UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑K
x | Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2011 | |
or | |
o | 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: 001‑34741
NORANDA ALUMINUM HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 20‑8908550 |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
801 Crescent Centre Drive, Suite 600 Franklin, TN 37067 | 37067 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (615) 771‑5700
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, $0.01 par value | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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. Yes x No ¨
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 registrant’s 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ¨ No x
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing of the Common Stock on the NYSE on June 30, 2011 the last business day of the registrant’s most recently completed second fiscal quarter, was $354,230,580. For purposes of this response, the registrant has assumed that its directors, executive officers and beneficial owners of 5% or more of its Common Stock are the affiliates of the registrant. Indicate the number of shares outstanding of cash of the registrant’s classes of common stock as of the latest practicable date.
Class | Outstanding at March 7, 2012 |
Common Stock, $0.01 par value | 67,390,365 |
Documents Incorporated by Reference:
Portions of the Registrant’s definitive Proxy Statement for its 2012 Annual Meeting of Stockholders
are incorporated by reference into Part III hereof.
are incorporated by reference into Part III hereof.
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NORANDA ALUMINUM HOLDING CORPORATION
TABLE OF CONTENTS
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CAUTIONARY STATEMENT CONCERNING FORWARD‑LOOKING STATEMENTS
This report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements about future, not past, events and involve certain important risks and uncertainties, any of which could cause the Company's actual results to differ materially from those expressed in forward-looking statements, including, without limitation: the cyclical nature of the aluminum industry and fluctuating commodity prices, which cause variability in earnings and cash flows; a downturn in general economic conditions, including changes in interest rates, as well as a downturn in the end-use markets for certain of the Company's products; fluctuations in the relative cost of certain raw materials and energy compared to the price of primary aluminum and aluminum rolled products; the effects of competition in Noranda's business lines; Noranda's ability to retain customers, a substantial number of which do not have long-term contractual arrangements with the Company; the ability to fulfill the business's substantial capital investment needs; labor relations (i.e. disruptions, strikes or work stoppages) and labor costs; unexpected issues arising in connection with Noranda's operations outside of the United States; the ability to retain key management personnel; and Noranda's expectations with respect to its acquisition activity, or difficulties encountered in connection with acquisitions, dispositions or similar transactions.
Forward-looking statements contain words such as "believes," "expects," "may," "should," "seeks," "approximately," "intends," "plans," "estimates," or "anticipates" or similar expressions that relate to Noranda's strategy, plans or intentions. All statements Noranda makes relating to its estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to the Company's expectations regarding future industry trends are forward-looking statements. Noranda undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect management's current estimates, projections, expectations or beliefs. All forward-looking statements herein are based upon information available to us on the date of this report on Form 10-K.
Important factors that could cause actual results to differ materially from our expectations, which we refer to as cautionary statements, are disclosed herein under Item 1A "Risk Factors,". All forward-looking information in this report on Form 10-K and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by our cautionary statements. In light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report on Form 10-K may not in fact occur. Accordingly, investors should not place undue reliance on those statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
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Glossary of Selected Terms
"Noranda," the "Company," "we," "our," and "us" means collectively (1) Noranda Aluminum, Inc. and its subsidiaries on a consolidated basis prior to the consummation of the Apollo Acquisition and (2) Noranda HoldCo and its subsidiaries on a consolidated basis.
"2007 Revolver" means that certain six-year $250 million revolving credit facility pursuant to the 2007 Senior Secured Credit Facilities that Noranda AcquisitionCo entered into on May 18, 2007.
"2007 Senior Secured Credit Facilities" means the 2007 Revolver and the 2007 Term B Loan (defined below).
"2007 Term B Loan" means that certain seven-year term B loan with an original principal amount of $500 million pursuant to the 2007 Senior Secured Credit Facilities that Noranda AcquisitionCo entered into on May 18, 2007.
"2012 Refinancing" means the February 29, 2012 transactions by which we refinanced our 2007 Revolver and 2007 Term B Loan, as well as the related repayment of the remaining $78 million 2007 Term B Loan.
"2012 Revolver" means that certain five-year $250 million asset-based revolving credit facility pursuant to the 2012 Senior Secured Credit Facilities that Noranda AcquisitionCo entered into on February 29, 2012.
"2012 Senior Secured Credit Facilities" means, collectively, the 2012 Term B Loan (defined below) and the 2012 Revolver.
"2012 Term B Loan" means that certain seven-year term B loan with an original principle amount of $325 million pursuant to the 2012 Senior Secured Credit Facilities that Noranda AcquisitionCo entered into on February 29, 2012.
"2012 Tender Offer" means the transactions, pursuant to a "Dutch Auction" tender offer, by which the aggregate principal amount of AcquisitionCo Notes outstanding was decreased by $75 million on March 8, 2012.
"AcquisitionCo Notes" means our senior floating rate notes due 2015 issued by Noranda AcquisitionCo.
"Apollo" means investment funds affiliated with, or co-investment vehicles managed indirectly by, Apollo Management L.P., including Apollo Investment Fund VI, L.P., along with its parallel investment funds.
"Apollo Acquisition" means the May 18, 2007 acquisition by Apollo of the Noranda aluminum business of Xstrata.
"Apollo Transactions" means collectively the Apollo Acquisition and the related financings.
"Century" means Century Aluminum Company together with its subsidiaries.
"CORE" means Cost-Out Reliability and Effectiveness, the Company’s productivity program.
"CRU" means CRU International Limited, an independent consulting group focused in part on the mining and metal sectors.
"DMT" means dry metric tonnes.
"Downstream Business" means our Flat-Rolled Products reportable segment consisting of four rolling mill facilities.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FIFO" means the first-in, first-out method of valuing inventory.
"GOJ" means the Government of Jamaica.
"Gramercy" means our wholly owned alumina refinery in Gramercy, Louisiana.
"HoldCo Notes" means our senior floating rate notes due 2014 issued by Noranda HoldCo.
"Joint Venture Transaction" means the transaction, consummated on August 31, 2009, whereby Noranda became sole owner of Gramercy and St. Ann.
