions of our board of directors.
We do
not currently anticipate paying any dividends, and our payment
of dividends and stock repurchases are subject to
restriction.
We have not declared or paid any cash dividends on our common
stock since we filed chapter 11 bankruptcy in 2002. We
currently intend to retain all earnings for the operation and
expansion of our business and do not currently anticipate paying
any dividends on our common stock. The declaration and payment
of dividends, if any, in the future will be at the discretion of
the board of directors and will be dependent upon our results of
operations, financial condition, cash requirements, future
prospects and other factors. Accordingly, from time to time, the
board may declare dividends, though we can give you no assurance
in this regard. Moreover, our revolving credit facility and our
term loan facility restrict our ability to declare or pay
dividends or repurchase any shares of our common stock. In
addition, significant repurchases of our shares of common stock
may jeopardize the preservation of our federal income tax
attributes, including our net operating loss carry-forwards.
Our
certificate of incorporation includes transfer restrictions that
may void transactions in our common stock effected by 5%
stockholders.
Our certificate of incorporation places restrictions on transfer
of our equity securities if either (1) the transferor holds
5% or more of the fair market value of all of our issued and
outstanding equity securities or (2) as a result of the
transfer, either any person would become such a 5% stockholder
or the percentage stock ownership of any such 5% stockholder
would be increased. These restrictions are subject to exceptions
set forth in our certificate of incorporation. Any transfer that
violates these restrictions will be unwound as provided in our
certificate of incorporation. Moreover, as indicated below,
these provisions may make our stock less attractive to large
institutional holders, and may also discourage potential
acquirers from attempting to take over our company. As a result,
these transfer restrictions may have the effect of delaying or
deterring a change of control of our company and may limit the
price that investors might be willing to pay in the future for
shares of our common stock.
Delaware
law, our governing documents and the stock transfer restriction
agreement we entered into as part of our Plan may impede or
discourage a takeover, which could adversely affect the value of
our common stock.
Provisions of Delaware law, our certificate of incorporation and
the stock transfer restriction agreement with the Union VEBA may
have the effect of discouraging a change of control of our
company or deterring tender offers
22
for our common stock. We are currently subject to anti-takeover
provisions under Delaware law. These anti-takeover provisions
impose various impediments to the ability of a third party to
acquire control of us, even if a change of control would be
beneficial to our existing stockholders. Additionally,
provisions of our certificate of incorporation and bylaws impose
various procedural and other requirements, which could make it
more difficult for stockholders to effect some corporate
actions. For example, our certificate of incorporation
authorizes our board of directors to determine the rights,
preferences and privileges and restrictions of unissued shares
of preferred stock without any vote or action by our
stockholders. Thus, our board of directors can authorize and
issue shares of preferred stock with voting or conversion rights
that could adversely affect the voting or other rights of
holders of common stock. Our certificate of incorporation also
divides our board of directors into three classes of directors
who serve for staggered terms. A significant effect of a
classified board of directors may be to deter hostile takeover
attempts because an acquirer could experience delays in
replacing a majority of directors. Moreover, stockholders are
not permitted to call a special meeting. As indicated above, our
certificate of incorporation prohibits certain transactions in
our common stock involving 5% stockholders or parties who would
become 5% stockholders as a result of the transaction. In
addition, we are party to a stock transfer restriction agreement
with the Union VEBA which limits its ability to transfer our
common stock. The general effect of the transfer restrictions in
the stock transfer restriction agreement and our certificate of
incorporation is to ensure that a change in ownership of more
than 45% of our outstanding common stock cannot occur in any
three-year period. These rights and provisions may have the
effect of delaying or deterring a change of control of our
company and may limit the price that investors might be willing
to pay in the future for shares of our common stock.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
The locations and general character of the principal plants and
other materially important physical properties relating to our
operations are described in Item 1.
Business Business Operations and those
descriptions are incorporated herein by reference. We own in fee
or lease all the real estate and facilities used in connection
with our business. Plants and equipment and other facilities are
generally in good condition and suitable for their intended uses.
All but three of our fabricated aluminum production facilities
are owned by us
and/or our
subsidiaries. The Chandler, Arizona facility is subject to a
lease with a primary lease term that expires in 2033. We have
certain extension rights in respect of the Chandler lease. The
Richland, Washington facility is subject to a lease with a 2011
expiration date, subject to certain extension rights held by us.
The Los Angeles facility is subject to a lease with a 2014
expiration date.
Our corporate headquarters and primary place of business is
located in Foothill Ranch, California and is leased.
Our obligations under the revolving credit facility and the term
loan facility are secured by, among other things, liens on our
U.S. production facilities. See Note 5 of Notes to
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data for
further discussion.
|
|
Item 3.
|
Legal
Proceedings
|
This Item may contain statements which constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. See
Item 1. Business Forward-Looking
Statements of this Report for cautionary information with
respect to such forward-looking statements. Such cautionary
information should be read as applying to all forward-looking
statements whenever they appear in this Report, including this
Item. Forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties.
Actual results may vary from those in forward-looking statements
as a result of a number of factors including those we discuss in
this Item, in Item 1A. Risk Factors and
elsewhere in this Report.
23
Reorganization
Proceedings
The discussion in Item 1. Business
Emergence from Reorganization Proceedings and Notes 2
and 14 of Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data are incorporated herein by reference. Pursuant to our
Plan, on July 6, 2006, the pre-petition ownership interests
of Kaiser were cancelled without consideration and approximately
$4.4 billion of pre-petition claims against us, including
claims in respect of debt, pension and postretirement medical
obligations and asbestos and other tort liabilities were
resolved on our emergence from chapter 11 bankruptcy.
Other
Environmental Matters
We have been 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 polychlorinated byphenyls, or PCBs, at our Trentwood
facility in Spokane, Washington before 1978. During April 2004,
we were served with a subpoena for documents and notified by
Federal authorities that they were investigating certain
environmental compliance issues with respect to our Trentwood
facility in the State of Washington. In early 2007, we received
a letter from the regulatory authorities confirming that their
investigation had been closed.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matter was submitted to a vote of our security holders during
the fourth quarter of 2006.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity and Related Stockholder
Matters
|
Market
Information
Our outstanding common stock is traded on the Nasdaq Global
Market under the ticker symbol KALU.
The following table sets forth the high and low sale prices of
our common stock for each quarterly period since such common
stock began trading on the Nasdaq Global Market on July 7,
2006.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
Third quarter (from July 7,
2006)
|
|
$
|
44.50
|
|
|
$
|
37.50
|
|
Fourth quarter
|
|
$
|
62.00
|
|
|
$
|
43.50
|
|
Holders
As of February 28, 2007, there were 494 holders of record
of our common stock.
Dividends
We have not paid any dividends on our common stock during the
two most recent fiscal years. We currently intend to retain all
earnings for the operation and expansion of our business and do
not currently anticipate paying any dividends on our common
stock. The declaration and payment of dividends, if any, in the
future will be at the discretion of the board of directors and
will be dependent upon our results of operations, financial
condition, cash requirements, future prospects and other
factors. Accordingly, from time to time, the board may declare
dividends, though we can give no assurance in this regard. The
revolving credit facility and the term loan facility currently
restrict our ability to pay any dividends or purchase any of our
stock. Under these credit arrangements, we may pay cash
dividends only if we are not in default or would not be in
default as a result of the dividends; and to an amount based on
a portion of cumulative earnings, net of dividends, as adjusted
for certain other cash inflows.
24
Stock
Performance Graph
The following graph shows the change in our cumulative total
shareholder return for the period from July 7, 2006 to
December 31, 2006, based on the market price of our common
stock, compared with: (1) the Dow-Jones Wilshire 5000 and (2)
the S & P Smallcap 600. The graph assumes a total initial
investment of $100 as of July 7, 2006, and shows a
Total Return that assumes reinvestment of dividends,
if any. The performance on the following graph is not
necessarily indicative of future performance of our stock price.
COMPARISON
OF 6 MONTH CUMULATIVE TOTAL RETURN*
Among Kaiser Aluminum Corporation, The Dow Jones Wilshire 5000
Index
And The S & P Smallcap 600 Index
* $100 invested on 7/7/06 in stock or on 6/30/06 in
index-including reinvestment of dividends.
Fiscal year ending December 31.
Our performance graph reflects the cumulative return of
(i) the Dow Jones Wilshire 5000, a broad equity market
index that includes companies whose equity securities are traded
on the Nasdaq Global Market and (ii) the S&P Smallcap
600. We elected to use the latter after determining that no
published industry or line-of-business indexes where closely
enough related to our industry or business to provide a
reasonable basis for comparison. Similarly, we determined that
we could not identify comparables to include in a peer group
that would provide a reasonable basis for comparison and that,
as a result, an index consisting of companies with similar
market capitalizations was appropriate.
|
|
Item 6.
|
Selected
Financial Data
|
The table at page 28 of Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 11 of
Notes to Consolidated Financial Statements, and Five-Year
Financial Data included in Item 8. Financial
Statements and Supplementary Data are incorporated herein
by reference.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Item may contain statements which constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. See
Item 1 Business
Forward-Looking Statements for
25
cautionary information with respect to such forward-looking
statements. Such cautionary information should be read as
applying to all forward-looking statements wherever they appear
in this Report, including this Item. Forward-looking statements
are not guarantees of future performance and involve significant
risks and uncertainties. Actual results may vary from those in
the forward-looking statements as a result of a number of
factors, including those we discuss in this Item, in
Item 1A. Risk Factors and elsewhere in this
Report.
In the discussion of operating results below, certain items
are referred to as non-run-rate items. For purposes of such
discussion, non-run-rate items are items that, while they may
recur from period to period, are (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.
Emergence
from Reorganization Proceedings
As more fully discussed in Note 14 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data during the past four
years, Kaiser and 25 of its subsidiaries operated under
chapter 11 of the United States Bankruptcy Code under the
supervision of the United States Bankruptcy Court for the
District of Delaware.
As outlined in Notes 2 and 14 of Notes to Consolidated
Financial Statements, included in Item 8. Financial
Statements and Supplementary Data, pursuant to our Second
Amended Plan of Reorganization, or our Plan, we emerged from
chapter 11 bankruptcy on July 6, 2006 with all of our
fabricated products facilities and operations and a 49% interest
in Anglesey, which owns a smelter in the United Kingdom.
Pursuant to our Plan, all material pre-petition debt, pension
and postretirement medical obligations and asbestos and other
tort liabilities, along with other pre-petition claims (which in
total aggregated at June 30, 2006 approximately
$4.4 billion), were addressed and resolved. Pursuant to our
Plan, all of the equity interests of Kaisers pre-emergence
stockholders were cancelled without consideration. Equity of the
newly emerged Kaiser was issued and delivered to a third-party
disbursing agent for distribution to claimholders pursuant to
our Plan. See Note 14 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data for additional information on the
reorganization process and our Plan.
A balance sheet showing the effects from the implementation of
our Plan, application of fresh start accounting, and certain
related activities is included in Note 2 of Notes to
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data. 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 bankruptcy. As a result,
comparisons between financial statement information after the
July 6, 2006 effective date of our Plan and historical
financial statement information before such date are difficult
to make.
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 Company after emergence is sometimes referred to herein as
the Successor. As more fully discussed below, there
will be a number of differences between the financial statements
before and after emergence that will make comparisons of future
and past financial information difficult which may make it more
difficult to assess our future prospects based on historical
performance.
As a result of our emergence from chapter 11, we applied
fresh start accounting to our opening July 1, 2006
consolidated balance sheet as required by generally accepted
accounting principles, or GAAP. As such:
|
|
|
|
|
We adjusted our balance sheet to equal the reorganization value
of the Company;
|
|
|
|
We allocated the reorganization value to our 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
|
26
|
|
|
|
|
liabilities were significantly adjusted from amounts previously
reported. As more fully discussed in the Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data, these adjustments may
adversely affect future results; and
|
|
|
|
|
|
We reset items such as accumulated depreciation, accumulated
deficit and accumulated other comprehensive income (loss) to
zero.
|
We also made some changes to our accounting policies and
procedures as part of the fresh start and emergence process. In
general, our accounting policies are the same as or similar to
those historically used to prepare our financial statements. In
certain cases, however, we adopted different accounting
principles for, or applied methodologies differently to, our
post-emergence financial statement information. For instance, we
changed our accounting methodologies with respect to inventory
accounting. While we still account for inventories on a
last-in,
first-out basis, or LIFO, after emergence, we are applying LIFO
differently than we did in the past. Specifically, we will view
each quarter on a standalone basis for computing LIFO; whereas,
in the past, we recorded LIFO amounts with a view to the entire
fiscal year, which, with certain exceptions, tended to result in
LIFO charges being recorded in the fourth quarter or second half
of the year.
Additionally, certain items such as earnings per share and
Statement of Financial Accounting Standards
No. 123-R,
Share-Based Payment (see discussion in Note 1 of
Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data), which had few, if any, implications while we were
in chapter 11 bankruptcy, will have increased importance in
our future financial statement information.
Results
of Operations
Our main line of business is the production and sale of
fabricated aluminum products. In addition, we own a 49% interest
in Anglesey, which owns and operates an aluminum smelter in
Holyhead, Wales.
Our emergence from chapter 11 bankruptcy and adoption of
fresh start accounting resulted in a new reporting entity for
accounting purposes. Although we emerged from chapter 11
bankruptcy on July 6, 2006, we adopted fresh start
accounting under the provisions of American Institute of
Certified Professional Accountants (AICPA) Statement
of Position
90-7
(SOP 90-7),
Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, effective as of the beginning of business
on July 1, 2006. As such, it was assumed that the emergence
was completed instantaneously at the beginning of business on
July 1, 2006 so that all operating activities during the
period from July 1, 2006 through December 31, 2006 are
reported as applying to the new reporting entity. We believe
that this is a reasonable presentation as there were no material
non-Plan-related transactions between July 1, 2006 and
July 6, 2006.
The table below provides selected operational and financial
information on a consolidated basis (in millions of dollars,
except shipments and prices). The selected operational and
financial information after July 6, 2006 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 December 31, 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 years ended December 31,
2005 and 2004. Differences between periods due to fresh start
accounting are explained when material.
27
The following data should be read in conjunction with our
consolidated financial statements and the notes thereto included
in Item 8. Financial and Supplementary Data.
