QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 ☒ No ☐
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 ☒ No ☐
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
☒
Accelerated filer
☐
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
☐
Emerging growth company
☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common stock, par value $0.01 per share
KALU
Nasdaq Global Select Market
As of July 22, 2019, there were 16,003,045 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)
June 30, 2019
December 31, 2018
(In millions of dollars, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
$
122.4
$
125.6
Short-term investments
24.4
36.7
Receivables:
Trade receivables, net
178.1
179.8
Other
25.1
25.6
Contract assets
46.9
54.9
Inventories
231.1
215.1
Prepaid expenses and other current assets
21.7
18.9
Total current assets
649.7
656.6
Property, plant and equipment, net
613.8
611.8
Operating lease assets
26.8
—
Deferred tax assets, net
15.5
35.9
Intangible assets, net
31.0
32.4
Goodwill
44.0
44.0
Other assets
41.3
38.6
Total
$
1,422.1
$
1,419.3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
101.3
$
121.4
Accrued salaries, wages and related expenses
30.4
40.1
Other accrued liabilities
47.2
44.0
Total current liabilities
178.9
205.5
Long-term portion of operating lease liabilities
26.0
—
Net liabilities of Salaried VEBA
32.6
32.4
Deferred tax liabilities
4.2
4.2
Long-term liabilities
63.2
66.4
Long-term debt
370.9
370.4
Total liabilities
675.8
678.9
Commitments and contingencies – Note 7
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized at both June 30, 2019 and December 31, 2018; no shares were issued and outstanding at June 30, 2019 and December 31, 2018
—
—
Common stock, par value $0.01, 90,000,000 shares authorized at both June 30, 2019 and at December 31, 2018; 22,549,931 shares issued and 16,028,675 shares outstanding at June 30, 2019; 22,471,705 shares issued and 16,234,603 shares outstanding at December 31, 2018
0.2
0.2
Additional paid in capital
1,059.2
1,059.3
Retained earnings
177.3
150.2
Treasury stock, at cost, 6,521,256 shares at June 30, 2019 and 6,237,102 shares at December 31, 2018, respectively
(448.1
)
(420.5
)
Accumulated other comprehensive loss
(42.3
)
(48.8
)
Total stockholders' equity
746.3
740.4
Total
$
1,422.1
$
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
Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
(In millions of dollars, except share and per share amounts)
Net sales
$
375.3
$
415.4
$
770.5
$
803.4
Costs and expenses:
Cost of products sold, excluding depreciation and amortization and other items
303.5
343.4
618.6
660.1
Depreciation and amortization
12.1
10.9
24.0
21.4
Selling, general, administrative, research and development
27.2
26.4
52.4
50.0
Other operating charges, net
0.1
—
0.1
0.1
Total costs and expenses
342.9
380.7
695.1
731.6
Operating income
32.4
34.7
75.4
71.8
Other (expense) income:
Interest expense
(5.8
)
(5.7
)
(11.5
)
(11.3
)
Other (expense) income, net – Note 9
(0.1
)
(0.5
)
0.4
(0.4
)
Income before income taxes
26.5
28.5
64.3
60.1
Income tax provision
(7.3
)
(7.8
)
(17.1
)
(13.7
)
Net income
$
19.2
$
20.7
$
47.2
$
46.4
Net income per common share:
Basic
$
1.19
$
1.24
$
2.93
$
2.78
Diluted
$
1.18
$
1.22
$
2.89
$
2.74
Weighted-average number of common shares outstanding (in thousands):
Basic
16,063
16,685
16,085
16,696
Diluted
16,240
16,905
16,298
16,962
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
Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
(In millions of dollars)
Net income
$
19.2
$
20.7
$
47.2
$
46.4
Other comprehensive (loss) income, net of tax – Note 8:
Defined benefit pension plan and Salaried VEBA
1.1
1.2
2.2
2.4
Available for sale securities
(0.1
)
(0.1
)
(0.3
)
(0.3
)
Cash flow hedges
(4.2
)
5.3
4.6
(4.0
)
Other comprehensive (loss) income, net of tax
(3.2
)
6.4
6.5
(1.9
)
Comprehensive income
$
16.0
$
27.1
$
53.7
$
44.5
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)
Six Months Ended June 30, 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 stock1
(175,977
)
—
—
—
(17.4
)
—
(17.4
)
Cash dividends on common stock and restricted shares and dividend equivalents on restricted stock units and performance shares2
—
—
—
(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
Net income
—
—
—
19.2
—
—
19.2
Other comprehensive loss, net of tax
—
—
—
—
—
(3.2
)
(3.2
)
Issuance of non-vested shares to non-employee directors
11,850
—
—
—
—
—
—
Issuance of common shares to non-employee directors
2,850
—
0.3
—
—
—
0.3
Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(12,395
)
—
(1.2
)
—
—
—
(1.2
)
Repurchase of common stock1
(108,177
)
—
—
—
(10.2
)
—
(10.2
)
Cash dividends on common stock and restricted shares and dividend equivalents on restricted stock units and performance shares2
—
—
—
(9.9
)
—
—
(9.9
)
Amortization of unearned equity compensation
—
—
3.4
—
—
—
3.4
BALANCE, June 30, 2019
16,028,675
$
0.2
$
1,059.2
$
177.3
$
(448.1
)
$
(42.3
)
$
746.3
____________________
1
Weighted-average repurchase price (dollars per share) for the quarters ended March 31, 2019 and June 30, 2019 was $98.55 and $95.00, respectively. At June 30, 2019, $121.0 million remained available to repurchase our common shares pursuant to the stock repurchase program.
