[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________________ to_________________________________________
Commission File Number: 1-09447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
94-3030279
(State of incorporation)
(I.R.S. Employer Identification No.)
27422 Portola Parkway, Suite 200 Foothill Ranch, California
92610-2831
(Address of principal executive offices)
(Zip Code)
(949) 614-1740
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of April 22, 2019, there were 16,123,168 shares of common stock of the registrant outstanding.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2019
December 31, 2018
(In millions of dollars, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
$
115.3
$
125.6
Short-term investments
22.3
36.7
Receivables:
Trade receivables, net
195.8
179.8
Other
22.4
25.6
Contract assets
58.4
54.9
Inventories
233.9
215.1
Prepaid expenses and other current assets
23.0
18.9
Total current assets
671.1
656.6
Property, plant and equipment, net
610.9
611.8
Operating lease assets
27.4
—
Deferred tax assets, net
22.4
35.9
Intangible assets, net
31.7
32.4
Goodwill
44.0
44.0
Other assets
40.3
38.6
Total
$
1,447.8
$
1,419.3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
124.4
$
121.4
Accrued salaries, wages and related expenses
28.2
40.1
Other accrued liabilities
51.6
44.0
Total current liabilities
204.2
205.5
Long-term portion of operating lease liabilities
26.6
—
Net liabilities of Salaried VEBA
32.5
32.4
Deferred tax liabilities
4.2
4.2
Long-term liabilities
61.8
66.4
Long-term debt
370.6
370.4
Total liabilities
699.9
678.9
Commitments and contingencies – Note 7
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized at both March 31, 2019 and December 31, 2018; no shares were issued and outstanding at March 31, 2019 and December 31, 2018
—
—
Common stock, par value $0.01, 90,000,000 shares authorized at both March 31, 2019 and at December 31, 2018; 22,547,626 shares issued and 16,134,547 shares outstanding at March 31, 2019; 22,471,705 shares issued and 16,234,603 shares outstanding at December 31, 2018
0.2
0.2
Additional paid in capital
1,056.7
1,059.3
Retained earnings
168.0
150.2
Treasury stock, at cost, 6,413,079 shares at March 31, 2019 and 6,237,102 shares at December 31, 2018, respectively
(437.9
)
(420.5
)
Accumulated other comprehensive loss
(39.1
)
(48.8
)
Total stockholders' equity
747.9
740.4
Total
$
1,447.8
$
1,419.3
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
1
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Quarter Ended
March 31,
2019
2018
(In millions of dollars, except share and per share amounts)
Net sales
$
395.2
$
388.0
Costs and expenses:
Cost of products sold, excluding depreciation and amortization and other items
315.1
316.7
Depreciation and amortization
11.9
10.5
Selling, general, administrative, research and development
25.2
23.6
Other operating charges, net
—
0.1
Total costs and expenses
352.2
350.9
Operating income
43.0
37.1
Other income (expense):
Interest expense
(5.7
)
(5.6
)
Other income, net – Note 9
0.5
0.1
Income before income taxes
37.8
31.6
Income tax provision
(9.8
)
(5.9
)
Net income
$
28.0
$
25.7
Net income per common share:
Basic
$
1.74
$
1.54
Diluted
$
1.71
$
1.51
Weighted-average number of common shares outstanding (in thousands):
Basic
16,108
16,707
Diluted
16,372
17,031
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
2
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
Quarter Ended
March 31,
2019
2018
(In millions of dollars)
Net income
$
28.0
$
25.7
Other comprehensive income (loss), net of tax – Note 8:
Defined benefit pension plan and Salaried VEBA
1.1
1.2
Available for sale securities
(0.2
)
(0.2
)
Cash flow hedges
8.8
(9.3
)
Other comprehensive income (loss), net of tax
9.7
(8.3
)
Comprehensive income
$
37.7
$
17.4
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
3
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (UNAUDITED)
Quarter Ended March 31, 2019
Common
Shares
Outstanding
Common
Stock
Additional
Paid in Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
(In millions of dollars, except share and per share amounts)
BALANCE, December 31, 2018
16,234,603
$
0.2
$
1,059.3
$
150.2
$
(420.5
)
$
(48.8
)
$
740.4
Net income
—
—
—
28.0
—
—
28.0
Other comprehensive income, net of tax
—
—
—
—
—
9.7
9.7
Issuance of common shares to employees upon vesting of restricted stock units and performance shares
122,309
—
—
—
—
—
—
Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(46,388
)
—
(5.0
)
—
—
—
(5.0
)
Repurchase of common stock
(175,977
)
—
—
—
(17.4
)
—
(17.4
)
Cash dividends on common stock and restricted shares and dividend equivalents on restricted stock units and performance shares1
—
—
—
(10.2
)
—
—
(10.2
)
Amortization of unearned equity compensation
—
—
2.4
—
—
—
2.4
BALANCE, March 31, 2019
16,134,547
$
0.2
$
1,056.7
$
168.0
$
(437.9
)
$
(39.1
)
$
747.9
____________________
1
Dividends declared per common share were $0.60 during the quarter ended March 31, 2019.