See Note 11 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and
Supplementary Data for further information regarding
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31,
|
|
|
|
to
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
|
July 1, 2006
|
|
|
Combined
|
|
|
2005
|
|
|
2004
|
|
Shipments (mm lbs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products
|
|
|
249.6
|
|
|
|
|
273.5
|
|
|
|
523.1
|
|
|
|
481.9
|
|
|
|
458.6
|
|
Primary Aluminum
|
|
|
77.3
|
|
|
|
|
77.1
|
|
|
|
154.4
|
|
|
|
155.6
|
|
|
|
156.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
326.9
|
|
|
|
|
350.6
|
|
|
|
677.5
|
|
|
|
637.5
|
|
|
|
615.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Realized Third Party Sales
Price (per pound):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products(1)
|
|
$
|
2.27
|
|
|
|
$
|
2.16
|
|
|
$
|
2.21
|
|
|
$
|
1.95
|
|
|
$
|
1.76
|
|
Primary Aluminum(2)
|
|
$
|
1.30
|
|
|
|
$
|
1.28
|
|
|
$
|
1.29
|
|
|
$
|
.95
|
|
|
$
|
.85
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products
|
|
$
|
567.2
|
|
|
|
$
|
590.9
|
|
|
$
|
1,158.1
|
|
|
$
|
939.0
|
|
|
$
|
809.3
|
|
Primary Aluminum
|
|
|
100.3
|
|
|
|
|
98.9
|
|
|
|
199.2
|
|
|
|
150.7
|
|
|
|
133.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
667.5
|
|
|
|
$
|
689.8
|
|
|
$
|
1,357.3
|
|
|
$
|
1,089.7
|
|
|
$
|
942.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated Products(3)(4)
|
|
$
|
60.8
|
|
|
|
$
|
61.2
|
|
|
$
|
122.0
|
|
|
$
|
87.2
|
|
|
$
|
33.0
|
|
Primary Aluminum(5)(6)
|
|
|
10.8
|
|
|
|
|
12.4
|
|
|
|
23.2
|
|
|
|
16.4
|
|
|
|
13.9
|
|
Corporate and Other
|
|
|
(25.5
|
)
|
|
|
|
(20.3
|
)
|
|
|
(45.8
|
)
|
|
|
(35.8
|
)
|
|
|
(71.3
|
)
|
Other Operating Benefits
(Charges), Net(7)
|
|
|
2.2
|
|
|
|
|
(.9
|
)
|
|
|
1.3
|
|
|
|
(8.0
|
)
|
|
|
(793.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income (Loss)
|
|
$
|
48.3
|
|
|
|
$
|
52.4
|
|
|
$
|
100.7
|
|
|
$
|
59.8
|
|
|
$
|
(817.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
$
|
|
|
|
|
$
|
4.3
|
|
|
$
|
4.3
|
|
|
$
|
363.7
|
|
|
$
|
121.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization Items(8)
|
|
$
|
|
|
|
|
$
|
3,090.3
|
|
|
$
|
3,090.3
|
|
|
$
|
(1,162.1
|
)
|
|
$
|
(39.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Cumulative Effect on
Years Prior to 2005 of Adopting Accounting For Conditional Asset
Retirement Obligations(9)
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4.7
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
26.2
|
|
|
|
$
|
3,141.2
|
|
|
$
|
3,167.4
|
|
|
$
|
(753.7
|
)
|
|
$
|
(746.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures (excluding
discontinued operations)
|
|
$
|
30.1
|
|
|
|
$
|
28.1
|
|
|
$
|
58.2
|
|
|
$
|
31.0
|
|
|
$
|
7.6
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(1) |
|
Average realized prices for our fabricated products business
unit are subject to fluctuations due to changes in product mix
as well as underlying primary aluminum prices and are not
necessarily indicative of changes in underlying profitability.
See Item 1. Business. |
|
(2) |
|
Average realized prices for our primary aluminum business unit
exclude hedging revenues. |
|
(3) |
|
Fabricated products business unit operating results for 2006
combined, 2005 and 2004 include non-cash LIFO inventory charges
of $25.0 million, $9.3 million and $12.1 million,
respectively, and metal gains of approximately
$20.8 million, $4.6 million, and $12.2 million,
respectively. |
28
|
|
|
(4) |
|
Fabricated products business unit operating results for 2006
combined include non-cash
mark-to-market
losses totaling $2.2 million. For further discussion
regarding
mark-to-market
matters, see Note 9 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data. |
|
(5) |
|
Primary aluminum business unit operating results for 2006 and
2005 combined, include non-cash
mark-to-market
gains (losses) totaling $17.3 million and
$(4.1) million, respectively. Non-cash
mark-to-market
gains (losses) for 2004 were not material. For further
discussion regarding
mark-to-market
matters, see Note 9 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data. |
|
(6) |
|
Primary aluminum business unit operating results for 2005
include non-cash charges of approximately $4.1 million in
respect of our decision to restate our accounting for derivative
financial instruments as more fully discussed in Note 1 of
Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data. |
|
(7) |
|
See Note 10 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and
Supplementary Data for a detailed summary of the
components of Other operating benefits (charges), net and the
business segment to which the items relate. |
|
(8) |
|
See Notes 2 and 14 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data for a discussion of Reorganization
items. |
|
(9) |
|
See Notes 1 and 3 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data for a discussion of the changes in
accounting for conditional asset retirement obligations. |
Significant
Items
Market-related Factors. Changes in global,
regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive
fabricated products in the markets in which we participate. Such
changes in demand can directly affect our earnings by impacting
the overall volume and mix of such products sold. During 2005
and 2006, the markets for aerospace and high strength products
in which we participate were strong, resulting in higher
shipments and improved margins.
Changes in primary aluminum prices also affect our primary
aluminum business unit and expected earnings under any firm
price fabricated products contracts. However, the impacts of
such changes are generally offset by each other or by primary
aluminum hedges. Our operating results are also, albeit to a
lesser degree, sensitive to changes in prices for power and
natural gas and changes in certain foreign exchange rates. All
of the foregoing have been subject to significant price
fluctuations over recent years. For a discussion of the possible
impacts of the reorganization on our sensitivity to changes in
market conditions, see Item 7A. Quantitative and
Qualitative Disclosures About Market Risks, Sensitivity.
During 2006, the average London Metal Exchange or LME,
transaction price per pound of primary aluminum was $1.17.
During 2005 and 2004, the average LME price per pound for
primary aluminum was $.86 and $.78, respectively. At
February 28, 2007, the LME price was approximately
$1.31 per pound.
Results
of Operations
Summary. The Company reported net income of
$3,167.4 million in 2006, compared to a net loss of
$753.7 million for 2005 and a net loss of
$746.8 million for 2004. Net income for 2006 includes a
non-cash gain of $3,110.3 million related to the
implementation of our Plan and application of fresh start
accounting. Net loss for 2005 includes a non-cash loss of
$1,131.5 million related to the assignment of intercompany
claims for the benefit of certain creditors offset by a gain of
$365.6 million on the sale of QAL and favorable QAL
operating results prior to its sale on April 1, 2005. Net
loss for 2004 includes non-cash losses of $797.5 million
related to the termination of pension plans, the termination of
postretirement medical benefit plans and the settlement of
unfair labor practices allegations by the United Steelworkers,
or USW. All years include a number of non-run-rate items that
are more fully explained in the sections below.
Net sales in 2006 totaled $1,357.3 million compared to
$1,089.7 million in 2005 and $942.4 million in 2004.
As more fully discussed below, the increase in revenues is
primarily the result of the increase in the market price for
29
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) our hedging activities, while
limiting our risk of losses, may limit our ability to
participate in price increases.
2006
as Compared to 2005
Fabricated Aluminum Products. Net sales of
fabricated products increased by 23% to $1,158.1 million
for 2006 as compared to 2005, primarily due to a 13% 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 together with a richer
product mix. The increase in volume in 2006 was led by Aero/HS
and defense-related shipments, but shipments of Custom
Automotive and Industrial Products and General Engineering
Products were also higher in 2006. The increased aerospace and
defense-related shipments reflect the strong demand for such
products. Additionally, incremental heat treat furnace capacity,
primarily resulting from the completion of the first phase of
our $105 million Trentwood expansion project, contributed
to increased shipments of heat treat plate.
Fourth quarter 2006 shipments were approximately 5% higher than
the comparable period in 2005, reflecting the additional heat
treat plate capacity at our Trentwood facility. One new heat
treat plate furnace reached full capacity in the fourth quarter
and a second furnace, which started producing in the fourth
quarter of 2006, is expected to reach full capacity during the
first quarter of 2007. Overall, we believe the mix of products
will continue to benefit from increased heat treat plate
shipments that will be made possible by incremental capacity as
various phases of the Trentwood expansion are completed,
including the new stretcher which will enable us to produce
heavier gauge plate products and the third heat treat plate
furnace, both of which are expected to be on-line by early 2008.
The fourth quarter of 2006 reflected a richer product mix which
continued into the first quarter of 2007. This trend may not
continue beyond the first quarter. Recent trends in other parts
of our business that affected the fourth quarter of 2006 and
could affect 2007 included a general weakening of industrial
demand, service center de-stocking of extrusion inventories, and
reduced vehicle builds (especially larger vehicles that
represent a significant portion of demand for our products).
Operating income for 2006 of $122.0 million was
approximately $35 million higher than for the prior year.
Operating income for 2006 included a favorable impact of
approximately $33 million from higher shipments, favorable
mix, stronger conversion prices (representing the value added
from the fabrication process) and favorable scrap raw material
costs as compared to the prior year. Energy costs and cost
performance both slightly improved year over year, offset by
slightly higher major maintenance. Depreciation and amortization
in 2006 was approximately $5 million lower than 2005,
primarily as a result of the adoption of fresh start accounting.
Both years include non-run-rate items. These items which are
listed below had a combined approximate $6 million adverse
impact on 2006 which is approximately $2 million worse than
2005:
|
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Metal profits in 2006 (before considering LIFO implications) of
approximately $20.8 million, which is approximately
$16.2 million greater than in 2005.
|
|
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A non-cash LIFO inventory charge of $25.0 million compared
to a $9.3 LIFO charges in the 2005.
|
|
|
|
Mark-to-market
charges on energy hedging in 2006 were approximately
$2.2 million. During 2005, there were no such
mark-to-market
charges.
|
Segment operating results for 2006 and 2005 include gains on
intercompany hedging activities with the primary aluminum
business unit totaling $44.6 million for 2006 and
$11.1 million for 2005. These amounts eliminate in
consolidation. Segment operating results for 2006 and 2005,
exclude defined contribution savings plan charges of
approximately $.4 million and $6.3 million,
respectively (see Note 10 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data).
Primary Aluminum. During 2006, third party net
sales of primary aluminum increased 32% compared to 2005. The
increase was almost entirely attributable to the increases in
average realized primary aluminum prices.
30
The following table recaps (in millions of dollars) the major
components of segment operating results for the current and
prior year periods as well as the primary factors leading to
such differences. Many of such factors indicated are subject to
significant fluctuation from period to period and are largely
impacted by items outside managements control. See
Item 1A. Risk Factors.
|
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2006 vs. 2005
|
|
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Operating
|
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Better
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Component
|
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Income
|
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(Worse)
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Primary Factor
|
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Sales of production from Anglesey
|
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$
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51
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$
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19
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Market price for primary aluminum
|
Internal hedging with Fabricated
Products
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(45
|
)
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(34
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)
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Eliminates in consolidation
|
Derivative settlements
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1
|
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Impacted by positions and market
prices
|
Mark-to-market
on derivative instruments
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17
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21
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Impacted by positions and market
prices
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$
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23
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$
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7
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|
The improvement in Anglesey-related results, as well as the
offsetting adverse internal hedging results in 2006 over 2005
was driven primarily by increases in primary aluminum market
prices. Approximately two-thirds of the cost of the
Anglesey-related operations is alumina and power. Beginning in
the second quarter of 2005, the Anglesey-related operating
results were adversely affected by an approximate 20% increase
in contractual alumina costs. However, contractual pricing for
alumina is expected to improve approximately 20% (versus
2006) beginning in the second quarter of 2007. Also,
Anglesey-related operating results were offset by an approximate
15% contractual increase in Angleseys power costs in 2006
(an adverse change of approximately $5 million compared to
2005). 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 makes its
operation viable. No assurance can be provided that Anglesey
will be successful in this regard.
In addition, given the potential for future shutdown and related
costs, dividends from Anglesey have been suspended while
Anglesey studies future cash requirements. Dividends over the
past five years have fluctuated substantially depending on
various operational and market factors. During the last five
years, cash dividends received were as follows (in millions of
dollars): 2006 $11.8, 2005 $9.0,
2004 $4.5, 2003 $4.3 and
2002 $6.0. Should the temporary suspension of
dividends continue for a prolonged period or become permanent,
we will have to consider whether it is appropriate to continue
to recognize our equity share in Angleseys earnings.
Corporate and Other. Corporate operating
expenses represent corporate general and administrative expenses
that are not allocated to our business segments.
Corporate operating expenses for 2006 were approximately
$10.0 million higher than in 2005. Incentive compensation
accruals were approximately $8.3 million higher in 2006
than in 2005, including the $4.0 million non-cash charge
associated with the granting of vested and non-vested shares of
our common stock at emergence as more fully discussed in
Notes 1 and 7 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and
Supplementary Data. Additionally, we incurred certain
costs we consider largely non-run-rate, including
$1.9 million of preparation costs related to the
Sarbanes-Oxley Act of 2002, or SOX and $1.3 million of
costs associated with certain computer upgrades. The remaining
change in 2006 primarily reflects lower salary and other costs
related to the movement toward a post-emergence structure.
Once the activities associated with our emergence from
chapter 11 bankruptcy (which will continue through early
2007) and incremental SOX adoption-related activities are
complete, we expect there will be at least a modest decline in
Corporate and other cash costs by the end of 2008.
Corporate operating results for 2006, discussed above, exclude
non-cash pension benefits of approximately $4.2 million
related to the terminated pension plans assumed by the PBGC and
a credit of approximately $3.0 million related to the
resolution of a pre-emergence contingency, offset by a charge of
approximately
31
$4.5 million related to post emergence
chapter 11-related
items. Corporate operating results for 2005, exclude defined
contribution savings plan charges of approximately
$.5 million. See Note 10 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data.
Discontinued Operations. Operating results
from discontinued operations for 2006 consist of a
$7.5 million payment from an insurer for certain residual
claims we had in respect of the 2000 incident at our 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. These
amounts were offset, in part, by a $5.0 million charge
resulting from an agreement between us and the Bonneville Power
Administration for a rejected electric power contract (see
Note 15 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and
Supplementary Data). Operating results from discontinued
operations for 2005 include the $365.6 million gain on the
sale of our interests in and related to QAL and the favorable
operating results of our interests in and related to QAL, which
were sold as of April 1, 2005.
Reorganization Items. Reorganization items
consist primarily of income, expenses (including professional
fees) or losses that are realized or incurred by us due to our
reorganization. Reorganization items in 2006 consisted primarily
of a non-cash gain of approximately $3,110.3 million
related to the implementation of our Plan and application of
fresh start reporting. Reorganization items in 2005 consisted
primarily of a non-cash charge of approximately
$1,131.5 million that was recognized in connection with the
consummation of two separate joint plans of liquidation of four
subsidiaries as the value associated with an intercompany amount
between two subsidiaries that was transferred for the benefit of
certain third party creditors. See Notes 2 and 14 of Notes
to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data.
2005
as Compared to 2004
Fabricated Aluminum Products. Net sales of
fabricated products increased by 16% during 2005 as compared to
2004 primarily due to a 10% increase in average realized prices
and a 6% increase in shipments. The increase in the average
realized prices reflects (in relatively equal proportions)
higher conversion prices and higher underlying primary aluminum
prices. The higher conversion prices are primarily attributable
to continuing strength in fabricated aluminum product markets,
particularly for aerospace and high strength products, as well
as a favorable mix in the type of aerospace/high strength
products in the early part of 2005. Current period shipments
were higher than 2004 shipments due primarily to the
aforementioned strength in aerospace and high strength product
demand.