"KMts" means kilometric tonnes.
"LIFO" means the last-in, first-out method of valuing inventory.
"LME" means the London Metals Exchange.
"Midwest Transaction Price" or "MWTP" is equal to the LME price of primary aluminum plus a Midwest premium.
"NBL" means Noranda Bauxite Limited, a Jamaican private limited company and wholly owned subsidiary of Noranda HoldCo.
"New Madrid" means our aluminum smelter near New Madrid, Missouri.
"NJBP" means Noranda Jamaica Bauxite Partnership, a Jamaican partnership owned 51% by the GOJ and 49% by NBL.
"Net Cash Cost" means our integrated net cash cost to produce a pound of primary aluminum, including the benefits of the Midwest premium, as well as the profit margin realized from value-added, alumina and bauxite sales to external customers.
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"Noranda 2007 Long-Term Incentive Plan" means the Amended and Restated Noranda Aluminum Holding Corporation 2007 Long-Term Incentive Plan.
"Noranda 2010 Incentive Award Plan" means the Noranda Aluminum Holding Corporation 2010 Incentive Award Plan.
"Noranda AcquisitionCo" means Noranda Aluminum Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Noranda HoldCo, excluding its subsidiaries.
"Noranda HoldCo" means Noranda Aluminum Holding Corporation, a Delaware corporation, excluding its subsidiaries.
"Notes" means, collectively, the AcquisitionCo Notes and the HoldCo Notes.
"Predecessor" means financial information (including results of operations, cash flows and financial information) for the periods from August 16, 2006 to December 31, 2006 and from January 1, 2007 to May 17, 2007, and as of December 31, 2006 for Noranda Aluminum, Inc. on a basis reflecting the stepped-up values of Noranda Aluminum, Inc. prior to the Apollo Acquisition, but subsequent to the Xstrata Acquisition.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Dividend" means the June 2007 dividend of $216.1 million paid to Noranda stockholders, along with the related financing.
"St. Ann" means our bauxite mining operation in Jamaica.
"Successor" means financial information (including results of operations, cash flows and financial information) for the period from May 18, 2007 to December 31, 2007, as of December 31, 2007, and as of and for the years ended December 31, 2008, 2009 and 2010 for Noranda on a basis reflecting the impact of the purchase allocation of the Apollo Acquisition.
"Upstream Business" means, collectively, our three reportable segments: Primary Aluminum, Alumina and Bauxite. These segments consist of the New Madrid, Missouri aluminum smelter, the Gramercy, Louisiana alumina refinery and the St. Ann, Jamaica bauxite mine.
"U.S. GAAP" means generally accepted accounting principles in the United States.
"Xstrata" means Xstrata (Schweiz) AG.
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PART I
ITEM 1. | BUSINESS |
Except as otherwise indicated herein or as the context otherwise requires, references in this report to (a) "Noranda HoldCo" refer only to Noranda Aluminum Holding Corporation, a Delaware corporation, excluding its subsidiaries, (b) "Noranda AcquisitionCo" refer only to Noranda Aluminum Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Noranda HoldCo, excluding its subsidiaries, and (c) "Noranda," the "Company," "we," "our," and "us" refer collectively to (1) Noranda Aluminum, Inc. and its subsidiaries on a consolidated basis prior to the Apollo Acquisition, and (2) Noranda HoldCo and its subsidiaries on a consolidated basis after the completion of the Apollo Acquisition. "HoldCo Notes" refer to our senior floating rate notes originally due 2014 issued by Noranda HoldCo, and "AcquisitionCo Notes" refer to senior floating rate notes due 2015 issued by Noranda AcquisitionCo.
Overview
We are a leading North American integrated producer of value-added primary aluminum and high quality rolled aluminum coils. We have two businesses: our upstream business and downstream business. Our upstream business consists of three reportable segments: Primary Aluminum, Alumina, and Bauxite. These three segments are closely integrated and consist of a smelter near New Madrid, Missouri, which we refer to as "New Madrid," and supporting operations at our bauxite mine and alumina refinery. In 2011, New Madrid produced approximately 583 million pounds (264,000 metric tonnes) of primary aluminum, representing approximately 13% of total 2011 U.S. primary aluminum production, based on statistics from CRU. Our downstream business comprises our Flat-Rolled Products segment, which is one of the largest aluminum foil producers in North America and consists of four rolling mill facilities with a combined maximum annual production capacity of 410 to 495 million pounds, depending on production mix.
Our upstream business is one of the largest U.S. producers of primary aluminum. We believe our combination of captive alumina and bauxite, a secure electric power contract and strategically located assets give us meaningful operational flexibility. Our bauxite mining operation in St. Ann, Jamaica provides a secure source of bauxite to our wholly owned alumina refinery in Gramercy, Louisiana. Gramercy provides a strategic supply of alumina to our New Madrid smelter at costs below recent spot market prices for alumina. Because our captive alumina and bauxite production capacity exceeds our internal requirements, we also sell these raw materials to third parties. The margin from these sales effectively lowers the cost of our alumina supply and therefore lowers our integrated net cash cost to produce primary aluminum ("Net Cash Cost"). In addition, we have a long-term, secure power contract at New Madrid that extends through 2020. We believe this contract gives Noranda an advantage over aluminum smelters facing frequent power shortages or disruptions. In addition, our power costs are not linked to London Metals Exchange aluminum prices (or "LME prices"), unlike the power costs of some of our competitors, particularly in North America.
In addition to providing security of supply, we believe our fully integrated upstream cost structure benefits us in an environment of rising aluminum prices. The cost of our supply of alumina, which we own, is positively affected by a rising LME price due to our realization of higher margins on third-party sales of alumina and bauxite.
Primary aluminum is a global commodity and its price is set on the LME. Due to a long-term domestic supply deficit in the U.S. and transportation costs, our primary aluminum products typically earn a Midwest premium on top of the LME price, the sum of which is known as the Midwest Transaction Price, or the "MWTP." In addition, we typically sell a majority of our primary aluminum shipments in the form of value-added products, such as billet, rod and foundry, which include a fabrication premium over the MWTP. We also have the flexibility to direct primary aluminum volumes to our downstream rolling mills, on an arm's-length basis, when demand is weak for our value-added end-products. This helps to ensure a standby demand for our upstream production.