2
Dividends declared per common share were $0.60 during each of the quarters ended March 31, 2019 and June 30, 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)
Six Months Ended June 30, 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 stock1
(58,155
)
—
—
—
(6.1
)
—
(6.1
)
Cash dividends on common stock and restricted shares and dividend equivalents on restricted stock units and performance shares2
—
—
—
(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
Net income
—
—
—
20.7
—
—
20.7
Other comprehensive income, net of tax
—
—
—
—
—
6.4
6.4
Issuance of non-vested shares to non-employee directors
9,009
—
—
—
—
—
—
Issuance of common shares to non-employee directors
1,954
—
0.2
—
—
—
0.2
Issuance of common shares to employees upon vesting of restricted stock units and performance shares
82
—
—
—
—
—
—
Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(95
)
—
—
—
—
—
—
Repurchase of common stock1
(127,545
)
—
—
—
(13.3
)
—
(13.3
)
Cash dividends on common stock and restricted shares and dividend equivalents on restricted stock units and performance shares2
—
—
—
(9.3
)
—
—
(9.3
)
Amortization of unearned equity compensation
—
—
2.7
—
—
—
2.7
BALANCE, June 30, 2018
16,665,941
$
0.2
$
1,054.7
$
123.1
$
(378.0
)
$
(39.0
)
$
761.0
____________________
1
Weighted-average repurchase price (dollars per share) for the quarters ended March 31, 2018 and June 30, 2018 was $104.50 and $104.74, respectively.
2
Dividends declared per common share were $0.55 during each of the quarters ended March 31, 2018 and June 30, 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)
Six Months Ended
June 30,
2019
2018
(In millions of dollars)
Cash flows from operating activities1:
Net income
$
47.2
$
46.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment
22.6
20.7
Amortization of definite-lived intangible assets
1.4
0.7
Amortization of debt discount and debt issuance costs
0.6
0.5
Deferred income taxes
18.3
17.8
Non-cash equity compensation
6.1
5.7
Gain on disposition of available for sale securities
(0.4
)
(1.5
)
Non-cash asset impairment charge
0.1
0.1
(Gain) loss on disposition of property, plant and equipment
(0.2
)
0.1
Other non-cash changes in assets and liabilities
6.1
15.7
Changes in operating assets and liabilities:
Trade and other receivables
2.2
(29.6
)
Contract assets
8.0
3.0
Inventories
(16.0
)
(10.0
)
Prepaid expenses and other current assets
(4.3
)
(3.0
)
Accounts payable
(13.4
)
43.9
Accrued liabilities
(6.6
)
(10.8
)
Annual variable cash contributions to VEBAs
(2.1
)
(15.7
)
Long-term assets and liabilities, net
0.9
—
Net cash provided by operating activities
70.5
84.0
Cash flows from investing activities1:
Capital expenditures
(29.9
)
(35.8
)
Purchase of available for sale securities
(33.0
)
(24.0
)
Purchase of equity securities
(0.7
)
(0.9
)
Proceeds from disposition of available for sale securities
45.7
136.6
Proceeds from disposition of property, plant and equipment
0.2
—
Net cash (used in) provided by investing activities
(17.7
)
75.9
Cash flows from financing activities1:
Repayment of finance lease
(0.6
)
(0.3
)
Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(6.2
)
(6.9
)
Repurchase of common stock
(28.6
)
(18.9
)
Cash dividends and dividend equivalents paid
(20.1
)
(19.3
)
Net cash used in financing activities
(55.5
)
(45.4
)
Net (decrease) increase in cash, cash equivalents and restricted cash during the period
(2.7
)
114.5
Cash, cash equivalents and restricted cash at beginning of period
139.6
64.3
Cash, cash equivalents and restricted cash at end of period
$
136.9
$
178.8
____________________
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 and Note 5). 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 and six months endedJune 30, 2019.