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
4
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY CONTINUED (UNAUDITED)
Quarter Ended March 31, 2018
Common
Shares
Outstanding
Common
Stock
Additional
Paid in Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
(In millions of dollars, except share and per share amounts)
BALANCE, December 31, 2017
16,773,586
$
0.2
$
1,055.9
$
85.5
$
(358.6
)
$
(36.7
)
$
746.3
Cumulative-effect adjustment
—
—
—
10.5
—
(0.4
)
10.1
BALANCE, January 1, 2018
16,773,586
$
0.2
$
1,055.9
$
96.0
$
(358.6
)
$
(37.1
)
$
756.4
Net income
—
—
—
25.7
—
—
25.7
Other comprehensive loss, net of tax
—
—
—
—
—
(8.3
)
(8.3
)
Issuance of common shares to employees upon vesting of restricted stock units and performance shares
135,134
—
—
—
—
—
—
Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(68,029
)
—
(6.9
)
—
—
—
(6.9
)
Repurchase of common stock
(58,155
)
—
—
—
(6.1
)
—
(6.1
)
Cash dividends on common stock and restricted shares and dividend equivalents on restricted stock units and performance shares1
—
—
—
(10.0
)
—
—
(10.0
)
Amortization of unearned equity compensation
—
—
2.8
—
—
—
2.8
BALANCE, March 31, 2018
16,782,536
$
0.2
$
1,051.8
$
111.7
$
(364.7
)
$
(45.4
)
$
753.6
____________________
1
Dividends declared per common share were $0.55 during the quarter ended March 31, 2018.
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
5
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Quarter Ended
March 31,
2019
2018
(In millions of dollars)
Cash flows from operating activities1:
Net income
$
28.0
$
25.7
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment
11.2
10.1
Amortization of definite-lived intangible assets
0.7
0.4
Amortization of debt discount and debt issuance costs
0.3
0.3
Deferred income taxes
10.4
7.9
Non-cash equity compensation
2.4
2.8
Gain on disposition of available for sale securities
(0.3
)
(1.1
)
Non-cash asset impairment charge
—
0.1
Other non-cash changes in assets and liabilities
3.6
8.1
Changes in operating assets and liabilities:
Trade and other receivables
(12.8
)
(23.0
)
Contract assets
(3.5
)
(1.9
)
Inventories
(18.8
)
(9.6
)
Prepaid expenses and other current assets
(3.4
)
(2.2
)
Accounts payable
7.4
32.0
Accrued liabilities
(0.4
)
(7.3
)
Annual variable cash contributions to VEBAs
(2.1
)
(15.7
)
Long-term assets and liabilities, net
0.1
(0.5
)
Net cash provided by operating activities
22.8
26.1
Cash flows from investing activities1:
Capital expenditures
(13.6
)
(19.7
)
Purchase of available for sale securities
(18.1
)
—
Proceeds from disposition of available for sale securities
32.7
100.3
Net cash provided by investing activities
1.0
80.6
Cash flows from financing activities1:
Repayment of finance lease
(0.3
)
(0.2
)
Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(5.0
)
(6.9
)
Repurchase of common stock
(18.5
)
(5.7
)
Cash dividends and dividend equivalents paid
(10.2
)
(10.0
)
Net cash used in financing activities
(34.0
)
(22.8
)
Net increase in cash, cash equivalents and restricted cash during the period
(10.2
)
83.9
Cash, cash equivalents and restricted cash at beginning of period
139.6
64.3
Cash, cash equivalents and restricted cash at end of period
$
129.4
$
148.2
____________________
1
See Note 12 for supplemental cash flow information.
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
6
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. Summary of Significant Accounting Policies
This Quarterly Report on Form 10-Q (this "Report") should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2018. Unless the context otherwise requires, references in these notes to interim consolidated financial statements - unaudited to "Kaiser Aluminum Corporation," "we," "us," "our," "the Company" and "our Company" refer collectively to Kaiser Aluminum Corporation and its subsidiaries.
Organization and Nature of Operations. Kaiser Aluminum Corporation specializes in the production of semi-fabricated specialty aluminum mill products, such as aluminum plate and sheet and extruded and drawn products, for the following end market applications: aerospace and high strength ("Aero/HS products"), automotive ("Automotive Extrusions"), general engineering ("GE products") and other industrial ("Other products"). Our business is organized into one operating segment. See Note 13 for additional information regarding our business, product and geographical area information and concentration of risk.