Our downstream business is a low-cost domestic producer of aluminum rolled products. We own and operate four rolling mills, including the West plant in Huntingdon, Tennessee, which is recognized as one of the most advanced rolled aluminum production facilities in North America. Versatile manufacturing capabilities and advantageous geographic locations provide our rolling mills with the flexibility to serve a diverse range of end-users. We believe that this flexibility, when combined with our strong customer service capabilities, product quality and strategic sales support, has allowed our downstream business to gain share of demand in 2009 and retain demand share through 2011.
The downstream business prices its products at the MWTP plus a fabrication premium; therefore, our profitability is largely insulated from movement in aluminum prices except in periods of rapid change, which could create significant differences between the cost of metal purchased and the price of metal sold to customers. As a result, the downstream business’s performance is predominantly driven by fluctuations in volumes and the fabrication premiums we are able to achieve. During periods of difficult market conditions in our downstream business, we have the ability to scale back meaningfully on capital expenditures, such as in 2009, when we reduced our capital expenditures by 58% versus 2008. We believe that the nominal maintenance capital requirements combined with operating performance that is substantially insulated from aluminum price fluctuations make the downstream business a relatively effective vehicle for free cash flow generation. The geographic proximity of the facilities in our upstream and downstream businesses creates a further degree of vertical integration, providing for additional operational flexibility.
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Company History
The Apollo Acquisition. Noranda HoldCo and Noranda AcquisitionCo were formed on March 27, 2007 by investment funds affiliated with, or co-investment vehicles managed indirectly by, Apollo Management, L.P., including Apollo Investment Fund VI, L.P. (collectively "Apollo"), along with its parallel investment funds, to acquire a portion of the aluminum business of Xstrata (Schweiz) AG ("Xstrata"). The Apollo Acquisition was completed on May 18, 2007, when Noranda AcquisitionCo acquired the stock of a subsidiary of Xstrata that held the Noranda aluminum business.
Upon completion of the Apollo Acquisition, Apollo and certain members of management became the owners of all of the outstanding equity interests of Noranda HoldCo. Noranda AcquisitionCo is a wholly owned subsidiary of Noranda HoldCo.
The Joint Venture Transaction. On August 31, 2009, we completed a transaction, which we refer to as the "Joint Venture Transaction," whereby we became the sole owner of the alumina and bauxite production joint ventures, Gramercy and St. Ann, respectively, that we had operated since 2004 with Century Aluminum Company (together with its subsidiaries, "Century"). In consideration for its ownership share, Century was forgiven certain liabilities to the alumina joint venture and was released from all agreements and obligations of the joint ventures. In addition, as part of the Joint Venture Transaction, we agreed to sell to Century approximately 190,500 metric tonnes of alumina through 2010, with the first 125,000 metric tonnes sold at a fixed price and the reminder sold at prices indexed to the LME price.
Primary Metal — Upstream Business
Business Overview. The upstream business is vertically integrated with operations in bauxite mining, alumina and aluminum smelting. The process of making aluminum is power intensive and requires a large amount of alumina (aluminum oxide), which is derived from the raw material bauxite. Approximately four pounds of bauxite are required to produce approximately two pounds of alumina, and two pounds of alumina will produce approximately one pound of aluminum.
New Madrid Primary Aluminum Smelter. All of our primary aluminum production occurs at New Madrid, which produced approximately 583 million pounds (264,000 metric tonnes) of primary aluminum during 2011. New Madrid is strategically located as the closest Midwest facility to a supply of alumina. It is also located in an area with abundant sources of electrical power. See "Raw Materials and Supply" below. The smelter was built in 1971 and underwent significant capacity expansions in 1976, 1983 and 2001.
During late 2010, we re-launched a project to expand the aluminum production capacity at our New Madrid smelter at a remaining cost of $38 million. (That project had been suspended during the 2008-2009 economic downturn.) Once complete, we expect this project to increase the smelter's annual metal production by approximately 35 million pounds through a combination of additional rectifiers and upgraded equipment allowing for increased amperage of electricity and more efficient utilization.
We expect to see incremental capacity increases coming on-line beginning in 2013 and to be completed in 2014. Since re-launching the project, we have spent $7.7 million. We anticipate the remaining capital spending to be incurred primarily in 2012 and 2013.
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The smelter is located aside the Mississippi River near New Madrid, Missouri. It occupies 250 acres, including 44 acres under roof, of the 4,200 acre St. Jude Industrial Park, the largest industrial park in the State of Missouri. Noranda owns and manages approximately 2,600 acres of the St. Jude Industrial Park, providing us land for either expansion or sale to prospective investors.
The smelter is fully integrated with its own raw material unloading facility, environmental control systems and aluminum reduction plant, including carbon anode fabrication. New Madrid has three production lines. This diversity of lines facilitates the maintenance of steady production levels near full capacity and, in rare instances of severe production threats, helps insulate us from complete plant shutdowns.
The plant site also includes a fabrication facility for the production of continuous cast rod, extrusion billet and foundry ingot. This business converts molten aluminum into value-added products. During 2011, approximately 60% of our value-added products were sold at the prior month’s MWTP plus a fabrication premium.
The fabrication facility has the capacity to produce annually approximately 160 million pounds of rod, used mainly for electrical applications and steel de-oxidation; 286 million pounds of extrusion billet, used mainly for building construction and architectural and transportation applications; and 75 million pounds of foundry ingot, used mainly for transportation. During 2011, based on CRU data, New Madrid supplied approximately 29% of the rod and 13% of the extrusion billet produced in North American primary smelter cast-houses. Molten aluminum that is not used in these product lines is produced as primary or value-added ingots for use in aerospace applications, for transfer to our downstream business or sale to other aluminum fabricators.
Source: Company data for the year ended December 31, 2011
Raw Materials and Supply. Energy and alumina are the main cost components for primary aluminum production.