8
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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 June 30, 2019 and December 31, 2018, the current cost of our inventory exceeded its stated LIFO value by $12.8 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 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 $0.4 million for each of the quarters endedJune 30, 2019 and June 30, 2018. The amount of interest expense capitalized as construction in progress was $0.9 million for each of the six months endedJune 30, 2019 and June 30, 2018.
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.
We designate our aluminum and energy derivatives as well as our forward swap contracts for zinc and copper ("Alloying Metals") used in our fabrication operations as cash flow hedges. Unrealized gains and losses associated with our cash flow hedges are deferred in Other comprehensive (loss) 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 $27.2 million and $27.6 million as of June 30, 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 2.00% and 3.00% at June 30, 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 $3.3 million and $3.6 million as of June 30, 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 June 30, 2019, we had a liability of $5.1 million recorded within Accrued salaries, wages and related expenses for estimated probable future payments relating to the six 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 June 30, 2019, 481,924 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
June 30, 2019
December 31, 2018
(In millions of dollars)
Cash and Cash Equivalents
Cash and money market funds
$
32.2
$
22.9
Commercial paper
90.2
102.7
Total
$
122.4
$
125.6
Trade Receivables, Net
Billed trade receivables
$
178.9
$
179.5
Unbilled trade receivables
—
1.1
Trade receivables, gross
178.9
180.6
Allowance for doubtful receivables
(0.8
)
(0.8
)
Trade receivables, net
$
178.1
$
179.8
Inventories
Finished products
$
44.2
$
48.0
Work-in-process
98.5
85.6
Raw materials
81.0
75.0
Operating supplies
7.4
6.5
Total
$
231.1
$
215.1
Property, Plant and Equipment, Net
Land and improvements
$
21.4
$
21.4
Buildings and leasehold improvements
98.7
97.0
Machinery and equipment
783.6
755.6
Construction in progress
38.1
43.6
Property, plant and equipment, gross
941.8
917.6
Accumulated depreciation
(329.6
)
(307.4
)
Assets held for sale
1.6
1.6
Property, plant and equipment, net
$
613.8
$
611.8
Other Accrued Liabilities
Uncleared cash disbursements
$
3.5
$
4.8
Accrued income taxes and taxes payable
7.8
6.5
Accrued annual contribution to Salaried VEBA
—
2.1
Accrued interest
2.9
2.9
Other – Note 5
33.0
27.7
Total
$
47.2
$
44.0
11
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2019
December 31, 2018
(In millions of dollars)
Long-Term Liabilities
Workers' compensation accruals
$
25.9
$
24.6
Long-term environmental accrual – Note 7
12.6
14.3
Other long-term liabilities
24.7
27.5
Total
$
63.2
$
66.4
3. Leases
We determine whether 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 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, however, applied the practical expedient within ASU 2016-02 to not separate lease and non-lease components to 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 June 30, 2019:
Finance Leases
Operating Leases
Weighted-average lease term (in years):
6.4
10.8
Weighted-average discount rate:
4.4
%
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 June 30, 2019 (in millions of dollars):
Leases
Classification
June 30, 2019
Assets
Operating lease assets
Operating lease assets
$
26.8
Finance lease assets
Property, plant and equipment, net
6.9
Total lease assets
$
33.7
Liabilities
Current:
Operating lease liabilities
Other accrued liabilities
$
3.6
Finance lease liabilities
Other accrued liabilities
1.2
Non-current:
Operating lease liabilities
Long-term portion of operating lease liabilities
26.0
Finance lease liabilities
Long-term liabilities
5.7
Total lease liabilities
$
36.5
The following table summarizes the components of lease cost in our Statements of Consolidated Income for the periods presented (in millions of dollars):
Lease Cost
Quarter Ended
June 30, 2019
Six Months Ended
June 30, 2019
Operating lease cost
$
1.8
$
3.8
Short-term lease cost
0.2
0.5
Finance lease cost:
Amortization of leased assets
0.3
0.7
Interest on lease liabilities
0.1
0.2
Total lease cost
$
2.4
$
5.2
The following table presents the maturity of our lease liabilities as of June 30, 2019 (in millions of dollars):
Maturity of Lease Liabilities
Finance Leases
Operating Leases
Remainder of 2019
$
0.8
$
2.6
2020
1.4
4.9
2021
1.2
4.2
2022
1.1
3.6
2023
1.1
3.4
2024
0.8
3.3
2025 and thereafter
1.6
18.6
Total minimum lease payments
$
8.0
$
40.6
Less: interest
(1.1
)
(11.0
)
Present value
$
6.9
$
29.6
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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):