Principles of Consolidation and Basis of Presentation. The accompanying unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries and are prepared in accordance with United States generally accepted accounting principles ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") applicable for interim periods and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In management's opinion, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for our interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2019 fiscal year. The financial information as of December 31, 2018 is derived from our audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates in the Preparation of Financial Statements. 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 our 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 our consolidated financial position and results of operations.
Fair Value Measurements. We apply the fair value hierarchy established by GAAP for the recognition and measurement of certain financial assets and liabilities. An asset or liability's fair value classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty risk in our assessment of fair value. We also review the underlying inputs that are significant to the fair value measurement of financial instruments to determine if a transfer among hierarchy levels is appropriate. We historically have not had significant transfers into or out of each hierarchy level.
Financial assets and liabilities that we measure at fair value each period include our derivative instruments, equity investments related to our deferred compensation plan and debt investment securities classified as available for sale securities (see Note 4). Additionally, we measure at fair value once each year at December 31 our Canadian defined benefit pension plan and the plan assets of the Salaried VEBA (defined in Note 4). We record our remaining financial assets and liabilities at carrying value.
For a majority of our non-financial assets and liabilities, which include goodwill, intangible assets, inventories and property, plant and equipment, we are not required to measure their fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill), an evaluation of the affected non-financial asset or liability will be required, which could result in a reduction to the carrying amount of such asset or liability.
None of our non-financial assets and liabilities subject to fair value assessments on a non-recurring basis required a material adjustment to the carrying amount of such assets and liabilities for the quarter ended March 31, 2019.
Inventories. Inventories are stated at the lower of cost or market value. Finished products, work-in-process and raw material inventories are stated on the last-in, first-out ("LIFO") basis. At March 31, 2019 and December 31, 2018, the current cost of our inventory exceeded its stated LIFO value by $17.2 million and $31.7 million, respectively. Other inventories are stated on the first-in, first-out basis and consist of operating supplies, which are materials and supplies to be consumed during the production
8
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
process. Inventory costs consist of material, labor and manufacturing overhead, including depreciation. Abnormal costs, such as idle facility expenses, freight, handling costs and spoilage, are accounted for as current period charges (see Note 2 for the components of inventories).
Replacement Parts. Replacement parts consist of preventative maintenance and capital spare parts, which are stated on the first-in, first-out basis. Replacement parts are recorded within Prepaid expenses and other current assets or Other assets depending on whether or not the expected utilization of the replacement parts is to occur within the current operating cycle.
Property, Plant and Equipment, Net. Property, plant and equipment, net is recorded at cost and includes construction in progress (see Note 2). Interest related to the construction of qualifying assets is capitalized as part of the construction costs. The amount of interest expense capitalized as construction in progress was $0.5 million during each of the quarters ended March 31, 2019 and March 31, 2018, respectively.
Depreciation is computed using the straight-line method at rates based on the estimated useful lives of the various classes of assets. Finance lease assets and leasehold improvements are depreciated on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term.
We classify assets as held for sale only when an asset is being actively marketed and expected to sell within 12 months. Assets held for sale are initially measured at the lesser of the assets' carrying amount and the fair value less costs to sell.
Derivative Financial Instruments. Consistent with guidelines established by management and approved by our Board of Directors, we use derivative financial instruments to mitigate our exposure to changes in the market price of aluminum, alloying metals, energy, and, to a lesser extent, foreign currency exchange rates. We do not use derivative financial instruments for trading or other speculative purposes. Hedging transactions are executed centrally on behalf of all of our operations to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors.
We reflect the fair value of all of our derivative instruments on our Consolidated Balance Sheets (see Note 5). The fair value of hedges settling within one year is included in Prepaid expenses and other current assets or Other accrued liabilities. The fair value of hedges settling beyond one year is included in Other assets or Long-term liabilities.
Our aluminum and energy derivatives qualify for hedge (deferral) accounting and, as such, we designate such hedges as cash flow hedges. Forward swap contracts for zinc and copper ("Alloying Metals") used in our fabrication operations are also designated as cash flow hedges. Unrealized gains and losses associated with our cash flow hedges are deferred in Other comprehensive income, net of tax, and reclassified to Cost of products sold, excluding depreciation and amortization and other items ("COGS") when such hedges settle (see Note 5).