Raw Materials
Our upstream business is fully integrated from bauxite to alumina to primary aluminum metal, ensuring security of raw material supply at long-term competitive costs. Our aluminum smelter in New Madrid, Missouri receives substantially all of its alumina requirements from Gramercy. We believe New Madrid has a freight cost advantage relative to other smelters because of the proximity of Gramercy to St. Ann and New Madrid to Gramercy. We believe our strategic location allows New Madrid to source its alumina from Gramercy at a lower freight cost than other U.S. based smelters.
Gramercy Alumina Refinery. At the Gramercy refinery, bauxite is chemically refined and converted into alumina, the principal raw material used in the production of primary aluminum. Extensive portions of the Gramercy refinery were rebuilt from 2000 through 2002. Gramercy has an annual production capacity of 1.2 million metric tonnes of alumina, approximately 45% of which is supplied to our New Madrid facility. The Gramercy refinery is the source for the vast majority of New Madrid’s alumina requirements. New Madrid purchases alumina from time to time from third parties, but the quantities are minimal. The remaining alumina production at the Gramercy refinery that is not taken by New Madrid is sold in the form of smelter grade alumina and alumina hydrate, or chemical grade alumina, margins on which effectively reduce the cost of New Madrid’s alumina supply.
St. Ann Bauxite Mine. Bauxite is the principal raw material used in the production of alumina and all of the bauxite used at our Gramercy refinery is purchased from St. Ann. We transport Bauxite from St. Ann to Gramercy by oceangoing vessels. We have a contract which extends through December 2015 with a third party for bauxite ocean vessel freight. During the years ended December 31, 2011, 2010 and 2009, St. Ann mined 4.6 million, 4.6 million and 3.2 million dry metric tonnes ("DMT") of bauxite, respectively.
We operate the St. Ann bauxite mine through Noranda Bauxite Limited ("NBL"), a Jamaican limited liability company formerly known as St. Ann Bauxite Limited. NBL’s Bauxite mining assets consist of: (1) a concession from the Government of Jamaica, or "GOJ,"
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to mine bauxite in Jamaica through 2030 and (2) a 49% interest in Noranda Jamaica Bauxite Partnership, or "NJBP," which holds the physical mining assets and conducts the mining and related operations pursuant to the concession. The GOJ owns the remaining 51% of NJBP.
During 2010, we began contracting a substantial portion of our bauxite mining out to third party contractors, who supply their own mining equipment. The remaining physical mining assets consist primarily of rail facilities, other mobile equipment, dryers and loading and dock facilities. The age and remaining lives of the mining assets vary and they may be repaired or replaced from time to time as part of NJBP’s ordinary capital expenditure plan.
Under the terms of the GOJ concession, NJBP mines the land covered by the concession and the GOJ retains surface rights and ownership of the land. The GOJ granted the concession and entered into other agreements with NBL for the purpose of ensuring that we have sufficient reserves to meet our annual alumina requirements. The concession ensures access to sufficient reserves to allow NBL to ship 4.5 million DMT of bauxite annually from mining operations in the specified concession area through September 30, 2030. We have reached agreement with the GOJ, giving us the option to mine over the 4.5 million DMT concession and up to 5.4 million DMT during 2012.
The GOJ is required to provide additional concessions if the specified concession does not contain sufficient quantities of commercially exploitable bauxite. NBL is responsible for reclamation of the land that it mines. The outstanding reclamation liability at December 31, 2011 was $4.6 million.
Pursuant to an establishment agreement that governs the relationship between NBL and the GOJ, NBL manages the operations of the partnership (NJBP), pays operating costs and is entitled to all of its bauxite production. NBL pays the GOJ according to a negotiated fiscal structure, which consists of the following elements: (i) a royalty based on the amount of bauxite mined, (ii) an annual "asset usage fee" for the use of the GOJ’s 51% interest in the mining assets, (iii) customary income and other taxes and fees, (iv) a production levy, which was waived for certain historical periods, but which is applicable in 2009 and future periods, and (v) certain fees for lands owned by the GOJ that are covered by the concession. In calculating income tax on revenues related to sales to our Gramercy refinery, NBL uses a set market price, which is negotiated periodically between NBL and the GOJ. At the end of 2009, we and the GOJ reached an agreement setting the fiscal regime structure for NBL’s bauxite mining operations through December 31, 2014. The agreement covers the fiscal regime, as well as NBL’s commitment for certain expenditures for haulroad development, maintenance, dredging, land purchases, contract mining, training and other general capital expenditures from 2009 through 2014. If we do not meet our commitment to the GOJ regarding these expenditures, we would owe to the GOJ a penalty that could be material to our consolidated financial statements. We believe there is a remote possibility that we will not meet the commitment. We signed the formal amendment with the GOJ on the fiscal structure in June 2010, which did not change the cost structure from the agreement reached in 2009. The terms of the agreement required us to make a $14.0 million prepayment of Jamaican income taxes for fiscal years 2011 through 2014, of which $10.0 million was paid in June 2010 and the remainder was paid in April 2011.
Energy
Electrical Power. The smelter is located in an area with abundant sources of electrical power. New Madrid has a power purchase agreement with Ameren Missouri, Missouri’s largest electric utility ("Ameren"), pursuant to which New Madrid has agreed to purchase substantially all of its electricity from Ameren through May 2020. This contract is for regulated power and cannot be altered without the approval of the Missouri Public Service Commission ("MoPSC").
On September 3, 2010, Ameren filed a new rate case with the MoPSC seeking an 11% base rate increase. In July 2011, the MoPSC ruled on this rate case approving Ameren to increase its base rates, which increased our base rate by 5.2% effective July 31, 2011. On February 3, 2012, Ameren filed a new rate case with the MoPSC seeking a 14.6% base rate increase. As we have been in previous rate cases, we expect to be an active participant in the MoPSC rate setting process. We expect a ruling on this request by January 3, 2013. Any increase approved would be effective at the beginning of the month following the MoPSC's ruling.