Segment operating results (before Other operating charges, net)
for 2005 improved over 2004 by approximately $54.0 million.
The improvement consisted of improved sales performance
(primarily due to factors cited above) of approximately
$64.0 million, offset, by higher operating costs,
particularly for natural gas. Higher natural gas prices had a
particularly significant impact on the fourth quarter of 2005.
Lower 2005 charges for legacy pension and retiree
medical-related costs (approximately $5.0 million; see
Note 7 of Notes to Consolidated Financial Statements) were
largely offset by other cost increases versus 2004 including
approximately $6.0 million of higher non-cash LIFO
inventory charges ($9.0 in 2005 versus $3.2 in 2004). Segment
operating results for 2005 and 2004 include gains on
intercompany hedging activities with the primary aluminum
business unit total $11.1 million and $8.6 million,
respectively. These amounts eliminate in consolidation.
Segment operating results for 2005, discussed above, exclude
deferred contribution savings plan charges of approximately
$6.3 million (see Note 10 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data).
Primary Aluminum. Third party net sales of
primary aluminum in 2005 increased by approximately 13% as
compared to 2004. The increase was almost entirely attributable
to the increase in average realized primary aluminum prices.
Segment operating results for 2005 included approximately
$32.0 million related to sale of primary aluminum resulting
from our ownership interests in Anglesey offset by
(a) losses on intercompany hedging activities with the
Fabricated products business unit (which eliminate in
consolidation) totaling approximately $11.1 million and
(b) approximately $4.1 million of non-cash charges
associated with the discontinuance of hedge accounting treatment
of derivative instruments as more fully discussed in
Notes 1 and 9 of Notes to Consolidated Financial
32
Statements included in Item 8. Financial Statements
and Supplementary Data. Primary aluminum hedging
transactions with third parties were essentially neutral in
2005. In 2004, segment operating results consisted of
approximately $21.0 related to sales of primary aluminum
resulting from the Companys ownership interests in
Anglesey and approximately $2.0 million of gains from third
party hedging activities offset by approximately
$8.6 million of by losses on intercompany hedging
activities with the Fabricated products business unit (which
eliminate in consolidation). The improvement in Anglesey-related
results in 2005 versus 2004 results primarily from the
improvement in primary aluminum market prices discussed above.
The primary aluminum market price driven improvement in
Anglesey-related operating results were offset by an approximate
15% contractual increase in Angleseys power costs during
the fourth quarter of 2005 as well as an increase in major
maintenance costs incurred in 2005 (over 2004).
Post 2005 results related to Anglesey will continue to be
affected by the higher contractual power rate through the term
of the existing power agreement, which ends in 2009, as well as
an approximate 20% increase in contractual alumina costs during
the remainder of the term of the Companys existing alumina
purchase contract, which extends 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 slated for decommissioning
in late 2009 or 2010, approximately the same time as when
Angleseys current power agreement expires. For Anglesey to
be able to operate past 2009, the power plant will need to
operate past its current decommissioning date and 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.
Corporate and Other. Corporate operating
expenses represent corporate general and administrative expenses
which are not allocated to our business segments. In 2005,
corporate operating expenses were comprised of approximately
$30.0 million of expenses related to ongoing operations and
$5.0 million related to retiree medical expenses. In 2004,
corporate operating expenses were comprised of approximately
$21.0 million of expenses related to ongoing operations and
approximately $50.0 million of retiree medical expenses.
The increase in expenses related to ongoing operations in 2005
compared to 2004 was due to an increase in professional expenses
associated primarily with initiatives to comply with SOX and
emergence-related activity, relocation of the corporate
headquarters and transition costs, offset by the fact that key
personnel ceased receiving retention payments as of the end of
the first quarter of 2004 pursuant to our key employee retention
program (see Note 19 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data). The decline in retiree-related
expenses is primarily attributable to the termination of the
Inactive Pension Plan in 2004 and the change in retiree medical
payments (see Note 19 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data).
Corporate operating results for 2005, discussed above, exclude
defined contribution savings plan charges of approximately
$.5 million (see Note 10 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data).
Discontinued Operations. Discontinued
operations in 2005 include the operating results of our
interests in and related to QAL for the first quarter of 2005
and the gain that resulted from the sale of such interests on
April 1, 2005. Discontinued operations in 2004 included a
full year of operating results attributable to our interests in
and related to QAL, as well as the operating results of the
commodity interests that were sold at various times during 2004.
Income from discontinued operations for 2005 increased
approximately $242.0 million over 2004. The primary factor
for the improved results was the larger gain on the sale of the
QAL-related interests (approximately $366.0 million) in
2005 compared to the gains from the sale of our interests in and
related to Alumina Partners of Jamaica and the sale of the Mead
Facility (approximately $127.0 million) in 2004. The
adverse impacts in 2005 of the $42.0 million Kaiser Bauxite
Company non-cash contract rejection charge were largely offset
by improved operating results in 2005 associated with QAL
(approximately $12.0 million) and the avoidance of
approximately $33.0 million net losses by other
commodity-related interests in 2004.
33
Reorganization Items. Reorganization items
increased substantially in 2005 over 2004 as a result a non-cash
charge for approximately of $1,131.5 million in the fourth
quarter of 2005. As more fully discussed in Note 14 of
Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data, the non-cash charge was recognized in connection
with the consummation of the plans of liquidation discussed
above as the value associated with an intercompany amount
between two subsidiaries that was transferred for the benefit of
certain third party creditors.
Liquidity
and Capital Resources
As a result of the filing of the chapter 11 bankruptcy
proceedings, claims against Kaiser and it subsidiaries that
filed such cases for principal and accrued interest on secured
and unsecured indebtedness existing on their filing date were
stayed while those entities continued business operations as
debtors-in-possession,
subject to the control and supervision of the Bankruptcy Court.
See Notes 2 and 14 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data for additional discussion of the
chapter 11 bankruptcy cases.
Operating Activities. In 2006, fabricated
products operating activities of the Successor provided
approximately $62 million of cash and fabricated products
operating activities of the Predecessor provided approximately
$13 million of cash. These amounts compare with 2005 when
fabricated operating activities of the Predecessor provided
approximately $88 million of cash and with 2004 when
fabricated products operating activities of the Predecessor
provided approximately $35 million of cash. Cash provided
in 2006 was primarily due to improved operating results offset
in part by increased working capital. The increase in working
capital 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.
Substantially all of the cash provided in 2005 was generated
from operating results; working capital changes were modest.
Operating results in 2004 generated approximately
$70 million which was offset by increases in working
capital of approximately $35 million. The increases in cash
provided by fabricated products operating results in 2005 and
2004 were primarily due to improving demand for fabricated
aluminum products. The foregoing analysis of fabricated products
cash flow excludes consideration of pension and retiree cash
payments made on behalf of current and former employees of the
fabricated products facilities. Such amounts are part of the
legacy costs that we internally categorize as a
corporate cash outflow. See Corporate and
Other Operating Activities below.
In 2006, operating activities of the Successor used
approximately $7 million and operating activities of the
Predecessor provided approximately $36 million of cash
attributable to our interest in and related to Anglesey. In 2005
and 2004, the operating activities of the Predecessor provided
approximately $20 million and $14 million,
respectively, of cash attributable to our interests in and
related to Anglesey. The increases in cash flows between 2006
and 2005 and between 2005 and 2004 is primarily attributable to
increases in primary aluminum market prices.
Corporate and Other Operating
Activities. Corporate and other operating
activities of the Successor (including all legacy
costs) used approximately $36 million and corporate and
other operating activities of the Predecessor used approximately
$70 million of cash during 2006. Corporate and other
operating activities of the Predecessor used approximately
$108 million and $150 million of cash in 2005 and
2004, respectively. Cash outflows from corporate and other
operating activities in 2006, 2005 and 2004 included:
(1) approximately $11 million, $37 million and
$57 million, respectively, in respect of retiree medical
obligations and VEBA funding for former and current operating
units; (2) payments for reorganization costs of
approximately $28 million, $39 million and
$35 million, respectively; and (3) payments in respect
of general and administrative costs totaling approximately
$41 million, $29 million and $26 million,
respectively. Cash outflows for corporate and other operating
activities in 2006 also included payments pursuant to our Plan
of approximately $25 million and in 2004 also included
$27 million to settle certain multi-site environmental
claims.
Discontinued Operations Activities. In 2006,
discontinued operation activities of the Predecessor provided
$9 million of cash. This compares with 2005 and 2004 when
discontinued operation activities of the Predecessor provided
$17 million and $64 million of cash, respectively.
Cash provided by discontinued operations in 2006 consisted of
the proceeds from an $8 million payment from an insurer and
a $1 million refund from commodity
34
interests energy vendors. The decrease in cash provided by
discontinued operations in 2005 over 2004 resulted primarily
from a decrease in favorable operating results due to the sale
of substantially all of the commodity interests between the
second half of 2004 and early 2005. The remaining commodity
interests were sold as of April 1, 2005.
Investing Activities. Total capital
expenditures for fabricated products were $56.9 million,
$30.6 million, and $7.6 million in 2006, 2005 and
2004, respectively. Total capital expenditures for fabricated
products are currently expected to be in the $60 million to
$70 million range for 2007. The higher level of capital
spending in 2006 and 2007 as compared to other periods reflects
incremental investments, particularly at our Spokane, Washington
facility. New equipment, furnaces
and/or
services will enable us to supply heavy gauge heat treat
stretched plate to the aerospace and general engineering
markets. The total capital spending for this project is expected
to be approximately $105 million. Approximately
$65 million of such cost was incurred in 2005 and 2006. The
balance will be incurred primarily in 2007. Our remaining
capital spending in 2007 will be spread among all manufacturing
locations. A majority of the 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.
In addition to the foregoing, as of March 2007, we are
considering capital expenditures of approximately
$20 million that would be for projects intended to generate
incremental cost efficiencies or enhance commercial operations.
Such costs would likely be incurred during 2007 and 2008 and
would focus on one or more of our
non-rolling
facilities. However, no assurances can be provided as to the
timing or success of any such expenditures.
The level of capital expenditures may be adjusted from time to
time depending on our business plans, price outlook for metal
and other products, our ability to maintain adequate liquidity
and other factors.
Total capital expenditures for discontinued operations were
$3.5 million in 2004 (of which $1.0 million was funded
by the minority partners in certain foreign joint ventures).
Financing Activities. In 2006, financing
activities of the Successor provided approximately
$49 million of cash and financing activities of the
Predecessor provided approximately $1 million of cash.
These amounts compare with 2005 when financing activities of the
Predecessor used approximately $394 million of cash and
with 2004 when financing activities of the Predecessor used
approximately $294 million of cash. Cash provided in 2006
was primarily due to approximately $50 million of
borrowings under the Successors term loan facility. Cash
used in 2005 and 2004 primarily relates to net cash used by
discontinued operations of approximately $387 million and
$291 million, respectively.
Financing Facilities and Liquidity. On the
July 6, 2006 effective date of our Plan, we entered into a
new senior secured revolving credit agreement with a group of
lenders providing for a $200 million revolving credit
facility of which up to a maximum of $60 million may be
utilized for letters of credit. Under the revolving credit
facility, we are able to borrow (or obtain letters of credit)
from time to time in an aggregate amount equal to the lesser of
$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 facitility 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 our option, plus a
specified variable percentage determined by reference to the
then remaining borrowing availability under the revolving credit
facility. The revolving credit facility may, subject to certain
conditions and the agreement of lenders thereunder, be increased
up to $275 million.
Concurrently with the execution of the revolving credit
facility, we also entered into a term loan facility with a group
of lenders that provides for a $50 million term loan and is
guaranteed by certain of our 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 our option.
35
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 our assets and the assets of our
U.S. operating subsidiaries that are also borrowers thereunder.
The term loan facility is secured by a second lien on
substantially all of our assets and the assets of our U.S.
operating subsidiaries that are the borrowers or guarantors
thereof.
Both credit facilities place restrictions on our ability 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.
We currently believe 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
us to meet our obligations for at least the next twelve months.
During July 2006, we borrowed and repaid $8.6 million under
the revolving credit facility. At February 28, 2007, there
were no borrowings outstanding under the revolving credit
facility, there were approximately $13.6 million of
outstanding letters of credit under the revolving credit
facility and there was $50 million outstanding under the
term loan facility.
Commitments and Contingencies. We are subject
to a number of environmental laws, to fines or penalties
assessed for alleged breaches of the environmental laws, and to
claims and litigation based upon such laws. Based on our
evaluation of these and other environmental matters, we have
established environmental accruals of $8.4 million at
December 31, 2006. However, we believe that it is
reasonably possible that changes in various factors could cause
costs associated with these environmental matters to exceed
current accruals by amounts that could be, in the aggregate, up
to an estimated $15.2 million.
We are 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 polychlorinated biphenyls, or PCBs, at the Trentwood
facility. In early 2007, we received a letter from the
regulatory authorities confirming that their investigation had
been closed.
Capital
Structure.
Successor: On the July 6, 2006 effective
date of our Plan, pursuant to the Plan, all equity interests in
Kaiser outstanding immediately prior to such date were cancelled
without consideration and issued 20,000,000 new shares of common
stock to a third-party disbursing agent for distribution in
accordance with our Plan. As we discussed in Note 6 of
Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data, 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 our purchase of
common stock by the Company and limitations on our ability to
pay dividends.
Predecessor: Prior to July 6, 2006,
effective date of our Plan, MAXXAM Inc. and one of its wholly
owned subsidiaries collectively owned approximately 63% of our
common stock, with the remaining approximately 37% being
publicly held. However, as discussed in Note 14 of Notes to
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data,
pursuant to our Plan, all of the pre-emergence equity interests
in Kaiser were cancelled without consideration upon our
emergence from chapter 11 bankruptcy on July 6, 2006.
Other
Matters
Income Tax Matters. Although we have
substantial tax attributes available to offset the impact of
future income taxes, we do not yet meet the more likely
than not criteria for recognition of such attributes
primarily because we do not have sufficient history of paying
taxes. As such, we have recorded a full valuation allowance
against the amount of tax attributes available and no deferred
tax asset was recognized. See Note 6 of Notes to
36
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data for a
discussion of these and other income tax matters.
New
Accounting Pronouncements
The section New Accounting Pronouncements from
Note 1 of Notes to Consolidated Financial Statements
included in Item 8. Financial Statements and
Supplementary Data is incorporated herein by reference.
Critical
Accounting Policies
Successor:
Critical accounting policies fall into two broad categories. The
first type of critical accounting policies includes those that
are relatively straightforward 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 1 of Notes to
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data and is
not addressed below. The second type of critical accounting
policies includes those that are both very important to the
portrayal of our 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. Our critical
accounting policies after emergence from chapter 11
bankruptcy 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 bankruptcy or related to liabilities that
were resolved pursuant to our Plan). See the Notes to
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data for
discussion of possible differences.