Self Insurance of Workers' Compensation and Employee Healthcare Liabilities. We self-insure the majority of the costs of workers' compensation benefits and employee healthcare benefits and rely on insurance coverage to protect us from large losses on individual claims. Workers' compensation liabilities are based on a combination of estimates for: (i) incurred-but-not-reported claims and (ii) the ultimate expense of incurred claims. Such estimates are based on judgment, using our historical claims data and information and analysis provided by actuarial and claims advisors, our insurance carriers and other professionals. Our undiscounted workers' compensation liabilities were estimated at $28.1 million and $27.6 million as of March 31, 2019 and December 31, 2018, respectively. However, we accounted for our workers' compensation accrued liabilities on a discounted basis (see Note 2), using a discount rate of 2.50% and 3.00% at March 31, 2019 and December 31, 2018, respectively. Accrued liabilities for employee healthcare benefits, which are estimates of unpaid incurred medical and prescription drug costs as provided by our healthcare administrators, were $3.4 million and $3.6 million as of March 31, 2019 and December 31, 2018, respectively.
9
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Short-Term Incentive Plans ("STI Plans"). We have annual short-term incentive compensation plans for senior management and certain other employees payable at our election in cash, shares of common stock or a combination of cash and shares of common stock. Amounts earned under STI Plans are based on our adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), modified for certain safety, quality, delivery, cost and individual performance factors. The Adjusted EBITDA targets are determined based on the return on adjusted net assets. Most of our production facilities have similar programs for both hourly and salaried employees. As of March 31, 2019, we had a liability of $3.9 million recorded within Accrued salaries, wages and related expenses for estimated probable future payments relating to the three month performance period of our 2019 STI Plan.
Long-Term Incentive Programs. Executive officers and other key employees of the Company, as well as non-employee directors of the Company, are eligible to participate in the Kaiser Aluminum Corporation 2016 Equity and Incentive Compensation Plan approved by stockholders on May 26, 2016 ("2016 Plan"). At March 31, 2019, 503,379 shares were available for awards under the 2016 Plan. We issue new shares of our common stock upon vesting under the 2016 Plan.
Adoption of New Accounting Pronouncements
ASU No. 2016-02, Leases (Topic 842): Amendments to the Financial Accounting Standards Board Accounting Standards Codification ("ASU 2016-02"), was issued in February 2016 (with amendments issued in 2018) and requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to operating leases under the previous guidance) while finance leases will result in a front-loaded expense pattern (similar to capital leases under the previous guidance). We adopted ASU 2016-02 and its subsequent amendments (together "ASC 842") during the quarter ended March 31, 2019 using the transition approach provided for under ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allowed us to apply the new lease standard as of January 1, 2019, rather than the beginning of the earliest period presented. We elected the package of practical expedients, which permitted us to: (i) not reassess whether any of our contracts contained leases; (ii) carry forward the historical lease classification of our existing leases; and (iii) not reassess initial direct costs for our existing leases. We did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets. Due to our adoption of ASC 842, we recorded an operating lease right-of-use asset of $29.0 million, a current operating lease liability of $4.1 million and a long-term operating lease liability of $27.4 million on our Consolidated Balance Sheets as of January 1, 2019. There was no cumulative-effect adjustment to Retained earnings required. The standard did not materially impact our consolidated net earnings and had no impact on cash flows. Comparative information in this Report has not been adjusted and continues to be reported under the previous lease accounting rules. See Note 3 for details of the significant changes and quantitative impacts of the changes, as well as other required disclosures related to our adoption of ASC 842.
There were no material impacts on our consolidated financial statements resulting from our adoption in the quarter ended March 31, 2019 of: (i) ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting and (ii) ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.
Accounting Pronouncements Issued But Not Yet Adopted
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), was issued in June 2016. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities will be replaced with a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowances for losses. We are currently in the process of evaluating the impact of adopting ASU 2016-13 in 2020, but do not expect it to have a material impact on our consolidated financial statements.
ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ("ASU 2018-15"), was issued in August 2018. Under ASU 2018-15, requirements for capitalizing implementation costs incurred in a hosting arrangement (cloud computing) that is a service contract, are to be aligned with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We are currently in the process of evaluating the impact of adopting ASU 2018-15 in 2020, but do not expect it to have a material impact on our consolidated financial statements.