We are currently a party to the appeal of several rate-related issues, including rate increases approved by the MoPSC in January 2009, May 2010, and July 2011, and the amount of cost increases related to the FAC. Despite these appeals, our consolidated financial statements reflect our payment of power costs at the enacted rates, with disputed amounts held in escrow by the Missouri Circuit Court. As of December 31, 2011 and 2010, other current assets (see Note 3, "Supplemental Financial Statement Information" to our consolidated financial statements) included $30.1 million and $9.8 million, respectively, for amounts held in escrow related to these appeals, with corresponding liabilities recorded in accrued liabilities.
On November 7, 2011, the Missouri Court of Appeals issued a decision to uphold the MoPSC's January 2009 rate increase approval. The parties to the appeal, including Noranda, are evaluating whether to request rehearing of the Court of Appeals' decision or to appeal that decision to the Missouri Supreme Court. If the parties decide not to file additional appeals, or if such appeals are filed and are not successful, a substantial portion of the escrowed funds will be released to Ameren. At December 31, 2011, such amount of released funds would have been $20.8 million. The release of these funds will not result in any impact to our operating results, our net working capital, or our net assets.
Natural Gas. Our Gramercy refinery has a contractual relationship with Atmos Energy Marketing, LLC ("Atmos") for the supply of its full natural gas requirement on a delivered basis via the three natural gas pipelines that connect directly into the Gramercy facility.
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The Atmos contract provides for a secure supply of natural gas at a price based on the Henry Hub Index plus transportation and pipeline costs. In addition, our contract with Atmos provides security in case of a short-term supply emergency (such as a hurricane or other force majeure situation), by granting Gramercy the option, at an established premium, to obligate Atmos to utilize its storage assets to supply Gramercy's full natural gas supply requirements. At December 31, 2011, we were a party to forward swaps for natural gas, effectively fixing our cost for approximately 45% of our natural gas exposure through 2012 at an average price of $7.37 per million BTU.
Fuel. Fuel is a substantial component of the cost structure at our St. Ann bauxite mine and is generally linked to the price of oil. The Pricing Index is based on the Platts Oilgram Price Reports, plus an adder for transportation and handling. The facility uses two types of oils. Bunker C or heavy fuel oil is supplied by Clark Oil Trading Company and diesel fuel is supplied by Petrojam, the local refinery. The St. Ann Bauxite mine has the ability to receive its fuel by ocean going vessel and from multiple suppliers.
Competition. The market for primary aluminum is diverse and highly competitive. We believe that we compete on the basis of price, quality, timeliness of delivery and customer service, with our focus on the latter three areas. We also compete on a global basis with other producers and other materials on the basis of production cost. The marginal cost of these producers, who are in the highest cost quartile, is one factor in determining the market price for aluminum. Aluminum also competes with other materials such as steel, plastic, copper, titanium and glass, based upon functionality and relative pricing.
Sales and Marketing. We employ a sales force consisting of inside and outside salespeople. Inside salespeople are responsible for maintaining customer relationships, receiving and soliciting individual orders and responding to service and other inquiries by customers. Our outside sales force is responsible for identifying potential customers and calling them to explain our services, as well as maintaining and expanding our relationships with our current customers. The sales force is trained and knowledgeable about the characteristics and applications of various metals, as well as the manufacturing methods employed by our customers.
Our sales and marketing focus is on the identification of original equipment manufacturers, or "OEMs," and other metals end-users that could achieve significant cost savings through the use of our inventory management, value-added processing, just-in-time delivery and other services. We use a variety of methods to identify potential customers, including the use of databases, direct mail and participation in manufacturers’ trade shows. Customer referrals and the knowledge of our sales force about regional end-users also result in the identification of potential customers. Once a potential customer is identified, our outside salespeople assume responsibility for visiting the appropriate customer contact, typically the vice-president of purchasing or operations and business owners.
All of our value-added (billet, foundry, rod) sales are on a negotiated price basis. In some cases, sales are the result of a competitive bid process where a customer provides a list of products, along with requirements, to us and several competitors and we submit a bid on each product.
Customers. During 2011, approximately 50% of the bauxite from St. Ann was shipped to our Gramercy refinery, and the majority of the remainder was sold to Sherwin Alumina Company pursuant to a contract through 2012. Beginning in 2011, pricing of the Sherwin contract is based on a percentage of LME, limited by certain ceilings and floors. The margins from these third-party sales effectively reduce the net cost of bauxite transferred to Gramercy.
During 2011, approximately 45% of the alumina from Gramercy was shipped to our New Madrid smelter, and the remainder was sold to third parties. The margins from these third-party sales effectively reduce the net cost of alumina transferred to New Madrid. In 2011, our ten largest alumina customers represented 60% of that segment's sales. Alumina sales to one customer represented almost 10% of our consolidated net sales during 2011. The contract with this customer extends through 2015 with prices based on a percentage of LME.
Our target customers in the Primary Aluminum segment are located in the midwestern United States and Mexico, with 78% of loads delivered to these customers within a one-day truck delivery distance. We have a diverse customer base in our Primary Aluminum segment, with no single customer accounting for more than 10% of our consolidated net sales in each of the last three full fiscal years. In 2011, our ten largest primary aluminum customers represented 45% of that segment's sales.
Rolling Mills — Downstream Business
Business Overview. Our downstream business is an integrated manufacturer of aluminum foil and light sheet. Our rolling mills are located in the southeastern United States, in Huntingdon, Tennessee, Salisbury, North Carolina and Newport, Arkansas, with a combined maximum annual production capacity of 410 to 495 million pounds, depending on our production mix. Our products include heavy gauge foil products such as finstock and semi-rigid container stock, light gauge converter foils used for packaging applications, consumer foils and light gauge sheet products such as transformer windings and building products. We primarily sell our products to OEMs of air conditioners, transformers, semi-rigid containers and foil packaging, most of whom are located in the eastern and central part of the United States. Our plants are well situated to serve these customers and approximately 64% of deliveries are within a one-day truck delivery distance, resulting in freight savings and customer service benefits. Versatile manufacturing capabilities and advantageous geographic locations provide our rolling mills the flexibility to serve a diverse range of end uses while maintaining a low cost base.