While we believe that all aspects of its financial statements
should be studied and understood in assessing its current (and
expected future) financial condition and results, we believe
that the accounting policies that warrant additional attention
include:
1. Application of fresh start accounting.
Upon emergence from chapter 11 bankruptcy, we applied
fresh start accounting to our consolidated financial
statements as required by
SOP 90-7.
As such, in July 2006, we adjusted stockholders equity to
equal the reorganization value of the entity at emergence.
Additionally, items such as accumulated depreciation,
accumulated deficit and accumulated other comprehensive income
(loss) were reset to zero. We allocated the reorganization value
to our individual assets and liabilities based on their
estimated fair value at the emergence date based, in part, on
information from a third party appraiser. Such items as current
liabilities, accounts receivable and cash reflected values
similar to those reported prior to emergence. Items such as
inventory, property, plant and equipment, long-term assets and
long-term liabilities were significantly adjusted from amounts
previously reported. Because fresh start accounting was adopted
at emergence and because of the significance of liabilities
subject to compromise that were relieved upon emergence,
meaningful comparisons between the historical financial
statements and the financial statements from and after emergence
are difficult to make.
2. Our judgments and estimates with respect to commitments
and contingencies.
Valuation of legal and other contingent claims is subject to a
great deal of judgment and substantial uncertainty. Under GAAP,
companies are required to accrue for contingent matters in their
financial statements only if the amount of any potential loss is
both probable and the amount (or a range) of
possible loss is estimatable. In reaching a
determination of the probability of an adverse ruling in respect
of a matter, we typically consult outside experts. However, any
such judgments reached regarding probability are subject to
significant uncertainty. We may, in fact, obtain an adverse
ruling in a matter that we did not consider a
probable loss and which, therefore, was not accrued
for in our financial statements. Additionally, facts and
circumstances in respect of a matter can change causing key
assumptions that were used in previous assessments of a matter
to change. It is possible that amounts at risk in respect of one
matter may be traded
37
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, we may only be able to estimate a range for possible
losses. In such event, GAAP requires that a liability be
established for at least the minimum end of the range assuming
that there is no other amount which is more likely to occur.
3. Our judgments and estimates in respect of our employee
defined benefit plans.
Defined benefit pension and postretirement medical obligations
included in our 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 our estimate of such
obligations to vary significantly. Restructuring actions
relating to our exit from most of our 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. Our judgments and estimates in respect to environmental
commitments and contingencies.
We are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches
of such laws and regulations and to claims and litigation based
upon such laws and regulations. Based on our evaluation of
environmental matters, we have established environmental
accruals, primarily related to potential solid waste disposal
and soil and groundwater remediation matters. These
environmental accruals represent our estimate of costs
reasonably expected to be incurred on a going concern basis in
the ordinary course of business based on presently enacted laws
and regulations, currently available facts, existing technology
and our assessment of the likely remediation action to be taken.
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 Consolidated Financial Statements in
Item 8. Financial Statements and Supplementary
Data for additional information in respect of
environmental contingencies.
5. Our 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 1 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data, we have evaluated our
exposures to CAROs and determined that we have CAROs at several
of our 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,
38
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, we 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: (1) the timing of when any such
CARO may be incurred, (2) the ability to accurately
identify all materials that may require special handling or
treatment, (3) the ability to reasonably estimate the total
incremental special handling and other costs, (4) the
ability to assess the relative probability of different
scenarios which could give rise to a CARO, and (5) other
factors outside a companys control including changes in
regulations, costs and interest rates. As such, actual costs and
the timing of such costs may vary significantly from the
estimates, judgments and probable scenarios we considered, which
could, in turn, have a material impact on our future financial
statements.
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 we
reasonably expect 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 our 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 Provision.
Although we have substantial tax attributes available to offset
the impact of future income taxes, we do not meet the more
likely than not criteria for recognition of such
attributes primarily because we do not have sufficient history
of paying taxes. As such, we recorded a full valuation allowance
against the amount of tax attributes available and no deferred
tax asset was recognized. The benefit associated with any
reduction of the valuation allowance is 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, we expect to record a full
statutory tax provision in future periods and, therefore, the
benefit of any tax attributes realized will only affect future
balance sheets and statements of cash flows. If we ultimately
determine that we meet the more likely than not
recognition criteria, the amount of net operating loss
carryforwards and other defined tax assets would be recorded on
the balance sheet and would be recorded as an adjustment to
Stockholders equity.
In accordance with GAAP, financial statements for interim
periods include an income tax provision based on the effective
tax rate expected to be incurred in the current year.
Accordingly, estimates and judgments are made (by taxable
jurisdiction) as to the amount of taxable income that may be
generated, the availability of deductions and credits expected
and the availability of net operating loss carry forwards or
other tax attributes to offset taxable income. Making such
estimates and judgments is subject to inherent uncertainties
given the difficulty predicting such factors as future market
conditions, customer requirements, the cost for key inputs such
as energy and primary aluminum, overall operating efficiency and
many other items. However, if among other things,
(1) actual results vary from our forecasts due to one or
more of the factors cited above or elsewhere in this Report,
(2) income is distributed differently than expected among
tax jurisdictions, (3) one or more material events or
transactions occur which were not contemplated, (4) other
uncontemplated transactions occur, or (5) certain expected
deductions, credits or carry forwards are not be available, it
is possible that the effective tax rate for a year could vary
materially from the assessments used to prepare the interim
39
consolidated financial statements. See Note 6 of Notes to
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data for
additional discussion of these matters.
Predecessor:
Our critical accounting policies after emergence from
chapter 11 bankruptcy will, in some cases, be different
from those before emergence. Many of the significant judgments
affecting our financial statements relate to matters related to
chapter 11 bankruptcy proceedings or liabilities that were
resolved pursuant to our Plan. Where critical accounting
policies before emergence were the same as current policies
and/or no
unique circumstances existed, the policies are not repeated
below.
1. Predecessor Reporting While in Reorganization.
Our consolidated financial statements as of and for dates and
periods prior to July 1, 2006, were prepared on a
going concern basis in accordance with
SOP 90-7
and did not include the impacts of our Plan including
adjustments relating to recorded asset amounts, the resolution
of liabilities subject to compromise and the cancellation of the
interests of our pre-emergence stockholders. Adjustments related
to the Plan materially affected the consolidated financial
statements included in Item 8. Financial Statements
and Supplementary Data as more fully shown in the opening
July 1, 2006 balance sheet presented in Note 2 of
Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data.
In addition, during the course of the chapter 11 bankruptcy
proceedings, there were material impacts including:
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Additional filing date claims were identified through the proof
of claim reconciliation process and arose in connection with
actions taken by us in the chapter 11 bankruptcy
proceedings. For example, while we considered rejection of the
Bonneville Power Administration, or BPA, contract to be in our
best long-term interests, the rejection resulted in an
approximate $75 million claim by the BPA. In the second
quarter of 2006, an agreement with 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 was materially different from the amounts reflected
in our consolidated financial statements.
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As more fully discussed below, changes in business plans
precipitated by the chapter 11 bankruptcy proceedings
resulted in significant charges associated with the disposition
of assets.
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2. Our judgments and estimates with respect to commitments
and contingencies.
Valuation of legal and other contingent claims is subject to
judgment and substantial uncertainty. Under 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 range of possible loss is
estimatable. In reaching a determination of the
probability of adverse rulings, we typically consult outside
experts. However, any judgments reached regarding probability
are subject to significant uncertainty. We may, in fact, obtain
an adverse ruling in a matter that it did not consider a
probable loss and which was not accrued for in our
financial statements. Additionally, facts and circumstances
causing key assumptions that were used in previous assessments
are subject to change. It is possible that amounts at risk in
one matter may be traded off against amounts under
negotiation in a separate matter. Further, in many instances a
single estimation of a loss may not be possible. Rather, we may
only be able to estimate a range for possible losses. In such
event, GAAP requires that a liability be established for at
least the minimum end of the range assuming that there is no
other amount which is more likely to occur.
Prior to our emergence from chapter 11 bankruptcy, we had
two potentially material contingent obligations that were
subject to significant uncertainty and variability in their
outcome: (1) the USW unfair labor practice claim and
(2) the net obligation in respect of personal
injury-related matters.
As more fully discussed in Note 21 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data, we accrued an amount in
the fourth quarter of 2004 for the USW unfair labor practice
matter. We did not accrue any amount prior to the fourth quarter
of 2004 because we did not
40
consider the loss to be probable. Our assessment had
been that the possible range of loss in this matter ranged from
zero to $250 million based on the proof of claims filed
(and other information provided) by the National Labor Relations
Board, or NLRB, and the USW in connection with our
chapter 11 bankruptcy proceedings. While we continued to
believe that the unfair labor practice charges were without
merit, during January 2004, we agreed to allow a claim in favor
of the USW in the amount of the $175 million as a
compromise and in return for the USW agreeing to substantially
reduce or eliminate certain benefit payments as more fully
discussed in Note 21 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements
and Supplementary Data. However, this settlement was not
recorded at that time because it was still subject to Bankruptcy
Court approval. The settlement was ultimately approved by the
Bankruptcy Court in February 2005 and, as a result of the
contingency being removed with respect to this item (which arose
prior to the December 31, 2004 balance sheet date), a
non-cash charge of $175 million was reflected in our
consolidated financial statements at December 31, 2004.
Also, as more fully discussed in Note 21 of Notes to
Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data, we were
one of many defendants in personal injury claims by a large
number of persons who assert that their injuries were caused by,
among other things, exposure to asbestos during, or as a result
of, their employment or association with us or by exposure to
products containing asbestos last produced or sold by us more
than 20 years ago. We have 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. Due to the chapter 11 bankruptcy proceedings,
existing lawsuits in respect of all such personal injury claims
were stayed and new lawsuits could not be commenced against us.
Our June 30, 2006 financial statements included a liability
for estimated asbestos-related costs of $1,115 million,
which represents our estimate of the minimum end of a range of
costs. The upper end of our estimate of costs was approximately
$2,400 million and we were aware that certain constituents
had asserted that they believed that actual costs could exceed
the top end of our estimated range, by a potentially material
amount. No estimation of our liabilities in respect of such
matters occurred as a part of our Plan. However, given that our
Plan was implemented in July 2006, all such obligations in
respect of personal injury claims have been resolved and will
not have a continuing effect on our financial condition after
emergence.
Our June 30, 2006 financial statements included a long-term
receivable of $963.3 million for estimated insurance
recoveries in respect of personal injury claims. We believed
that, prior to the implementation of our Plan, recovery of this
amount was probable (if our Plan was not approved) and
additional amounts were recoverable in the future if additional
liability was ultimately determined to exist. However, we could
not provide assurance that all such amounts would be collected.
However, as our Plan was implemented in July 2006, the rights to
the proceeds from these policies have been transferred (along
with the applicable liabilities) to certain personal injury
trusts set up as a part of our Plan and we have no continuing
interests in such policies.
3. Our judgments and estimates related to employee benefit
plans.
Pension and postretirement medical obligations included in the
consolidated financial statements at June 30, 2006 and at
prior dates were based on assumptions that were subject to
variation from year to year. Such variations can cause our
estimate of such obligations to vary significantly.
Restructuring actions relating to our exit from most of our
commodities businesses also had a significant impact on the
amount of these obligations.
For pension obligations, the most significant assumptions used
in determining the estimated year-end obligation were the
assumed discount rate and LTRR on pension assets. Since recorded
pension obligations represent the present value of expected
pension payments over the life of the plans, decreases in the
discount rate used to compute the present value of the payments
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 pension assets
reflected our 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 obligations to increase, yielding a reduced net pension
obligation. A reduction in the LTRR would reduce the amount of
projected net assets available to satisfy pension obligations
and, thus, caused the net pension obligation to increase.
For postretirement obligations, the key assumptions used to
estimate the year-end obligations were the discount rate and the
assumptions regarding future medical costs increases. The
discount rate affected the postretirement obligations in a
similar fashion to that described above for pension obligations.
As the assumed
41
rate of increase in medical costs went up, so did the net
projected obligation. Conversely, as the rate of increase was
assumed to be smaller, the projected obligation declined.
Since our largest pension plans and the post retirement medical
plans were terminated in 2003 and 2004, the amount of
variability in respect of such plans was substantially reduced.
However, there were five remaining defined benefit pension plans
that were still ongoing pending the resolution of certain
litigation with the PBGC. We prevailed in the litigation against
the PBGC in August 2006, and four of these remaining plans were
terminated in December 2006.
Given that all of our significant benefit plans after the
emergence date are defined contribution plans or have limits on
the amounts to be paid, our future financial statements will not
be subject to the same volatility as our financial statements
prior to emergence and the termination of the plans.
4. Our judgments and estimates related to environmental
commitments and contingencies.
We are subject to a number of environmental laws and
regulations, to fines or penalties that may be assessed for
alleged breaches of such laws and regulations, and to
clean-up
obligations and other claims and litigation based upon such laws
and regulations. We have in the past been and may in the future
be 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, or CERCLA.
Based on our evaluation of these and other environmental
matters, we have established environmental accruals, primarily
related to investigations and potential remediation of the soil,
groundwater and equipment at our current operating facilities
that may have been adversely impacted by hazardous materials,
including PCBs. These environmental accruals represent our
estimate of costs reasonably expected to be incurred on a going
concern basis in the ordinary course of business based on
presently enacted laws and regulations, currently available
facts, existing technology and our assessment of the likely
remedial action to be taken. However, making estimates of
possible environmental 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, actual costs may exceed the current
environmental accruals.
Contractual
Obligations and Commercial Commitments
The following summarizes our significant contractual obligations
at December 31, 2006 (dollars in millions):
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Payments Due by Period
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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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9.3
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3.0
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4.5
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1.7
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.1
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Total cash contractual
obligations(1)
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$
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59.3
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$
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3.0
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$
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4.5
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$
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51.7
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$
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.1
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(1) |
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Total contractual obligations exclude future annual variable
cash contributions to the VEBAs, which cannot be determined at
this time. See Off Balance Sheet and Other
Arrangements below for a summary of possible annual
variable cash contribution amounts at various levels of earnings
and cash expenditures. |
Off-Balance
Sheet and Other Arrangements
As of December 31, 2006, outstanding letters of credit
under our revolving credit facility were approximately
$14.1 million, substantially all of which expire within
approximately twelve months. The letters of credit relate
primarily to insurance, environmental and other activities.
We have agreements to supply alumina to and to purchase aluminum
from Anglesey. Both the alumina sales agreement and primary
aluminum purchase agreement are tied to primary aluminum prices.
42
Our employee benefit plans include the following:
|
|
|
|
|
We are obligated to make monthly contribution of one dollar per
hour worked by each bargaining unit employee to the appropriate
multi-employee pension plans sponsored by the USW and certain
other unions at six of our production facilities. This
obligation came into existence in December 2006 for three of our
production facilities upon the termination of four defined
benefit plans (see Note 7 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data). The arrangement for
the other three locations came into existence during the first
quarter of 2005. We currently estimate contributions will range
from $1 million to $3 million per year.
|
|
|
|
We have a defined contribution 401(k) savings plan for hourly
bargaining unit employees at five of our production facilities.