10
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
2. Supplemental Balance Sheet Information
March 31, 2019
December 31, 2018
(In millions of dollars)
Cash and Cash Equivalents
Cash and money market funds
$
29.3
$
22.9
Commercial paper
86.0
102.7
Total
$
115.3
$
125.6
Trade Receivables, Net
Billed trade receivables
$
196.6
$
179.5
Unbilled trade receivables
—
1.1
Trade receivables, gross
196.6
180.6
Allowance for doubtful receivables
(0.8
)
(0.8
)
Trade receivables, net
$
195.8
$
179.8
Inventories
Finished products
$
47.1
$
48.0
Work-in-process
104.9
85.6
Raw materials
74.8
75.0
Operating supplies
7.1
6.5
Total
$
233.9
$
215.1
Property, Plant and Equipment, Net
Land and improvements
$
21.4
$
21.4
Buildings and leasehold improvements
97.8
97.0
Machinery and equipment
766.9
755.6
Construction in progress
41.8
43.6
Property, plant and equipment, gross
927.9
917.6
Accumulated depreciation
(318.6
)
(307.4
)
Assets held for sale
1.6
1.6
Property, plant and equipment, net
$
610.9
$
611.8
Other Accrued Liabilities
Uncleared cash disbursements
$
6.6
$
4.8
Accrued income taxes and taxes payable
9.9
6.5
Accrued annual contribution to Salaried VEBA
—
2.1
Accrued interest
8.4
2.9
Other – Note 5
26.7
27.7
Total
$
51.6
$
44.0
11
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2019
December 31, 2018
(In millions of dollars)
Long-Term Liabilities
Workers' compensation accruals
$
25.5
$
24.6
Long-term environmental accrual – Note 7
13.1
14.3
Other long-term liabilities
23.2
27.5
Total
$
61.8
$
66.4
3. Leases
We determine if an agreement is a lease at inception. We have operating and finance leases for equipment and real estate that primarily have fixed lease payments. Our leases have remaining lease terms of one year to 15 years, some of which may include options to extend the lease for up to 20 years, and some of which may include options to terminate the lease within one year. None of our options to extend or terminate are reasonably certain of being exercised, and are therefore not included in our determination of lease assets and liabilities. Short-term leases with an initial term of 12 months or less are not recorded in our Consolidated Balance Sheets.
As most of our leases do not provide an implicit rate, we use information available at the lease commencement date in determining an incremental borrowing rate when calculating our operating lease assets and operating lease liabilities. In determining the inputs to the incremental borrowing rate calculation, we make judgments about the value of the leased asset, our credit rating and the lease term including the probability of our exercising options to extend or terminate the underlying lease. Additionally, we make judgments around contractual asset substitution rights in determining whether a contract contains a lease.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. These non-lease components include items such as common area maintenance, taxes and insurance for our real estate leases, as well as maintenance charges related to our equipment leases. We have applied the practical expedient within ASU 2016-02 to not separate lease and non-lease components to only our embedded supply system equipment leases and have therefore accounted for both lease and non-lease components in determining the lease assets and liabilities.
Many of our equipment leases contain clauses that require us to return the equipment with certain functionality intact. We account for these costs as residual value guarantees when the guarantee becomes probable of being owed. Our lease agreements do not contain any material restrictive covenants.
The following table presents lease terms and discount rates as of March 31, 2019:
Finance Leases
Operating Leases
Weighted-average lease term (in years):
6.1
10.9
Weighted-average discount rate:
4.7
%
5.8
%
12
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
The following table summarizes the classification of lease assets and lease liabilities in our Consolidated Balance Sheet at March 31, 2019 (in millions of dollars):
Leases
Classification
March 31, 2019
Assets
Operating lease assets
Operating lease assets
$
27.4
Finance lease assets
Property, plant and equipment, net
6.7
Total lease assets
$
34.1
Liabilities
Current:
Operating lease liabilities
Other accrued liabilities
$
3.5
Finance lease liabilities
Other accrued liabilities
1.3
Non-current:
Operating lease liabilities
Long-term portion of operating lease liabilities
26.6
Finance lease liabilities
Long-term liabilities
5.4
Total lease liabilities
$
36.8
The following table summarizes the components of lease cost in our Statements of Consolidated Income during the quarter ended March 31, 2019 (in millions of dollars):
Lease Cost
Quarter Ended
March 31, 2019
Operating lease cost
$
2.0
Short-term lease cost
0.3
Finance lease cost:
Amortization of leased assets
0.4
Interest on lease liabilities
0.1
Total lease cost
$
2.8
The following table presents the maturity of our lease liabilities as of March 31, 2019 (in millions of dollars):
Maturity of Lease Liabilities
Finance Leases
Operating Leases
Remainder of 2019
$
1.2
$
3.7
2020
1.4
4.7
2021
1.2
4.1
2022
1.1
3.6
2023
1.0
3.4
2024
0.6
3.3
2025 and thereafter
1.2
18.7
Total minimum lease payments
$
7.7
$
41.5
Less: interest
(1.0
)
(11.4
)
Present value
$
6.7
$
30.1
13
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
The following table presents minimum rental commitments at December 31, 2018 (in millions of dollars):
Year Ended December 31,
Finance Leases
Operating Leases
2019
$
1.7
$
6.1
2020
1.4
3.7
2021
1.2
2.8
2022
1.1
2.4
2023
1.0
2.2
2024 and thereafter
1.8
20.8
Total minimum lease payments
$
8.2
$
38.0
Less: interest
(1.2
)
Present value1
$
7.0
_________________________
1.