The Huntingdon site has ISO 9001-2000 certification from the International Organization for Standardization with regards to its quality management system. A description of the products produced at our four rolling mill facilities follows:
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Plant | Location | Maximum capacity | Products |
(in millions of pounds) | |||
Huntingdon – West | Huntingdon, TN | 235 | Finstock, container stock, intercompany re-roll and miscellaneous heavy gauge products |
Huntingdon – East | Huntingdon, TN | 130 | Finstock, transformer windings, household foil, and miscellaneous heavy gauge products |
Salisbury | Salisbury, NC | 95 | Finstock, light-gauge, intercompany re-roll and miscellaneous heavy gauge product |
Newport | Newport, AR | 35 | Light gauge products including flexible packaging |
Total | 495(1) | ||
(1) | Capacity includes intercompany re-roll. Effective annual capacity is 410 million pounds based on production mix at December 31, 2011. |
Products. Aluminum foil has several outstanding characteristics that account for a wide range of commercial applications:
Ÿ | long life — the aluminum surface has a natural hard, transparent layer of oxide which substantially precludes further oxidation; |  |
Ÿ | high electrical and thermal conductivity; | |
Ÿ | non-toxic and non-absorbent; | |
Ÿ | excellent moisture barrier even at thicknesses less than the diameter of a human hair; | |
Ÿ | light weight; | |
Ÿ | highly reflective and attractive in appearance; | |
Ÿ | "dead fold" for packaging applications; | |
Ÿ | the most plentiful metal in the earth's crust; | |
Ÿ | the most recycled packaging material in the world; and | |
Ÿ | attractive cost-to-weight ratio compared to other metals such as copper and tin. | |
We have a variety of distinctive product and service capabilities, providing us with a strong competitive position. Our main product lines are the following:
Finstock: Bare or coated aluminum foil and sheet ranging in gauge from 0.002 inches to 0.007 inches is widely used as a heat exchanger in air conditioners because it provides more heat transfer area per unit of cost than any other material. Aluminum sheet and foil finstock are used in commercial, residential and automotive applications.
Semi-Rigid Containers: These products are typically made with harder alloys than finstock, although the range of gauges is similar, encompassing both foil and light sheet. Formed, disposable aluminum containers are among the most versatile of all packages and are widely used for pre-packaged foods, easily withstanding all normal extremes of heating and freezing.
Flexible Packaging: Aluminum foil is laminated to papers, paperboards and plastic films to make flexible and semi-rigid pouches and cartons for a wide range of food, drink, agricultural and industrial products. The laminating process is known as "converting," hence the term "converter foil" for rolled aluminum products used in this application.
Transformer Windings: Aluminum sheet cut into strips and insulated is widely used as the conducting medium that forms the windings of electrical transformers widely used on power grids. Aluminum’s relatively low cost is key to this application.
We price our products at the MWTP plus a negotiated fabrication premium. The cost of primary metal is passed through to customers; therefore, our profitability is largely insulated from movement in aluminum prices except in periods of rapid change, which could create significant differences between the cost of metal purchased and the price of metal sold to customers. We seek to maximize profitability by optimizing both the mix of rolled products produced and the prime-to-scrap ratio in our metal feed. During 2011, approximately 12% of our primary aluminum production was shipped to our rolling mills. Historically, approximately 20% of our primary aluminum production is shipped to our rolling mills, providing security of supply, and allowing us to take advantage of short-term surges in demand.
Raw Materials and Supply. The principal raw materials that we use in rolled products manufacturing include primary aluminum sourced from various smelters, and discounted metal units, usually scrap or recycled scrap ingot, as well as alloying elements. The downstream business purchased 351 million pounds of metal (including purchases from New Madrid) during 2011. These raw materials are generally available from several sources and are not subject to supply constraints under normal market conditions. We also consume considerable amounts of energy in the operation of our facilities, which is a significant component of our non-metal conversion costs.
In the downstream business, natural gas and electricity represent the substantial majority of our energy consumption. We purchase our natural gas on the open market with short to medium term supply contracts and agreements for key transportation requirements. See
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Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures about Market Risk" for a summary of the price and quantity of natural gas hedging contracts.
Electricity is purchased through medium-term contracts at industrial rates from regional utilities supplied through local distributors. Supply has been reliable at all plants.
Competition. The aluminum rolled products market is highly competitive. We face domestic competition from a number of companies in the markets in which we operate. Our primary competitors are J.W. Aluminum Company, Aleris International Inc. and Novelis North America. Some of our competitors are substantially larger, have more diversified operations, and compete in product lines in which we do not operate. We also face competition from imports, mainly from Asia. The factors influencing competition vary by region and end-use, but we generally compete on the basis of price, product quality, the ability to meet customers’ specifications, range of products offered, lead times, technical support and customer service.
In addition to competition from within the aluminum rolled products industry, the industry faces competition from non-aluminum materials. In the packaging market, aluminum rolled products’ primary competitors are plastics and cardboard. However, for our largest market, usage of aluminum finstock is well entrenched because we believe no other material offers more favorable economics. Factors affecting competition with substitute materials include technological innovation, relative prices, ease of manufacture, consumer preference and performance characteristics.
Sales and Marketing; Customers. Our sales force consists of inside and outside salespeople. Our outside sales force is primarily responsible for identifying potential customers and calling on them to negotiate profitable business and handling any subsequent issues that may arise. Inside salespeople are primarily responsible for maintaining customer relationships, receiving and soliciting individual orders and responding to service and other inquiries by customers. The sales force is trained and knowledgeable about the characteristics and applications of our various products, as well as our manufacturing methods and the end-use markets in which our customers are involved.
Our sales and marketing focus is on servicing OEMs who are major participants in the markets where our products are used as inputs. However, our staff participates in industry groups and attends trade shows in order to keep abreast of market developments and to identify potential new accounts. Once a potential new customer is identified, our outside salespeople assume responsibility for visiting the appropriate customer contact, typically the purchasing manager or manager of operations, to explore and develop business opportunities.
Nearly all business is conducted on a negotiated price basis, with a few sales made at list prices, typically to smaller accounts.