We will be required to make contributions to this plan for
active bargaining unit employees at these production facilities
that will range from $800 to $2,400 per employee per year,
depending on the employees age. This arrangement came into
existence in December 2004 for three production facilities upon
the termination of three defined benefit plans (see Note 19 of
Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data). The arrangement for the other two locations came
into existence during December 2006. We currently estimate that
contributions to such plans will range from $1 million to
$3 million per year.
|
|
|
|
We have a defined benefit plan for our salaried employees at our
production facility in London, Ontario with annual contributions
based on each salaried employees age and years of service.
In addition, we have a defined benefit pension plan for one
inactive operation with three remaining former employees covered
by that plan.
|
|
|
|
We have a defined contribution savings plan for salaried and
non-bargaining unit hourly employees providing for a match of
certain contributions made by employees plus a contribution of
between 2% and 10% of their compensation depending on their age
and years of service. We currently estimate that contributions
to such plans will range from $1 million to $3 million
per year.
|
|
|
|
We have a non-qualified defined contribution restoration plan
for key employees who would otherwise suffer a loss of benefits
under our defined contribution savings plan as a result of the
limitations by the Internal Revenue Code.
|
|
|
|
We have an annual variable cash contribution to the VEBAs. The
amount to be contributed to the VEBAs will be 10% of the first
$20 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 million.
Such annual payments will not exceed $20 million and will
also be limited (with no carryover to future years) to the
extent that the payments would cause our liquidity to be less
than $50 million. Such amounts will be determined on an
annual basis and payable no later than March 31 of the
following year. However, we have 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 July 6, 2006 effective date of our Plan. We do
not anticipate any annual variable cash contribution payments
will be required with respect to 2006, however, we have not yet
determined how much, if any, of the excess contribution payments
of $12.7 million will be utilized to offset annual variable
contributions that would otherwise have been due in respect of
2006.
|
43
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 offset 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 for illustrative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments for
|
|
|
|
Capital Expenditures, Income Taxes, Interest Expense, etc.
|
|
EBITDA
|
|
$25.0
|
|
|
$50.0
|
|
|
$75.0
|
|
|
$100.0
|
|
|
$20.0
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
40.0
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.0
|
|
|
5.0
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
80.0
|
|
|
9.0
|
|
|
|
4.0
|
|
|
|
.5
|
|
|
|
|
|
100.0
|
|
|
13.0
|
|
|
|
8.0
|
|
|
|
3.0
|
|
|
|
|
|
120.0
|
|
|
17.0
|
|
|
|
12.0
|
|
|
|
7.0
|
|
|
|
2.0
|
|
140.0
|
|
|
20.0
|
|
|
|
16.0
|
|
|
|
11.0
|
|
|
|
6.0
|
|
160.0
|
|
|
20.0
|
|
|
|
20.0
|
|
|
|
15.0
|
|
|
|
10.0
|
|
180.0
|
|
|
20.0
|
|
|
|
20.0
|
|
|
|
19.0
|
|
|
|
14.0
|
|
200.0
|
|
|
20.0
|
|
|
|
20.0
|
|
|
|
20.0
|
|
|
|
18.0
|
|
|
|
|
|
|
We have a short term incentive compensation plan for management
payable in cash which is based primarily on earnings, adjusted
for certain safety and performance factors. Most of our
production facilities have similar programs for both hourly and
salaried employees.
|
|
|
|
We have a stock-based long-term incentive plan for key managers.
As more fully discussed in Note 7 of Notes to Consolidated
Financial Statements included in Item 8. Financial
Statements and Supplementary Data, an initial,
emergence-related award was made under this program. Additional
awards are expected to be made in future years.
|
In connection with the sale of our interests in and related to
the Gramercy, Louisiana facility and Kaiser Jamaica Bauxite
Company, we indemnified the buyers for up to $5 million of
losses suffered by the buyers that result from any failure of
our seller representations and warranties to be true. Upon the
closing of the transaction, such amount was recorded in
long-term liabilities in our financial statements. A claim for
the full amount of the indemnity was made initially. In October
2006, the claimant filed a revised report to indicate that its
claim was approximately $2 million and separately filed for
summary judgment in respect to its claim. In early 2007, this
matter was resolved for a cash payment by the Company of
approximately $.1 million. The indemnity expired with
respect to additional claims in October 2006.
During the third quarter of 2005 and August 2006, we placed
orders for certain equipment
and/or
services intended to augment our heat treat and aerospace
capabilities at our Trentwood facility in Spokane, Washington
and we expect to become obligated for costs related to these
orders of approximately $105 million. Of such amount,
approximately $65 million was incurred in 2005 and 2006.
The balance is expected to be incurred primarily in 2007.
At December 31, 2006, there was still approximately
$2 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 our emergence from chapter 11 bankruptcy.
Approximately $5 million of such amounts were recorded in
connection with emergence and fresh start accounting and were
paid by us in early 2007.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our operating results are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and
also depend to a significant degree upon the volume and mix of
all products sold. As discussed more fully in Notes 1 and 9
of Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data, we historically have utilized hedging transactions
to lock-in a specified price
44
or range of prices for certain products which we sell or consume
in our production process and to mitigate our exposure to
changes in foreign currency exchange rates.
Sensitivity
Primary Aluminum. Our share of primary
aluminum production from Anglesey is approximately
150 million pounds annually. Because we purchase alumina
for Anglesey at prices linked to primary aluminum prices, only a
portion of our net revenues associated with Anglesey are exposed
to price risk. We estimate the net portion of our share of
Anglesey production exposed to primary aluminum price risk to be
approximately 100 million pounds annually (before
considering income tax effects).
Our pricing of fabricated aluminum products is generally
intended to lock-in a conversion margin (representing the value
added from the fabrication process(es) ) and to pass metal price
risk on to its customers. However, in certain instances we do
enter into firm price arrangements. In such instances, we do
have price risk on anticipated primary aluminum purchase in
respect of the customers order. Total fabricated products
shipments during 2004, 2005, the period from January 1,
2006 to July 1, 2006 and the period from July 1, 2006
through December 31, 2006 for which we had price risk were
(in millions of pounds) 119.6, 155.0, 103.9 and 96.0,
respectively.
During the last three years, the volume of fabricated products
shipments with underlying primary aluminum price risk were at
least as much as our net exposure to primary aluminum price risk
at Anglesey. As such, we consider our 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,
we may use third party hedging instruments to eliminate any net
remaining primary aluminum price exposure existing at any time.
At December 31, 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 for 2007 through 2011 totaling approximately
(in millions of pounds): 2007, 149; 2008, 111; 2009, 83; 2010,
83; and 2011, 77.
Foreign Currency. We from time to time will
enter into forward exchange contracts to hedge material cash
commitments for foreign currencies. After considering the
completed sales of our commodity interests, our primary foreign
exchange exposure is the Anglesey-related commitment that we
fund in Great Britain Pound Sterling, or GBP. We estimate 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 our annual
pre-tax operating income.
Energy. We are exposed to energy price risk
from fluctuating prices for natural gas. We estimate that,
before consideration of any hedging activities, each $1.00
change in natural gas prices (per mcf) impacts our annual
pre-tax operating results by approximately $4.0 million.
We from time to time in the ordinary course of business enter
into hedging transactions with major suppliers of energy and
energy-related financial investments. As of December 31, 2006,
we had fixed price purchase contracts which limit our exposure
to increases in natural gas prices for approximately 81% of the
natural gas purchases from January 2007 through March 2007, 27%
of natural gas purchases from April 2007 through June 2007 and
14% of natural gas purchases from July 2007 through September
2007.
45
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
97
|
|
|
|
|
99
|
|
46
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
To the Stockholders and the Board of Directors of
Kaiser Aluminum Corporation:
We have audited the accompanying consolidated balance sheets of
Kaiser Aluminum Corporation and subsidiaries (the
Company) as of December 31, 2006 (Successor
Company balance sheet) and 2005 (Predecessor Company balance
sheet), and the related consolidated statements of income
(loss), stockholders equity (deficit) and comprehensive
income (loss) and cash flows for the period from July 1,
2006 to December 31, 2006 (Successor Company operations),
the period from January 1, 2006 to July 1, 2006 and
for each of the two years in the period ended December 31,
2005 (Predecessor Company operations). These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company emerged from bankruptcy on July 6,
2006. In connection with its emergence, the Company adopted
fresh-start reporting pursuant to American Institute of
Certified Public Accountants Statement of Position
90-7,
Financial Reporting by Entities in Reorganization under the
Bankruptcy Code, as of July 1, 2006. As a result, the
consolidated financial statements of the Successor Company are
presented on a different basis than those of the Predecessor
Company and, therefore, are not comparable.
In our opinion, the Successor Company consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of the Company as of
December 31, 2006, and the results of its operations and
its cash flows for the period from July 1, 2006 to
December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America. Further, in
our opinion, the Predecessor Company consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of the Predecessor
as of December 31, 2005, and the results of its operations
and its cash flows for the period from January 1, 2006 to
July 1, 2006 and for each of the two years in the period
ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE &
TOUCHE LLP
Costa Mesa, California
March 29, 2007
47
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
(In millions of dollars, except share amounts)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
50.0
|
|
|
|
$
|
49.5
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful
receivables of $2.0 and $2.9
|
|
|
98.4
|
|
|
|
|
94.6
|
|
Due from affiliate
|
|
|
1.3
|
|
|
|
|
|
|
Other
|
|
|
6.3
|
|
|
|
|
6.9
|
|
Inventories
|
|
|
188.1
|
|
|
|
|
115.3
|
|
Prepaid expenses and other current
assets
|
|
|
40.8
|
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
384.9
|
|
|
|
|
287.3
|
|
Investments in and advances to
unconsolidated affiliate
|
|
|
18.6
|
|
|
|
|
12.6
|
|
Property, plant, and
equipment net
|
|
|
170.3
|
|
|
|
|
223.4
|
|
Personal injury-related insurance
recoveries receivable
|
|
|
|
|
|
|
|
965.5
|
|
Intangible assets- net, including
goodwill of $11.4 at December 31, 2005
|
|
|
|
|
|
|
|
11.4
|
|
Net assets in respect of VEBAs
|
|
|
40.7
|
|
|
|
|
|
|
Other assets
|
|
|
40.9
|
|
|
|
|
38.7
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
655.4
|
|
|
|
$
|
1,538.9
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIT)
|
Liabilities not subject to
compromise
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
73.2
|
|
|
|
$
|
51.4
|
|
Accrued interest
|
|
|
.7
|
|
|
|
|
1.0
|
|
Accrued salaries, wages, and
related expenses
|
|
|
39.4
|
|
|
|
|
42.0
|
|
Other accrued liabilities
|
|
|
46.9
|
|
|
|
|
55.2
|
|
Payable to affiliate
|
|
|
16.2
|
|
|
|
|
14.8
|
|
Long-term debt current
portion
|
|
|
|
|
|
|
|
1.1
|
|
Discontinued operations
current liabilities
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
176.4
|
|
|
|
|
167.6
|
|
Long-term liabilities
|
|
|
58.3
|
|
|
|
|
42.0
|
|
Long-term debt
|
|
|
50.0
|
|
|
|
|
1.2
|
|
Discontinued operations
liabilities (liabilities subject to compromise)
|
|
|
|
|
|
|
|
68.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284.7
|
|
|
|
|
279.3
|
|
Liabilities subject to compromise
|
|
|
|
|
|
|
|
4,400.1
|
|
Minority interests
|
|
|
|
|
|
|
|
.7
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders equity
(deficit):
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.01,
authorized 45,000,000 shares; issued and outstanding
20,525,660 shares at December 31, 2006
|
|
|
.2
|
|
|
|
|
.8
|
|
Additional capital
|
|
|
487.5
|
|
|
|
|
538.0
|
|
Retained earnings (deficit)
|
|
|
26.2
|
|
|
|
|
(3,671.2
|
)
|
Common stock owned by Union VEBA
subject to transfer restrictions, at reorganization value,
6,291,945 shares at December 31, 2006
|
|
|
(151.1
|
)
|
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
|
7.9
|
|
|
|
|
(8.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
370.7
|
|
|
|
|
(3141.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
655.4
|
|
|
|
$
|
1,538.9
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
48
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
to
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
|
July 1, 2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions of dollars, except share and
|
|
|
|
per share amounts)
|
|
Net sales
|
|
$
|
667.5
|
|
|
|
$
|
689.8
|
|
|
$
|
1,089.7
|
|
|
$
|
942.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
580.4
|
|
|
|
|
596.4
|
|
|
|
951.1
|
|
|
|
852.2
|
|
Depreciation and amortization
|
|
|
5.5
|
|
|
|
|
9.8
|
|
|
|
19.9
|
|
|
|
22.3
|
|
Selling, administrative, research
and development, and general
|
|
|
35.5
|
|
|
|
|
30.3
|
|
|
|
50.9
|
|
|
|
92.3
|
|
Other operating (benefits) charges,
net
|
|
|
(2.2
|
)
|
|
|
|
.9
|
|
|
|
8.0
|
|
|
|
793.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
619.2
|
|
|
|
|
637.4
|
|
|
|
1,029.9
|
|
|
|
1,760.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
48.3
|
|
|
|
|
52.4
|
|
|
|
59.8
|
|
|
|
(817.6
|
)
|
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 $95.0 in 2005
and 2004)
|
|
|
(1.1
|
)
|
|
|
|
(.8
|
)
|
|
|
(5.2
|
)
|
|
|
(9.5
|
)
|
Reorganization items
|
|
|
|
|
|
|
|
3,090.3
|
|
|
|
(1,162.1
|
)
|
|
|
(39.0
|
)
|
Other net
|
|
|
2.7
|
|
|
|
|
1.2
|
|
|
|
(2.4
|
)
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
and discontinued operations
|
|
|
49.9
|
|
|
|
|
3,143.1
|
|
|
|
(1,109.9
|
)
|
|
|
(861.9
|
)
|
Provision for income taxes
|
|
|
(23.7
|
)
|
|
|
|
(6.2
|
)
|
|
|
(2.8
|
)
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
26.2
|
|
|
|
|
3,136.9
|
|
|
|
(1,112.7
|
)
|
|
|
(868.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations, net of income taxes, including minority interests
|
|
|
|
|
|
|
|
4.3
|
|
|
|
(2.5
|
)
|
|
|
(5.3
|
)
|
Gain from sale of commodity
interests
|
|
|
|
|
|
|
|
|
|
|
|
366.2
|
|
|
|
126.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
4.3
|
|
|
|
363.7
|
|
|
|
121.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect on years prior to
2005 of adopting accounting for conditional asset retirement
obligations
|
|
|
|
|
|
|
|
|
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
26.2
|
|
|
|
$
|
3,141.2
|
|
|
$
|
(753.7
|
)
|
|
$
|
(746.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.31
|
|
|
|
$
|
39.37
|
|
|
$
|
(13.97
|
)
|
|
$
|
(10.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
|
$
|
.05
|
|
|
$
|
4.57
|
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from cumulative effect on
years prior to 2005 of adopting accounting for conditional asset
retirement obligations
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
(.06
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.31
|
|
|
|
$
|
39.42
|
|
|
$
|
(9.46
|
)
|
|
$
|
(9.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
Diluted (same as Basic for Predecessor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from cumulative effect on
years prior to 2005 of adopting accounting for conditional asset
retirement obligations
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
(000):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,003
|
|
|
|
|
79,672
|
|
|
|
79,675
|
|
|
|
79,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
20,089
|
|
|
|
|
79,672
|
|
|
|
79,675
|
|
|
|