Of the $7.0 million in finance lease obligations as of December 31, 2018, $1.4 million was included in Other accrued liabilities and $5.6 million was included in Long-term liabilities. Assets recorded under finance leases and the accumulated amortization thereon were $8.3 million and $1.3 million, respectively, as of December 31, 2018.
4. Employee Benefits
Pension and Similar Benefit Plans. We provide contributions to: (i) defined contribution 401(k) savings plans for salaried employees and certain hourly employees; (ii) a non-qualified, unfunded, unsecured plan of deferred compensation (see "Deferred Compensation Plan" below); (iii) multi-employer pension plans sponsored by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC, the International Association of Machinists and certain other unions at certain of our production facilities; and (iv) a defined benefit pension plan for salaried employees at our London, Ontario (Canada) facility.
Deferred Compensation Plan. We have a non-qualified, unfunded, unsecured plan of deferred compensation for certain employees who would otherwise suffer a loss of benefits under our defined contribution plan as a result of the limitations imposed by the Internal Revenue Code of 1986. Despite the plan being an unfunded plan, we make an annual contribution to a rabbi trust to fulfill future funding obligations as contemplated by the terms of the plan. The assets in the trust are held in various investment funds at certain registered investment companies and are accounted for as equity investments with changes in fair value recorded within Other income, net. During the quarter ended March 31, 2019, we recognized a $0.5 million gain on equity securities still held at March 31, 2019 related to our deferred compensation plan. For the quarter ended March 31, 2018, the corresponding amount was immaterial. Assets of our deferred compensation plan are classified within Level 2 of the fair value hierarchy and are measured and recorded at fair value based on their quoted market prices. The fair value of these assets at March 31, 2019 and December 31, 2018 was $11.0 million and $9.8 million, respectively, and are included in Other assets. Offsetting liabilities relating to the deferred compensation plan are included in Other accrued liabilities and Long-term liabilities.
Salaried VEBA Postretirement Obligation. Certain retirees who retired prior to 2004 and certain employees who were hired prior to February 2002 and have subsequently retired or will retire with the requisite age and service, along with their surviving spouses and eligible dependents, are eligible to participate in a voluntary employees' beneficiary association ("VEBA") that provides healthcare cost, medical cost and long-term care insurance cost reimbursement benefits ("Salaried VEBA"). We have an ongoing obligation with no express termination date to make annual variable cash contributions up to a maximum of $2.9 million to the Salaried VEBA. We paid $2.1 million with respect to 2018 during the quarter ended March 31, 2019. We account for the Salaried VEBA as a defined benefit plan in our financial statements.
Union VEBA Postretirement Obligation. Certain other eligible retirees represented by certain unions, along with their surviving spouses and eligible dependents, participate in a separate VEBA ("Union VEBA"). During the first quarter of 2018,
14
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
we made a $12.8 million cash contribution to the Union VEBA with respect to the nine months ended September 30, 2017. This was our final contribution. We have no ongoing obligation to make further contributions to the Union VEBA.
Fair Value of Plan Assets. The plan assets of our Canadian pension plan and the Salaried VEBA are measured annually on December 31 and reflected in our Consolidated Balance Sheets at fair value. In determining the fair value of the plan assets at an annual period end, we utilize primarily the results of valuations supplied by the investment advisors responsible for managing the assets of each plan, which we independently review for reasonableness.
The following tables present the total expense related to all benefit plans for the periods presented (in millions of dollars):
Quarter Ended
March 31,
2019
2018
Defined contribution plans1
$
3.9
$
4.3
Deferred compensation plan1
0.7
0.1
Multiemployer pension plans1
1.2
1.2
Net periodic postretirement benefit cost relating to Salaried VEBA2
1.7
1.5
Total
$
7.5
$
7.1
____________________
1
Substantially all of the expense related to employee benefits are in COGS with the remaining balance in Selling, general, administrative, research and development ("SG&A and R&D").
2
The current service cost component of Net periodic postretirement benefit cost relating to Salaried VEBA is included within our Statements of Consolidated Income in SG&A and R&D for all periods presented. All other components of Net periodic postretirement benefit cost relating to Salaried VEBA are included within Other income, net in our Statements of Consolidated Income.
Components of Net Periodic Benefit Cost. Our results of operations included the following impacts associated with our Canadian pension plan and the Salaried VEBA: (i) a charge for service rendered by employees; (ii) a charge for accretion of interest; (iii) a benefit for the return on plan assets; and (iv) amortization of prior service costs associated with plan amendments, net gains or losses on assets and actuarial differences. Net periodic benefit cost related to our Canadian pension plan was not material for the quarters ended March 31, 2019 and March 31, 2018.