Our downstream business has a diverse customer base, with no single customer accounting for more than 10% of our consolidated net sales in each of the last three years. In 2011, our ten largest Flat-Rolled Products customers represented 53% of that segment's sales.
Facilities. We operate four plants at three locations in the southeastern United States and our divisional offices, which consist of leased office space aggregating to approximately 30,000 square feet, are located at our Corporate headquarters in Franklin, Tennessee.
Huntingdon. Our largest production site is in Huntingdon, Tennessee, with a maximum annual capacity of up to 365 million pounds, depending on production mix. The Huntingdon site is subject to a long-term lease arrangement with the Industrial Development Board of the Town of Huntingdon, pursuant to which we functionally own the facility and can acquire legal title for the nominal sum of $100. The site includes a long established casting and rolling facility which was built in 1967 and acquired from Archer Aluminum by Noranda in 1979, which we refer to as the East plant. Construction began on a second plant in 1998 and production started in 2000 at a capital cost of $238 million, which we refer to as the West plant. The two plants are physically separate, but are operated with shared administration and maintenance personnel, and with some sharing of production capabilities. According to CRU, the Huntingdon ‑ West facility is one of the most advanced rolled aluminum production facilities in North America, and has the lowest conversion cost (excluding metal) for foil stock production in North and South America.
Salisbury. This plant was originally constructed in 1965 and has a maximum annual capacity of up to 95 million pounds, depending on production mix. The Salisbury plant is a major U.S. producer of intermediate width light gauge product (less than 0.001 inches thickness), typically sold to customers who laminate the foil with paper, plastic or cardboard used in flexible packaging applications such as juice boxes.
Newport. The Newport plant is a rolling and finishing operation only and relies on intermediate gauge "reroll" supplied by Salisbury or Huntingdon. The Newport plant has a maximum annual capacity of up to 35 million pounds, depending on production mix.
Employees
As of December 31, 2011, we employed approximately 2,500 persons, of which approximately 69% were union members.
We are a party to 6 collective bargaining agreements, all of which expire within the next five years. Our collective bargaining agreements are with the following unions: the United Steelworkers of America ("USWA"); the International Association of Machinists and Aerospace Workers ("IAMAW"); the University and Allied Workers Union ("UAWU"); and the Union of Technical, Administrative and Supervisory Personnel ("UTASP"). We have recently completed the process of formalizing recognition of a third union at St. Ann with the Bustamante Industrial Trade Union ("BITU").
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• | During third quarter 2011, we finalized the terms of a three-year agreement with the UAWU at St. Ann which will extend through April 30, 2013. This agreement covers the majority of our Jamaican workforce. |
• | The agreement at St. Ann with the UTASP expired in December 2010. A claim for a new contract was received in June 2011. Negotiations regarding the terms of a new agreement are on going. |
• | With the recent formalization of the BITU at St. Ann, approximately 90% of our St. Ann workforce is represented by a union. |
• | The agreement with the IAMAW at our Newport rolling mill expired in May 2011, and on June 1, 2011, a new three-year labor agreement went into effect. |
• | The five year contract in place with the USWA, representing our unionized employees at the New Madrid smelter will expire in August 2012. This contract covers approximately 80% of our New Madrid workforce. |
• | The three-year contract in place with the USWA, representing our unionized employees at the Salisbury rolling mill will expire in November 2012. This contract covers approximately 88% of our Salisbury workforce. |
From time to time, there are shortages of qualified operators of metals processing equipment. In addition, during periods of low unemployment, turnover among less-skilled workers can be relatively high. We believe that our relations with our employees are satisfactory.
Safety
We believe ensuring the safety of our workforce is our number one accountability as an employer. We are committed to continuing and improving upon each facility’s focus on safety in the workplace. We have a number of safety programs in place, which include regular bi-weekly safety meetings and training sessions to teach proper safe work procedures.
Our executive management, along with site managers and union leadership, are actively involved in supporting and promoting the ongoing emphasis on workplace safety. Improvement in safety performance is a key metric used in determining annual incentive awards for our U.S. employees.
Research and Development
We do not incur material expenses in research and development activities but from time to time participate in various research and development programs. We address research and development requirements and product enhancement by maintaining a staff of technical support, quality assurance and engineering personnel.
Additional Information
Noranda Aluminum Holding Corporation was incorporated in Delaware on March 27, 2007. We file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov.
You may obtain copies of the information and documents incorporated by reference in this report at no charge by writing or telephoning us at the following address or telephone number:
Noranda Aluminum Holding Corporation
801 Crescent Centre Drive, Suite 600
Franklin, TN 37067
Attention: Robert Mahoney
Chief Financial Officer
(615) 771‑5700
We also maintain an Internet site at http://www.norandaaluminum.com. We will, as soon as reasonably practicable after the electronic filing of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports if applicable, make available such reports free of charge on our website. Our website and the information contained therein or connected thereto is not incorporated into this annual report.
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ITEM 1A. RISK FACTORS
You should carefully consider the risk factors set forth below as well as the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks described below are not the only risks we face. Additional risks not presently known to us or which we currently consider immaterial also may adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition and operating results could be materially adversely affected. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
Cyclical fluctuations in the primary aluminum industry cause variability in our earnings and cash flows.
Our operating results depend on the market for primary aluminum, a cyclical commodity whose prices have historically been volatile, as illustrated in the chart below:
Primary aluminum prices are subject to regional and global market forces of supply and demand and other related factors. Such factors include production activities by competitors, production costs in major production regions, economic conditions, interest rates, non-market political pressures, speculative activities by market participants, and currency exchange and interest rates. Extended phases of industry overcapacity may result in a weak pricing environment and margin compression for aluminum producers, including Noranda.
Our significant cost components, specifically our supply of alumina, which we own, and our New Madrid power contract are not tied to the LME price of aluminum. As a result, as the LME price decreases, absent corresponding decreases in other raw material input costs, our profit margins may suffer which could materially and adversely affect our business, financial condition, results of operations and cash flows.