79,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
49
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Union
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VEBA
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Subject to
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
Earnings
|
|
|
Transfer
|
|
|
Income
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Restriction
|
|
|
(Loss)
|
|
|
Total
|
|
|
|
(In millions of dollars)
|
|
|
BALANCE, December 31,
2003 Predecessor
|
|
$
|
.8
|
|
|
$
|
539.1
|
|
|
$
|
(2,170.7
|
)
|
|
$
|
|
|
|
$
|
(107.9
|
)
|
|
$
|
(1,738.7
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(746.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(746.8
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97.9
|
|
|
|
97.9
|
|
Unrealized net increase in value of
derivative instruments arising during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
2.1
|
|
Reclassification adjustment for net
realized losses on derivative instruments included in net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(644.4
|
)
|
Restricted stock cancellations
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31,
2004 Predecessor
|
|
|
.8
|
|
|
|
538.0
|
|
|
|
(2,917.5
|
)
|
|
|
|
|
|
|
(5.5
|
)
|
|
|
(2,384.2
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(753.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(753.7
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
(3.2
|
)
|
Unrealized net decrease in value of
derivative instruments arising during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.3
|
)
|
|
|
(.3
|
)
|
Reclassification adjustment for net
realized losses on derivative instruments included in net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(757.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
26.2
|
|
Benefit plan adjustments not
recognized in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.1
|
|
Issuance of 4,273 shares of
common stock to directors in lieu of annual retainer fees
|
|
|
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2
|
|
Recognition of pre-emergence tax
benefits in accordance with fresh start accounting
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Amortization of unearned equity
compensation
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2006
|
|
$
|
.2
|
|
|
$
|
487.5
|
|
|
$
|
26.2
|
|
|
$
|
(151.1
|
)
|
|
$
|
7.9
|
|
|
$
|
370.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
50
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
to
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
|
July 1, 2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions of dollars)
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
26.2
|
|
|
|
$
|
3,141.2
|
|
|
$
|
(753.7
|
)
|
|
$
|
(746.8
|
)
|
Less net income from discontinued
operations
|
|
|
|
|
|
|
|
4.3
|
|
|
|
363.7
|
|
|
|
121.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations, including loss from cumulative effect of adopting
change in accounting in 2005
|
|
|
26.2
|
|
|
|
|
3,136.9
|
|
|
|
(1,117.4
|
)
|
|
|
(868.1
|
)
|
Adjustments to reconcile net
income(loss) from continuing operations to net cash used by
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of pre-emergence tax
benefits in accordance with fresh start accounting
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash charges in reorganization
items in 2005 and other operating charges in 2004
|
|
|
|
|
|
|
|
|
|
|
|
1,131.5
|
|
|
|
805.3
|
|
Depreciation and amortization
(including deferred financing costs of $.3, $.9, $4.4 and $5.8,
respectively)
|
|
|
5.7
|
|
|
|
|
10.7
|
|
|
|
24.3
|
|
|
|
28.1
|
|
Non-cash equity compensation
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on discharge of pre-petition
obligations and fresh start adjustments
|
|
|
|
|
|
|
|
(3,110.3
|
)
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
Gains on sale of real estate
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(.2
|
)
|
|
|
|
|
Equity in (income) loss of
unconsolidated affiliates, net of distributions
|
|
|
(7.5
|
)
|
|
|
|
(10.1
|
)
|
|
|
1.5
|
|
|
|
(4.0
|
)
|
Decrease (increase) in trade and
other receivables
|
|
|
14.5
|
|
|
|
|
(18.3
|
)
|
|
|
9.3
|
|
|
|
(30.5
|
)
|
Increase in inventories, excluding
LIFO adjustments and other non-cash operating items
|
|
|
(16.1
|
)
|
|
|
|
(7.8
|
)
|
|
|
(9.4
|
)
|
|
|
(24.5
|
)
|
(Increase) decrease in prepaid
expenses and other current assets
|
|
|
(7.1
|
)
|
|
|
|
(14.5
|
)
|
|
|
|
|
|
|
.8
|
|
Increase (decrease) in accounts
payable and accrued interest
|
|
|
13.8
|
|
|
|
|
4.7
|
|
|
|
(2.4
|
)
|
|
|
16.4
|
|
(Decrease) increase in other
accrued liabilities
|
|
|
(13.4
|
)
|
|
|
|
5.7
|
|
|
|
(15.0
|
)
|
|
|
(18.6
|
)
|
(Decrease) increase in payable to
affiliates
|
|
|
(16.8
|
)
|
|
|
|
18.2
|
|
|
|
.1
|
|
|
|
3.3
|
|
Increase (decrease) in accrued and
deferred income taxes
|
|
|
8.9
|
|
|
|
|
(.5
|
)
|
|
|
(4.3
|
)
|
|
|
1.7
|
|
Net cash impact of changes in
long-term assets and liabilities
|
|
|
(4.6
|
)
|
|
|
|
(8.0
|
)
|
|
|
(25.0
|
)
|
|
|
(11.5
|
)
|
Benefit plan adjustments not
recognized in earnings
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued
operations
|
|
|
|
|
|
|
|
8.5
|
|
|
|
17.9
|
|
|
|
64.0
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
(.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
operating activities
|
|
|
18.8
|
|
|
|
|
(11.7
|
)
|
|
|
16.9
|
|
|
|
(38.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net of
accounts payable of $5.8 in period from July 1, 2006
through December 31, 2006 and $1.6 for period from
January 1,2006 to July 1, 2006
|
|
|
(30.0
|
)
|
|
|
|
(28.1
|
)
|
|
|
(31.0
|
)
|
|
|
(7.6
|
)
|
Net proceeds from dispositions:
real estate in 2006 and 2005, real estate and equipment in 2004
|
|
|
|
|
|
|
|
1.0
|
|
|
|
.9
|
|
|
|
2.3
|
|
Net cash provided by discontinued
operations; primarily proceeds from sale of commodity interests
in 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
401.4
|
|
|
|
356.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by
investing activities
|
|
|
(30.0
|
)
|
|
|
|
(27.1
|
)
|
|
|
371.3
|
|
|
|
351.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Term
Loan Facility
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs
|
|
|
(.8
|
)
|
|
|
|
(.2
|
)
|
|
|
(3.7
|
)
|
|
|
(2.4
|
)
|
Repayment of debt
|
|
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
Decrease (increase) in restricted
cash
|
|
|
|
|
|
|
|
1.5
|
|
|
|
(1.5
|
)
|
|
|
|
|
Net cash used by discontinued
operations: primarily increase in restricted cash in 2005 and
increase in restricted cash and payment of Alpart CARIFA loan of
$14.6 in 2004
|
|
|
|
|
|
|
|
|
|
|
|
(387.2
|
)
|
|
|
(291.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
financing activities
|
|
|
49.2
|
|
|
|
|
1.3
|
|
|
|
(394.1
|
)
|
|
|
(293.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents during the period
|
|
|
38.0
|
|
|
|
|
(37.5
|
)
|
|
|
(5.9
|
)
|
|
|
19.9
|
|
Cash and cash equivalents at
beginning of period
|
|
|
12.0
|
|
|
|
|
49.5
|
|
|
|
55.4
|
|
|
|
35.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
50.0
|
|
|
|
$
|
12.0
|
|
|
$
|
49.5
|
|
|
$
|
55.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized
interest of $1.6,$1.0, $.6, and $.1
|
|
$
|
.2
|
|
|
|
$
|
|
|
|
$
|
.7
|
|
|
$
|
3.8
|
|
Less interest paid by discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
.2
|
|
|
|
$
|
|
|
|
$
|
.7
|
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
.7
|
|
|
|
$
|
1.2
|
|
|
$
|
22.3
|
|
|
$
|
10.7
|
|
Less income taxes paid by
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
(18.9
|
)
|
|
|
(10.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
.7
|
|
|
|
$
|
1.2
|
|
|
$
|
3.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
51
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(In millions of dollars, except share amounts)
The accompanying financial statements include the financial
statements of Kaiser Aluminum Corporation both before and after
emergence. Financial information related to Kaiser Aluminum
Corporation after emergence is generally referred to throughout
this Report as Successor information. Information of
Kaiser Aluminum Corporation 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 as
more fully described below.
The Notes to Consolidated Financial Statements are grouped
into two categories: (1) those primarily affecting the
Successor entity (Notes 1 through 12) and
(2) those primarily affecting the Predecessor entity
(Notes 13 through 21).
SUCCESSOR
|
|
1.
|
Summary
of Significant Accounting Policies
|
Principles of Consolidation and Basis of
Presentation. The consolidated financial
statements include the statements of Kaiser Aluminum Corporation
(Kaiser, KAC, or the
Company) and its majority owned subsidiaries.
This is the first annual report under the Securities Exchange
Act of 1934 reflecting Successor financial information and, as
discussed in Note 2, reflects the terms of Kaisers
Second Amended Plan of Reorganization (the Plan) and
certain related actions and the application of fresh
start accounting as required by the 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. In accordance with generally accepted
accounting principles (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 2, 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.
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 (herein referred to as the
Effective Date), 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 period from
July 1, 2006 through December 31, 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 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 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.
52
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments in 50%-or-less-owned entities are accounted for
primarily by the equity method. The only such affiliate of
significance at December 31, 2006 was Anglesey Aluminium
Limited (Anglesey). 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 voluntary employee beneficiary association
(VEBA) for the benefit of certain union retirees,
their surviving spouses and eligible dependents (the Union
VEBA) that are subject to transfer restrictions, while
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 and
restricted stock units granted during the period from the dates
of grant (see Note 7).The impact of the non-vested shares
and restricted stock units on the number of dilutive common
shares is calculated by reducing the total number of non-vested
shares and restricted stock units (525,086) by the theoretical
number of shares that could be repurchased under the assumption
that the hypothetical proceeds of such non-vested shares and
restricted stock units is the amount of unrecognized
compensation expense together with any related income tax
benefits (439,732). Based on the foregoing, a total
85,354 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 December 31, 2006, $4.0 of
compensation cost was recognized in connection with vested and
non-vested stock and restricted stock units 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.
53
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other Income (Expense). Amounts included in
Other income (expense), other than interest expense and
reorganization items in 2006, 2005 and 2004, included the
following pre-tax gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
to July 1,
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Interest income(a)
|
|
$
|
2.0
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Adjustment to environmental
liabilities for non-operating properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.4
|
)
|
Gain (loss) on sale of real estate
and miscellaneous properties with no operations (Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
Settlement of outstanding
obligations of former affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.3
|
|
Asbestos and personal
injury-related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
All other, net
|
|
|
.7
|
|
|
|
|
1.2
|
|
|
|
(2.4
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.7
|
|
|
|
$
|
1.2
|
|
|
$
|
(2.4
|
)
|
|
$
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In accordance with S0P
90-7,
interest income during the pendency of the chapter 11
reorganization proceedings was treated as a reduction of
reorganization expense. |
Income Taxes. 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 on a
last-in,
first-out (LIFO) basis, 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.
54
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
Fabricated products
|
|
|
|
|
|
|
|
|
|
Finished products
|
|
$
|
61.1
|
|
|
|
$
|
34.7
|
|
Work in process
|
|
|
72.8
|
|
|
|
|
43.1
|
|
Raw materials
|
|
|
42.0
|
|
|
|
|
26.3
|
|
Operating supplies and repairs and
maintenance parts
|
|
|
12.1
|
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188.0
|
|
|
|
|
115.2
|
|
Commodities Primary
aluminum
|
|
|
.1
|
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188.1
|
|
|
|
$
|
115.3
|
|
|
|
|
|
|
|
|
|
|
|
As stated above, the Company determines cost for substantially
all of its product inventories on a LIFO basis. All Predecessor
LIFO layers were eliminated in connection with the application
of 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 net non-cash LIFO charge of
approximately $3.3 during the period from July 1, 2006
through December 31, 2006, a non-cash LIFO charge of
approximately $21.7 during the period from January 1, 2006
to July 1, 2006 and non-cash LIFO charges of $9.3 and $12.1
during the years ended December 31, 2005 and 2004. These
amounts are primarily a result of changes in metal prices.
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 profit margin associated
with the selling and conversion efforts. As reported in
Note 2, this resulted in an increase in the value of the
inventories in the opening July 2006 balance sheet of
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 that was
reflected in the opening inventory balance at July 1, 2006,
given the application of fresh start accounting, is higher than
long term historical averages. As such, with the inevitable ebb
and flow of business cycles, non-cash LIFO charges 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
|
|
|
|
(Years)
|
|
|
Land improvements
|
|
|
3-7
|
|
Buildings
|
|
|
15-35
|
|
Machinery and equipment
|
|
|
2-22
|
|
As more fully discussed below, 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
55
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes 2 and 4) will cause future depreciation expense
to be different than the historical depreciation expense of the
Predecessor.
Capitalization of Interest. Interest related
to the construction of qualifying assets is capitalized as part
of the construction costs.
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. At the Effective Date,
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 December 31, 2006, and the useful
lives assigned to each type of identified intangible asset is
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
July 1,
|
|
|
|
|
|
2006
|
|
|
2006
|
|
|
Useful Life
|
|
|
|
|
|
|
|
|
(Years)
|
|
Customer relationships
|
|
$
|
|
|
|
$
|
8.1
|
|
|
15-18
|
Trade name
|
|
|
|
|
|
|
3.7
|
|
|
Indefinite
|
Patents
|
|
|
|
|
|
|
.5
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets were reduced proportionately during the period
from July 1, 2006 through December 31, 2006 by
approximately $12.1 in respect of the resolution of certain
pre-emergence income tax attributes recognized during the period
from July 1, 2006 through December 31, 2006 (see
Note 6) and $.2 of amortization.
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 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
56
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 30, 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 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
57
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
The Companys estimates and judgments that affect the
probability weighted estimated future contingent cost amounts
did not change during the year ended December 31, 2006. The
following amounts have been reflected in the Companys
results for the year ended December 31, 2006: (i) an
immaterial incremental amount of depreciation expense and
(ii) an incremental accretion of the estimated liability of
$.2 ( in Cost of products sold). The estimated fair value of the
CARO at December 31, 2006 was $2.9.
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 (see Note 3).
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 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 adopted 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 was
fully reflected in the Companys September 30, 2006
balance sheet and therefore SFAS No. 158 did not have
a material impact on the Companys balance sheet reporting
for the defined benefit pension plans. However, the adoption of
SFAS No. 158 in respect to the 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 resulted in an increase in equity
of approximately $8.1 in respect of increases in the value of
the VEBA net assets between the emergence date and
December 31, 2006, which have not been reflected in
earnings pursuant to SFAS No. 106 and
SFAS No. 158.