The following table presents the components of Net periodic postretirement benefit cost relating to Salaried VEBA for the periods presented (in millions of dollars):
Quarter Ended
March 31,
2019
2018
Salaried VEBA1:
Interest cost
$
0.8
$
0.7
Expected return on plan assets
(0.6
)
(0.7
)
Amortization of prior service cost2
1.4
1.3
Amortization of net actuarial loss
0.1
0.2
Total net periodic postretirement benefit cost relating to Salaried VEBA
$
1.7
$
1.5
____________________
1
The service cost was insignificant for all periods presented.
2
We amortize prior service cost on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan participants.
15
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
5. Derivatives, Hedging Programs and Other Financial Instruments
Overview
In conducting our business, we enter into derivative transactions, including forward contracts and options, to limit our exposure to: (i) metal price risk related to our sale of fabricated aluminum products and the purchase of metal used as raw material for our fabrication operations and (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in our production processes.
Our derivative activities are overseen by a committee ("Hedging Committee"), which is composed of our chief executive officer, chief operating officer, chief financial officer, chief accounting officer, vice president of metal management, treasurer and other officers and employees selected by the chief executive officer.The Hedging Committee meets regularly to review commodity price exposure, derivative positions and strategy. Management reviews the scope of the Hedging Committee's activities with our Board of Directors.
We are exposed to counterparty credit risk on all of our derivative instruments, which we manage by monitoring the credit quality of our counterparties and allocating our hedging positions among multiple counterparties to limit exposure to any single entity. Our counterparties are major, investment grade financial institutions or trading companies. Hedging transactions are governed by negotiated reciprocal credit lines, which generally require collateral to be posted above specified credit thresholds. We believe the risk of loss is remote and contained due to counterparty credit quality, our diversification practice and collateral requirements.
In a majority of our hedging counterparty agreements, our counterparty offers us a credit line that adjusts up or down, depending on our liquidity. Below specified liquidity thresholds, we may have to post collateral if the fair value of our net liability with such counterparty exceeds our reduced credit line. We manage this risk by allocating hedging transactions among multiple counterparties, using options as part of our hedging activities, or both. The aggregate fair value of our derivative instruments that were in a net liability position was $6.0 million and $12.6 million at March 31, 2019 and December 31, 2018, respectively, and we had no collateral posted as of those dates.
Additionally, our firm-price customer sales commitments create incremental customer credit risk related to metal price movements. Under certain circumstances, we mitigate this risk by periodically requiring cash collateral from them, which we classify as deferred revenue and include as a component of Other accrued liabilities. We had $0.2 million cash collateral posted from our customers as of December 31, 2018. Cash collateral posted from our customers as of March 31, 2019 was immaterial. For more information about concentration risks concerning customers and suppliers, see Note 13.
Aluminum Hedges. 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 through metal price fluctuations to our customers. For some of our higher value added products sold on a spot basis, the pass through of metal price movements can sometimes lag by as much as several months, with a favorable impact to us when metal prices decline and an adverse impact to us when metal prices increase. Additionally, in certain instances, we enter into firm-price arrangements with our customers for stipulated volumes to be delivered in the future. Because we generally purchase primary and secondary aluminum on a floating price basis, the lag in passing through metal price movements to customers on some of our higher value added products sold on a spot basis and the volume that we have committed to sell to our customers under a firm-price arrangement create metal price risk for us. We use third-party hedging instruments to limit exposure to metal price risk related to the metal pass through lag on some of our products and firm-price customer sales contracts.
Alloying Metals Hedges. We are exposed to risk of fluctuating prices for Alloying Metals used as raw materials in our fabrication operations. We, from time to time, in the ordinary course of business, use third-party hedging instruments to mitigate our risk from price fluctuations in Alloying Metals.
Energy Hedges. We are exposed to risk of fluctuating prices for natural gas and electricity. We, from time to time, in the ordinary course of business, enter into hedging transactions and/or physical delivery commitments with third parties to mitigate our risk from fluctuations in natural gas and electricity prices.
16
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Notional Amount of Derivative Contracts
The following table summarizes our derivative positions at March 31, 2019:
Aluminum
Maturity Period
(month/year)
Notional Amount of Contracts (mmlbs)
Fixed price purchase contracts
4/19 through 12/21
117.1
Fixed price sales contracts
4/19 through 11/19
0.5
Midwest premium swap contracts1
4/19 through 12/21
89.4
Alloying Metals
Maturity Period
(month/year)
Notional Amount of Contracts (mmlbs)
Fixed price purchase contracts
4/19 through 12/20
10.5
Natural Gas2
Maturity Period
(month/year)
Notional Amount of Contracts (mmbtu)
Fixed price purchase contracts
4/19 through 12/24
8,530,000
Electricity3
Maturity Period
(month/year)
Notional Amount of Contracts (Mwh)
Fixed price purchase contracts
1/20 through 12/21
307,080
____________________
1
Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on our purchases of primary aluminum.
2
As of March 31, 2019, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 69% of the expected natural gas purchases for the remainder of 2019, 66% of the expected natural gas purchases for both 2020 and 2021, 37% of the expected natural gas purchases for both 2022 and 2023 and 31% of the expected natural gas purchases for 2024.
3
As of March 31, 2019, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 54% of our expected electricity purchases for both the remainder of 2019 and 2020 and 27% of our expected electricity purchases for 2021.
Loss (Gain)
See Note 8 for the total amount of loss (gain) on derivative instruments designated and qualifying as cash flow hedging instruments that was reported in Accumulated other comprehensive income ("AOCI"), as well as the related reclassifications into earnings and tax effects. Cumulative gains and losses related to cash flow hedges are reclassified out of AOCI when the associated hedged commodity purchases impact earnings.
17
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
The amount of loss (gain) included on our Statements of Consolidated Income (all within COGS) associated with all derivative contracts consisted of the following for each period presented (in millions of dollars):
Quarter Ended March 31,
2019
2018
Total amounts of income and expense line items presented in our Statements of Consolidated Income in which the effects of hedges are recorded
$
315.1
$
316.7
Loss (gain) recognized in income related to cash flow hedges:
Aluminum
$
4.2
$
0.3
Alloying metals
0.1
(0.4
)
Natural gas
(0.1
)
—
Total loss (gain) recognized in income
$
4.2
$
(0.1
)
Fair Values of Derivative Contracts
The fair values of our derivative contracts are based upon trades in liquid markets. Valuation model inputs can be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are classified within Level 2 of the fair value hierarchy.
All of our derivative contracts with counterparties are subject to enforceable master netting arrangements. We reflect the fair value of our derivative contracts on a gross basis on our Consolidated Balance Sheets. The following table presents the fair value of our derivative financial instruments as of the periods presented (in millions of dollars):
March 31, 2019
December 31, 2018
Derivative Assets
Derivative Liabilities
Net Amount
Derivative Assets
Derivative Liabilities
Net Amount
Cash Flow Hedges:
Aluminum –
Fixed price purchase contracts
$
0.6
$
(7.9
)
$
(7.3
)
$
0.1
$
(13.2
)
$
(13.1
)
Fixed price sales contracts
—
—
—
0.1
—
0.1
Midwest premium swap contracts
2.8
(0.2
)
2.6
3.2
(0.5
)
2.7
Alloying Metals – Fixed price purchase contracts
0.9
(0.3
)
0.6
—
(1.7
)
(1.7
)
Natural gas – Fixed price purchase contracts
0.4
(0.8
)
(0.4
)
0.2
(0.5
)
(0.3
)
Electricity – Fixed price purchase contracts
2.0
—
2.0
0.7
—
0.7
Total
$
6.7
$
(9.2
)
$
(2.5
)
$
4.3
$
(15.9
)
$
(11.6
)
18
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
The following table presents the balance sheet location of derivative assets and liabilities as of the periods presented (in millions of dollars):
March 31, 2019
December 31, 2018
Assets:
Prepaid expenses and other current assets
$
4.1
$
3.4
Other assets
2.6
0.9
Total assets
$
6.7
$
4.3
Liabilities:
Other accrued liabilities
$
(8.1
)
$
(13.2
)
Long-term liabilities
(1.1
)
(2.7
)
Total liabilities
$
(9.2
)
$
(15.9
)
Fair Value of Other Financial Instruments
Cash and Cash Equivalents. See Note 2 for components of cash and cash equivalents.
Available for Sale Securities. We hold debt investment securities that are accounted for as available for sale securities and are presented as cash equivalents and short-term investments on our Consolidated Balance Sheets. The fair value of the debt investment securities, which consist of commercial paper, is determined based on valuation models that use observable market data. At March 31, 2019, all of our short-term investments had maturity dates within 12 months. We review our debt investment portfolio for other-than-temporary impairment at least quarterly or when there are changes in credit risk or other potential valuation concerns. At March 31, 2019 and December 31, 2018, the total unrealized loss, net of tax, included in AOCI was immaterial and was not other-than-temporarily impaired. We believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the unrealized loss on these securities was due to normal market fluctuations, and not due to increased credit risk or other valuation concerns. The fair value input of our available for sale securities, which are classified within Level 2 of the fair value hierarchy, is calculated based on broker quotes. The amortized cost for available for sale securities approximates their fair value.
The following table presents our other financial assets, classified under the appropriate level of the fair value hierarchy, as of March 31, 2019 (in millions of dollars):
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
$
29.3
$
86.0
$
—
$
115.3
Short-term investments
—
22.3
—
22.3
Total
$
29.3
$
108.3
$
—
$
137.6
The following table presents our other financial assets, classified under the appropriate level of the fair value hierarchy, as of December 31, 2018 (in millions of dollars):