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-
58
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 adoption
of this bulletin did not have an impact on the Companys
financial statements.
Significant accounting policies of the Predecessor are discussed
in Note 13.
|
|
2.
|
Emergence
from Reorganization Proceedings
|
Summary. As more fully discussed in
Note 14, during the past four years, the Company and 25 of
its 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 14, Kaiser and its debtor
subsidiaries which included all of the Companys core
fabricated products facilities and a 49% interest in Anglesey
which owns a smelter in the United Kingdom, emerged from
chapter 11 on Effective Date pursuant to the Plan. Four
subsidiaries not related to the fabricated products operations
were liquidated in December 2005. Pursuant to the Plan, all
material pre-petition debt, pension and postretirement medical
obligations and asbestos and other tort liabilities, along with
other pre-petition claims (which in total aggregated to
approximately $4.4 billion in the June 30, 2006
consolidated financial statements) were addressed and resolved.
Pursuant to the Plan, the equity interests of all of
Kaisers pre-emergence stockholders were cancelled without
consideration. The equity of the newly emerged Kaiser was issued
and delivered to a third-party disbursing agent for distribution
to claimholders pursuant to the Plan.
Impacts on the Opening Balance Sheet After
Emergence. As a result of the Companys
emergence from chapter 11, the Company applied fresh
start accounting to its opening July 2006 consolidated
financial statements as required by
SOP 90-7.
As such, the Company adjusted its stockholders equity to
equal the reorganization value at the Effective Date. Items such
as accumulated depreciation, accumulated deficit and accumulated
other comprehensive income (loss) were reset to zero. The
Company allocated the reorganization value to its individual
assets and liabilities based on their estimated fair value.
Items such as current liabilities, accounts receivable, and cash
reflected values similar to those reported prior to emergence.
Items such as inventory, property, plant and equipment,
long-term assets and long-term liabilities were significantly
adjusted from amounts previously reported. Because fresh start
accounting was applied at emergence and because of the
significance of liabilities subject to compromise that were
relieved upon emergence, comparisons between the historical
financial statements and the financial statements from and after
emergence are difficult to make.
59
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following shows the impacts of the Plan and the adoption of
fresh start accounting on the opening balance sheet of the new
reporting entity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
Plan
|
|
|
Fresh Start
|
|
|
Balance
|
|
|
|
Historical
|
|
|
Adjustments(a)
|
|
|
Adjustments(b)
|
|
|
Sheet
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37.3
|
|
|
$
|
(25.3
|
)
|
|
$
|
|
|
|
$
|
12.0
|
|
Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful
receivables
|
|
|
114.1
|
|
|
|
|
|
|
|
.7
|
|
|
|
114.8
|
|
Other
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
5.7
|
|
Inventories
|
|
|
123.1
|
|
|
|
|
|
|
|
48.9
|
|
|
|
172.0
|
|
Prepaid expenses and other current
assets
|
|
|
34.0
|
|
|
|
(.3
|
)
|
|
|
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
314.2
|
|
|
|
(25.6
|
)
|
|
|
49.6
|
|
|
|
338.2
|
|
Investments in and advances to
unconsolidated affiliate
|
|
|
22.7
|
|
|
|
(.3
|
)
|
|
|
(11.3
|
)
|
|
|
11.1
|
|
Property, plant, and
equipment net
|
|
|
242.7
|
|
|
|
(4.1
|
)
|
|
|
(98.9
|
)
|
|
|
139.7
|
|
Personal injury-related insurance
recoveries receivable
|
|
|
963.3
|
|
|
|
(963.3
|
)
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
11.4
|
|
|
|
(11.7
|
)
|
|
|
12.6
|
|
|
|
12.3
|
|
Net assets in respect of VEBAs
|
|
|
|
|
|
|
33.2
|
(c)
|
|
|
|
|
|
|
33.2
|
|
Other assets
|
|
|
43.6
|
|
|
|
2.1
|
|
|
|
(.8
|
)
|
|
|
44.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,597.9
|
|
|
$
|
(969.7
|
)
|
|
$
|
(48.8
|
)
|
|
$
|
579.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Liabilities not subject to
compromise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
56.1
|
|
|
$
|
(.5
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
53.8
|
|
Accrued interest
|
|
|
1.1
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Accrued salaries, wages, and
related expenses
|
|
|
37.0
|
|
|
|
(4.1
|
)
|
|
|
.7
|
|
|
|
33.6
|
|
Other accrued liabilities
|
|
|
61.0
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
59.2
|
|
Payable to affiliate
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
|
|
33.0
|
|
Long-term debt current
portion
|
|
|
1.1
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Discontinued operations
current liabilities
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
190.8
|
|
|
|
(8.6
|
)
|
|
|
(1.1
|
)
|
|
|
181.1
|
|
Long-term liabilities
|
|
|
49.0
|
|
|
|
17.5
|
|
|
|
2.5
|
|
|
|
69.0
|
|
Long-term debt
|
|
|
1.2
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
Discontinued operations
liabilities (liabilities subject to compromise)
|
|
|
73.5
|
|
|
|
(73.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314.5
|
|
|
|
(65.8
|
)
|
|
|
1.4
|
|
|
|
250.1
|
|
Liabilities subject to compromise
|
|
|
4,388.0
|
|
|
|
(4,388.0
|
)
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
.7
|
|
|
|
(.7
|
)
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
.8
|
|
|
|
.2
|
(d)
|
|
|
(.8
|
)
|
|
|
.2
|
|
Additional capital
|
|
|
538.0
|
|
|
|
480.2
|
(d)
|
|
|
(538.0
|
)
|
|
|
480.2
|
|
Common stock owned by Union VEBA
subject to transfer restrictions
|
|
|
|
|
|
|
(151.1
|
)(c)
|
|
|
|
|
|
|
(151.1
|
)
|
Accumulated deficit
|
|
|
(3,635.3
|
)
|
|
|
3,155.5
|
(e)
|
|
|
479.8
|
(f)
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(8.8
|
)
|
|
|
|
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(3,105.3
|
)
|
|
|
3,484.8
|
|
|
|
(50.2
|
)
|
|
|
329.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,597.9
|
|
|
$
|
(969.7
|
)
|
|
$
|
(48.8
|
)
|
|
$
|
579.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
Reflects impacts on the Effective Date of implementing the Plan,
including the settlement of liabilities subject to compromise
and related payments, distributions of cash and new shares of
common stock and the cancellation of predecessor common stock
(see Note 14). 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 1) 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 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 staff of the Securities and Exchange Commission, the Company
concluded that, while the Companys only obligations in
respect of two VEBAs is an annual variable contribution
obligation based primarily on earnings and capital spending, the
Company should account for the VEBAs as defined benefit
postretirement plans with a cap. Note 7 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. |
|
|
3.
|
Investment
In and Advances To Unconsolidated Affiliate
|
Summary financial information is provided below for Anglesey, a
49.0% owned unconsolidated aluminum company, 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
61
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, dividends
from Anglesey have been suspended while Anglesey studies future
cash requirements. Dividends over the past five years have
fluctuated substantially depending on various operational and
market factors. During the last five years, cash dividends
received were as follows: 2006 $11.8,
2005 $9.0, 2004 $4.5, 2003
$4.3 and 2002 $6.0.
Summary
of Angleseys Financial Position
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Current assets
|
|
$
|
111.7
|
|
|
$
|
69.9
|
|
Non-current assets (primarily
property, plant, and equipment, net)
|
|
|
51.1
|
|
|
|
52.9
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
162.8
|
|
|
$
|
122.8
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
62.5
|
|
|
$
|
36.1
|
|
Long-term liabilities
|
|
|
30.9
|
|
|
|
50.1
|
|
Stockholders equity
|
|
|
69.4
|
|
|
|
36.6
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
162.8
|
|
|
$
|
122.8
|
|
|
|
|
|
|
|
|
|
|
Summary
of Angleseys Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
to
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
|
July 1, 2006
|
|
|
2005
|
|
|
2004
|
|
Net sales
|
|
$
|
198.1
|
|
|
|
$
|
170.1
|
|
|
$
|
266.2
|
|
|
$
|
249.2
|
|
Costs and expenses
|
|
|
(155.2
|
)
|
|
|
|
(132.1
|
)
|
|
|
(243.9
|
)
|
|
|
(223.1
|
)
|
Provision for income taxes
|
|
|
(12.2
|
)
|
|
|
|
(11.2
|
)
|
|
|
(6.7
|
)
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30.7
|
|
|
|
$
|
26.8
|
|
|
$
|
15.6
|
|
|
$
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys equity in income
|
|
$
|
18.3
|
|
|
|
$
|
11.0
|
|
|
$
|
4.8
|
|
|
$
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received
|
|
$
|
9.1
|
|
|
|
$
|
2.7
|
|
|
$
|
9.0
|
|
|
$
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys equity in income differs from the summary net
income due to equity method accounting adjustments and applying
US GAAP. At year-end 2005, Anglesey recorded a CARO liability of
approximately $15.0 in its financial statements. 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). If US
GAAP principles had been applied to prior years, the pro forma
effects would have been as follows: (a) the Companys
investment in Anglesey as of December 31, 2004 and 2003
would have been reduced by $.8 and $.8, respectively, in respect
of the additional CARO liability, and (b) the
Companys share of Angleseys earnings for 2004 would
have been decreased by $.8 (in respect of the incremental
depreciation, accretion and foreign exchange). However, if these
affects had been retroactively applied, the related Earnings
(loss) per share amounts for 2004 would not have changed.
For purposes of the Companys fair value estimates, it used
a credit adjusted risk free rate of 7.5%.
62
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys estimates and judgments that affect the
probability weighted estimated future contingent cost amounts
did not change during the year ended December 31, 2006. The
following amounts have been reflected in the Companys
results for the year ended December 31, 2006:
(i) incremental depreciation expense of $.2 and
(ii) and incremental accretion of the estimated liability
of $.4 (in Cost of products sold). The estimated fair value of
the CARO at December 31, 2006 was $17.5.
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. Anglesey will have to secure a new contract to
purchase alumina at comparable prices. No assurances can be
given that Anglesey will be successful in this regard. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
Predecessor
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
to
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
July 1, 2006
|
|
|
2005
|
|
|
2004
|
|
Purchases
|
|
$
|
95.0
|
|
|
|
$
|
82.4
|
|
|
$
|
150.4
|
|
|
$
|
120.9
|
|
Sales
|
|
|
24.4
|
|
|
|
|
24.9
|
|
|
|
35.1
|
|
|
|
23.7
|
|
At December 31, 2006 and 2005, the receivables from
Anglesey were $1.3 and none.
As a result of fresh start accounting, the Company decreased its
investment in Anglesey at the Effective Date by $11.6 (see
Note 2). The $11.6 difference between the Companys
share of Angleseys 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 non-cash amortization was approximately $1.8 for the six
months ended December 31, 2006.
4. Property,
Plant and Equipment
The major classes of property, plant, and equipment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
Land and improvements
|
|
$
|
12.8
|
|
|
|
$
|
7.7
|
|
Buildings
|
|
|
18.6
|
|
|
|
|
62.4
|
|
Machinery and equipment
|
|
|
92.3
|
|
|
|
|
460.4
|
|
Construction in progress
|
|
|
51.9
|
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175.6
|
|
|
|
|
555.5
|
|
Accumulated depreciation
|
|
|
(5.3
|
)
|
|
|
|
(332.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
$
|
170.3
|
|
|
|
$
|
223.4
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to fresh start accounting, as more fully discussed in
Note 2, 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 the vast majority of the Companys
Property, plant and equipment was based on an independent
appraisal with only a small portion being based on
managements estimates. The fair value of the Property,
plant and equipment at July 1, 2006 was estimated to be
approximately $300.0. However, as a result of the allocation of
the reorganization value, the value at July 1, 2006 was
reduced to $139.7 (i.e. the net results of the fresh start
process, as reported in Note 2, was a net decrease in
Property, plant and equipment of $103.0). The amount of
63
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
depreciation to be recognized by the Company will initially be
lower than the amount historically recognized by the Predecessor.
Approximately $44.5 of the Construction in progress at
December 31, 2006, relates to the Companys Spokane,
Washington facility (see Commitments
Note 8).
|
|
5.
|
Secured
Debt and Credit Facilities
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
Revolving Credit Facility
|
|
$
|
|
|
|
|
$
|
|
|
Term Loan Facility
|
|
|
50.0
|
|
|
|
|
|
|
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. At December 31, 2006, the average interest rate
applicable to borrowings under the Term Loan Facility was 9.62%.
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 U.S. 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 U.S. operating subsidiaries that are the
borrowers or guarantors thereof.
64
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 December 31, 2006, there were
no borrowings outstanding under the Revolving Credit Facility,
there were approximately $14.1 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 17.
Tax Attributes. Although the Company has
substantial tax attributes available to offset the impact of
future income taxes, the Company does not meet the more
likely than not criteria for recognition of such
attributes 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 reduction of the valuation
allowance is 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 and other
deferred tax assets would be recorded on the balance sheet and
would be recorded as an adjustment to Stockholders equity.
The Company is in the process of finalizing its calculations of
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. The Company
expects to complete such work in mid 2007 in connection with the
filing of its 2006 Federal income tax return. Our current
estimate is that the Company will have net operating loss
carryforwards in the $875 - $925 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 $100-$125) will become available (likely over the next
two years). Such net operating loss carryforwards expire
periodically through 2026. 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.
At December 31, 2006, the Company also had $31.0 of AMT credit
carryforwards, which have an indefinite life, available to
offset regular federal income tax requirements.
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.
65
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Tax Provision. Income (loss) before income
taxes and minority interests by geographic area (excluding
discontinued operations and cumulative effect of change in
accounting principle) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
to
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
|
July 1, 2006
|
|
|
2005
|
|
|
2004
|
|
Domestic
|
|
$
|
27.0
|
|
|
|
$
|
3,082.6
|
|
|
$
|
(1,130.7
|
)
|
|
$
|
(886.1
|
)
|
Foreign
|
|
|
22.9
|
|
|
|
|
60.5
|
|
|
|
20.8
|
|
|
|
24.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49.9
|
|
|
|
$
|
3,143.1
|
|
|
$
|
(1,109.9
|
)
|
|
$
|
(861.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes are classified as either domestic or foreign, based
on whether payment is made or due to the United States or a
foreign country. Certain income classified as foreign is also
subject to domestic income taxes.
The (provision) benefit for income taxes on income (loss) before
income taxes and minority interests (excluding discontinued
operations and cumulative effect of change in accounting
principle) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
Foreign
|
|
|
State
|
|
|
Total
|
|
|
July 1, 2006 through
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
(9.4
|
)
|
|
$
|
(.5
|
)
|
|
$
|
(9.9
|
)
|
Benefit applied to reduce
intangible assets and increase additional capital
|
|
|
(14.1
|
)
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
(15.4
|
)
|
Deferred
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(14.1
|
)
|
|
$
|
(7.8
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(23.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2006 to
July 1, 2006
|
|
Predecessor
|
|
|
|
Current
|
|
$
|
.9
|
|
|
$
|
(7.9
|
)
|
|
$
|
(.1
|
)
|
|
$
|
(7.1
|
)
|
Deferred
|
|
|
|
|
|
|
.9
|
|
|
|
|
|
|
|
.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
.9
|
|
|
$
|
(7.0
|
)
|
|
$
|
(.1
|
)
|
|
$
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
(3.8
|
)
|
|
$
|
.5
|
|
|
$
|
(3.3
|
)
|
Deferred
|
|
|
|
|
|
|
.5
|
|
|
|
|
|
|
|
.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(3.3
|
)
|
|
$
|
.5
|
|
|
$
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
(6.4
|
)
|
|
$
|
|
|
|
$
|
(6.4
|
)
|
Deferred
|
|
|
|
|
|
|
.2
|
|
|
|
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(6.2
|
)
|
|
$
|
|
|
|
$
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation between the (provision) benefit for income
taxes and the amount computed by applying the federal statutory
income tax rate to income (loss) before income taxes and
minority interests (excluding discontinued operations and
cumulative effect of change in accounting principle) is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
January 1, 2006
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
to
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
|
July 1, 2006
|
|
|
2005
|
|
|
2004
|
|
Amount of federal income tax
benefit (expense) based on the statutory rate
|
|
$
|
(17.5
|
)
|
|
|
$
|
(1,100.1
|
)
|
|
$
|
388.5
|
|
|
$
|
301.7
|
|
Decrease (increase) in valuation
allowances
|
|
|
|
|
|
|
|
1,099.3
|
|
|
|
(379.8
|
)
|
|
|
(304.7
|
)
|
Percentage depletion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.1
|
|
State income taxes, net of federal
benefit
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign income taxes
|
|
|
(4.7
|
)
|
|
|
|
(.5
|
)
|
|
|
3.9
|
|
|
|
(6.3
|
)
|
Other
|
|
|
(.3
|
)
|
|
|
|
(4.9
|
)
|
|
|
(15.4
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(23.7
|
)
|
|
|
$
|
(6.2
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above reflects a full statutory U.S. tax
provision despite the fact that the Company is only paying AMT
in the U.S. See Tax Attributes above.
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.
Deferred Income Taxes. Deferred income taxes
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. The
components of the Companys net deferred income tax assets
(liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
Postretirement benefits other than
pensions
|
|
$
|
|
|
|
|
$
|
398.9
|
|
Loss and credit carryforwards(1)
|
|
|
442.4
|
|
|
|
|
348.0
|
|
Pension benefits
|
|
|
.7
|
|
|
|
|
170.5
|
|
Other liabilities
|
|
|
19.1
|
|
|
|
|
168.3
|
|
Inventories and other
|
|
|
61.8
|
|
|
|
|
39.0
|
|
Assigned intercompany claim for
benefit of certain creditors
|
|
|
|
|
|
|
|
443.9
|
|
Valuation allowances
|
|
|
(503.8
|
)
|
|
|
|
(1,527.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax
assets net
|
|
|
20.2
|
|
|
|
|
41.5
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment
|
|
|
(5.8
|
)
|
|
|
|
(41.3
|
)
|
VEBA
|
|
|
(16.0
|
)
|
|
|
|
|
|
Other
|
|
|
(3.0
|
)
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax
liabilities
|
|
|
(24.8
|
)
|
|
|
|
(43.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
(liabilities)(2)
|
|
$
|
(4.6
|
)
|
|
|
$
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
67
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
The above assumes that the net federal operating loss
carryforwards are ultimately determined to be $924.1 which is
the Companys current best estimate. However, as discussed
above, the amount of NOLs is estimated to be between $875 and
$925, and until the Company completes certain additional tax
analyses, the Companys estimates are subject to change. |
|
|
|
(2) |
|
These deferred income tax liabilities are included in the
Consolidated Balance Sheets as of December 31, 2006 and
2005, respectively, in the caption entitled Long-term
liabilities. |
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than
not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
deductible. Management considers taxable income in carryback
years, the scheduled reversal of deferred tax liabilities, tax
planning strategies and projected future taxable income in
making this assessment. As of December 31, 2006, due to
uncertainties surrounding the realization of the Companys
deferred tax assets including the cumulative federal and state
net operating losses sustained during the prior years, the
Company has a valuation allowance of $503.8 against its deferred
tax assets. When recognized, the tax benefits relating to any
reversal of the valuation allowance will be recorded as an
adjustment of Stockholders equity rather than as a
reduction of income tax expense.
Other. The Company and its subsidiaries file
income tax returns in the U.S. federal jurisdiction, and
various states and foreign jurisdictions. The Companys
federal income tax return for the 2004 tax year is currently
under examination by the Internal Revenue Service. The Company
does not expect that the results of this examination will have a
material effect on its financial condition or results of
operations. Certain past years are still subject to examination
by taxing authorities. The last year examined by major
jurisdiction is as follows: 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.
No U.S. federal or state liability has been recorded for
the undistributed earnings of the Companys Canadian
subsidiaries at December 31, 2006. These undistributed
earnings are considered to be indefinitely reinvested.
Accordingly, no provision for U.S. federal and state income
taxes or foreign withholding taxes has been provided on such
undistributed earnings. Determination of the potential amount of
unrecognized deferred U.S. income tax liability and foreign
withholding taxes is not practicable because of the complexities
associated with its hypothetical calculation.
In accordance with the requirements of
SOP 90-7,
the Company adopted the provisions of FIN 48 on
July 1, 2006. The Company was not required to recognize any
additional liability for unrecognized tax benefits as a result
of the implementation of FIN 48. From July 1, 2006 to
December 31, 2006, the Company did not recognize any
additional liabilities for unrecognized tax benefits.
The Company recognizes interest accrued for unrecognized tax
benefits and penalties in the income tax provision. During the
year ended December 31, 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
December 31, 2006, respectively, for interest and
penalties. Additionally, deductions taken in the Companys
tax returns but not reflected in the Companys financial
statements were $14.6 at December 31, 2006. No material
amounts were paid in respect of such deductions during 2006 or
are expected to turn in the next twelve months.
Income tax matters of the Predecessor are discussed in
Note 18.
|
|
7.
|
Employee
Benefit and Incentive Plans
|
Equity Based Compensation. Upon the
Companys emergence from chapter 11, the 2006 Equity
and Performance Incentive Plan (which we refer to herein as the
Equity Incentive Plan) became effective. Executive
officers, other key employees and directors of the Company are
eligible to participate in the Equity Incentive Plan.
68
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Equity Incentive Plan permits the granting of awards in the
form of options to purchase the Companys Common Stock,
stock appreciation rights, shares of non-vested and vested
stock, restricted stock units, performance shares, performance
units and other awards. The Equity Incentive Plan will expire on
July 6, 2016. No grants will be made after that date, but
all grants made on or prior to such date will continue in effect
thereafter subject to the terms thereof and of the Equity
Incentive Plan. The Companys Board of Directors may, in
its discretion, terminate the Equity Incentive Plan at any time.
The termination of the Equity Incentive Plan will not affect the
rights of participants or their successors under any awards
outstanding and not exercised in full on the date of termination.
Subject to certain adjustments that may be required from time to
time to prevent dilution or enlargement of the rights of
participants under the Equity Incentive Plan, up to
2,222,222 shares of the Companys Common Stock were
reserved for issuance under the Equity Incentive Plan. During
the period from July 1, 2006 through December 31,
2006, the following shares were issued to, or reserved for
future issuance pursuant to restricted stock unit agreements.
|
|
|
|
|
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 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. Additionally, in November
2006, the Company granted 3,699 restricted stock units to
certain of its employees to complete its emergence related
compensation. The restricted stock units have the same rights as
non-vested shares of Common Stock and the employee will receive
one share of Common stock for each restricted stock unit upon
the vesting of the restricted stock unit. The restricted stock
units vest one third on the first anniversary of the grant date
and one third on each of the second and third anniversaries of
the date of emergence, July 6, 2006. The fair value of the
non-vested shares and restricted stock units issued, after
assuming a 5% forfeiture rate, of $.2 is being amortized to
expense over the vesting period on a ratable basis.
|
|
|
|
In early August 2006, the Company granted 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 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.
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At December 31, 2006, 1,692,863 shares of Common Stock
remained available for issuance under the Equity Insurance Plan.
Cash
and other Compensation.
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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. During 2006, 2005 and 2004, the
Company recorded charges of $7.9, $5.7 and $1.7, respectively,
related to these plans. Of the total charges in 2006, 2005 and
2004, $2.9, $3.3 and $1.2, respectively, were included in Cost
of products sold and $5.0, $2.4 and $.5 , respectively, were
included in Selling, administrative, research and development
and general.
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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
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69
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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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 19).
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Pension and Similar Plans. Pensions and
similar plans include:
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The Company will make monthly contributions of one dollar per
hour worked by each bargaining unit employee to the appropriate
multi-employee pension plans sponsored by the United
Steelworkers (USW) and certain other unions in
respect of six facilities. This arrangement came into existence
in December 2006 for three locations upon the termination of
four Predecessor defined benefit plans (see Note 8). The
arrangement for the other three locations came into existence
during the first quarter of 2005. The Company currently
estimates that contributions in this respect range from $1 to
$3 per year.
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A defined contribution 401(k) savings plan for hourly bargaining
unit employees (which we refer to herein as the Hourly DC
Plan) at five of the Companys production facilities.
The Company will be required to make contributions to the Hourly
DC Plans for active bargaining unit employees at these locations
that will range from eight hundred dollars to twenty-four
hundred dollars per employee per year, depending on the
employees age. This arrangement came into existence in
December 2004 for three locations upon the termination of three
Predecessor deferred benefit plans (see Note 19). The
arrangement for the other two locations came into existence
during December 2006. The Company currently estimates that
contributions to such plans will range from $1 to $3 per
year.
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A defined benefit plan for our salaried employees at the
Companys facility in London, Ontario with annual
contributions based on each salaried employees age and
years of service. Also, a defined benefit pension plan for one
inactive operation with three remaining former employees covered
by that plan.
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A defined contribution savings plan for salaried and
non-bargaining unit hourly employees (which we refer to herein
as the Salaried DC Plan) providing for a match of
certain contributions made by employees plus a contribution of
between 2% and 10% of their compensation depending on their age
and years of service. The Company currently estimates that
contributions to such plans will range from $1 to $3 per
year.
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The Company has a non-qualified defined contribution plan (the
Restoration Plan) for key employees who would
otherwise suffer a loss of benefits under the Companys
defined contribution plan as a result of the limitations by the
Internal Revenue Code.
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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 paid by the VEBAs are at the sole
discretion of the respective VEBA trustees and are outside the
Companys control.
At emergence, the Salaried VEBA received rights to
1,940,100 shares of the Companys newly issued Common
Stock. However, prior to the Companys emergence, the
Salaried VEBA sold its rights to approximately
940,200 shares and received net proceeds of approximately
$31. The remaining approximately 999,900 shares of the
Companys Common Stock held by the Salaried VEBA at
July 1, 2006 were unrestricted. The Salaried VEBA sold its
remaining shares during the second half of 2006.
At emergence, the Union VEBA received rights to
11,439,900 shares of the Companys newly issued Common
Stock. However, prior to the Companys emergence, the Union
VEBA sold its rights to approximately 2,630,000 shares and
received net proceeds of approximately $81. 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
70
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Common Stock owned at emergence during the two years following
the emergence date without certain approvals by the Company (see
Note 12).
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. 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 the annual variable
cash requirement.
For accounting purposes, after discussions with the staff of 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 postretirement
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 at the Effective Date and December 31,
2006 include:
With respect to VEBA assets:
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The 6,291,945 shares of the Companys Common Stock
held by the Union VEBA that were not transferable have been
excluded from assets used to compute the net asset or liability
of the Union VEBA, and will continue to be excluded until the
restrictions lapse. Such shares are being accounted for similar
to treasury stock in the interim (see Notes 1
and 12).
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The unrestricted shares of stock held by each VEBA were valued
at emergence at the fair value of $43.68 per share. At
December 31, 2006 the fair value of the unrestricted shares
of stock held by each VEBA was $55.98 per share.
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At emergence, the Company assumed that each VEBA would achieve a
long term rate of return of approximately 5.5% on its assets. At
December 31, 2006, the Company assumed that each VEBA would
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.
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71
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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The annual variable payment obligation is being treated as a
funding/contribution policy and not counted as a VEBA asset.
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With respect to VEBA obligations:
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The APBO for each VEBA has been computed based on the level of
benefits being provided by each VEBA at July 1, 2006 and
December 31, 2006, which was the same at each period.
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The present value at the Effective Date was computed using a
discount rate of return of 6.25%. The present value at
December 31, 2006, was computed using a discount rate of
5.75% .
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Since the Salaried VEBA was paying a fixed annual amount to its
constituents at both the Effective Date and December 31,
2006, no future cost trend rate increase has been assumed in
computing the APBO for the Salaried VEBA.
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For the Union VEBA, which is currently paying certain
prescription drug benefits, an initial cost trend rate of 12%
has been assumed and the trend rate is assumed to decline to 5%
by 2013 at both the Effective Date and December 31, 2006.
The trend rate used by the Company was based on information
provided by the Union VEBA and industry data from the
Companys actuaries.
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The following recaps the net assets of each VEBA as of
December 31, 2006 and July 1, 2006 (such information
is also included in the tables required under GAAP below which
roll forward the assets and obligations):
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December 31, 2006
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July 1, 2006
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Union VEBA
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Salaried VEBA
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Total
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Union VEBA
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Salaried VEBA
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Total
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APBO
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$
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(226.6
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)
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$
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(51.5
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$
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(278.1
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$
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(211.2
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)
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$
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(50.8
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$
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(262.0
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)
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Plan assets
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241.4
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77.4
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318.8
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213.3
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81.9
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295.2
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Net asset
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$
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14.8
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$
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25.9
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$
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40.7
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$
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2.1
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$
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31.1
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$
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33.2
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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.
The Company does not anticipate any annual variable cash
contribution payments will be required with respect to 2006,
however, the Company has not yet determined how much, if any, of
the excess contribution payments of $12.7 will be utilized to
offset annual variable contributions that would otherwise have
been due in respect of 2006.
Financial
Data.
Assumptions
The following recaps the key assumptions used and the amounts
reflected in the Companys financial statements with
respect to the Successors and Predecessors pension
plans and other postretirement benefit plans. In accordance with
generally accepted accounting principles, impacts of the changes
in the Companys pension and other postretirement benefit
plans discussed above have been reflected in such information.
The Company uses a December 31 measurement date for all of
its plans.
72
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Weighted-average assumptions used to determine benefit
obligations as of December 31 and net periodic benefit cost
for the years ended December 31 are:
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Pension Benefits(2)
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Medical/Life Benefits(1)
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2006
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2005
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2004
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2006
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2005
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2004
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