Although we have at times hedged our exposure to the volatility of LME prices since the Apollo Acquisition, we currently have no such hedges in place. We are under no obligation under our senior secured credit facilities, our AcquisitionCo Notes or otherwise to enter into further hedging arrangements. If we do not undertake further hedging activities, we will continue to have price risk with respect to the unhedged portion of our primary aluminum shipments. A prolonged downturn in prices for primary aluminum products could significantly reduce the amount of cash available to us to meet our current obligations and fund our long-term business strategies. In addition, we may enter into new hedging arrangements in the future, which may not be beneficial, depending on subsequent LME price changes, and could materially and adversely affect our business, financial condition, results of operations and cash flows. For additional information regarding our hedging activities, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
A downturn in general economic conditions, as well as a downturn in the end-use markets for certain of our products, could materially and adversely affect our business, financial condition, results of operations and cash flows.
Historically, demand for primary aluminum has been highly correlated to general economic and market conditions in the United States and other major global economies, including China. As demonstrated by the global recession and credit crisis that began in late 2007 and continued through much of 2009 a sustained decline in either the United States or global primary aluminum market would have a negative impact on our business, financial condition, results of operations and cash flows.
The substantial majority of our products are delivered to destinations in the United States. However, adverse changes in economic
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conditions in regions outside the United States, such as the European sovereign debt crisis, may have a negative impact on demand for our products. Although not all-inclusive, such negative impacts may include increased competition from displaced imports or because of the impact of those conditions on the demand for our customers' products. In addition, certain end-use markets for our rolled products, such as the housing, construction and transportation industries, experience demand cycles that are correlated to the general economic environment. Economic downturns in regional and global economies or a decrease in manufacturing activity in industries such as construction, packaging and consumer goods, all of which are sensitive to a number of factors outside our control, could materially and adversely affect our business, financial condition, results of operations and cash flows.
Losses caused by disruptions in the supply of electrical power could materially and adversely affect our business, financial condition, results of operations and cash flows.
We are subject to losses associated with equipment shutdowns, which may be caused by the loss or interruption of electrical power to our facilities due to unusually high demand, blackouts, equipment failure, natural disasters or other catastrophic events. We use large amounts of electricity to produce primary aluminum, and any loss of power that causes an equipment shutdown can result in the hardening or "freezing" of molten aluminum in the pots where it is produced. If this occurs, we may experience significant losses if the pots are damaged and require repair or replacement, a process that could limit or shut down our production operations for a prolonged period of time.
During the week of January 26, 2009, power supply to our New Madrid smelter was interrupted numerous times because of a severe ice storm in Southeastern Missouri, causing a loss of approximately 75% of the smelter capacity. Although the smelter returned to full operations by March 31, 2010, there can be no assurance that we will not ultimately experience shorter pot lives or higher failure rates as a result of damage from the equipment shutdown.
Although we maintain property and business interruption insurance to mitigate losses resulting from catastrophic events, we may be required to pay significant amounts under the deductible provisions of those insurance policies. In addition, our coverage may not be sufficient to cover all losses, or may not address all causes of loss or cover certain events. Certain of our insurance policies do not cover any losses we may incur if our suppliers are unable to provide us with power during periods of unusually high demand.
Our operations consume substantial amounts of energy and our profitability may decline if energy costs rise.
Electricity and natural gas are essential to our businesses, which are energy intensive. The costs of these resources can vary widely and unpredictably. The factors that affect our energy costs tend to be specific to each of our facilities.
Electricity
Electricity is the largest cost component at our New Madrid smelter and is a key factor to our long-term competitive position in the primary aluminum business. We have a power purchase agreement with Ameren Missouri, Missouri’s largest electric utility ("Ameren"), pursuant to which we have agreed to purchase substantially all of New Madrid’s electricity through May 2020. The pricing structure of our power contract includes two components: a base rate and a fuel adjustment clause.
Ameren may increase the rates it charges its customers, including Noranda, with the approval of the Missouri Public Service Commission ("MoPSC"). Once a rate increase request is filed, the MoPSC has 11 months to issue its ruling. Other than the time required by this rate setting process, and the fact that Ameren may not file two rate cases in the same calendar year, there are no restrictions on the frequency with which Ameren may seek rate increases. Indeed, during the five year period ended December 31, 2011, Ameren has filed four rate cases.
On February 3, 2012, Ameren filed a new rate case with the MoPSC seeking a14.6% base rate increase. As we have in previous rate cases, we expect to be an active participant in the MoPSC rate setting process. Any increase approved would be effective at the beginning of the month following the MoPSC's ruling. We expect a ruling on this request by January 3, 2013. The outcome of this case or any future rate cases Ameren may initiate could materially and adversely affect the competitiveness and long-term viability of our smelter as well as our business, financial condition, results of operations and cash flows.
The impact of the fuel adjustment clause may have a dramatic and unpredictable effect on our future operating results as they are dependent on Ameren’s fuel costs and off-system sales volume and prices. The fuel adjustment clause increased cost of goods sold by $14.7 million in 2011 and $5.4 million in 2010, and decreased cost of goods sold by $0.2 million in 2009.
Electricity is also a key cost component at our rolling mill facilities. Electricity is purchased through medium-term contracts at industrial rates from regional utilities supplied through local distributors. If we are unable to obtain power at affordable rates upon expiration of these contracts, we may be forced to curtail or idle a portion of our production capacity, which could materially and adversely affect our business, financial condition, results of operations and cash flows.
Natural gas
Natural gas is the largest cost component at our Gramercy refinery and a key cost component at our rolling mill facilities. Our Gramercy refinery has a contract to guarantee secure supply at an index-based price. Our downstream business purchases natural gas on the open market. The price of natural gas can be particularly volatile. As a result, our natural gas costs may fluctuate dramatically, and we may not be able to mitigate the effect of higher natural gas costs on our cost of sales. Any substantial increases in energy costs could
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cause our operating costs to increase and could materially and adversely affect our business, financial condition, results of operations and cash flows. At December 31, 2011, we are a party to forward swaps for natural gas, effectively fixing our cost for approximately 45% of our natural gas exposure through 2012. We will continue to have price risk with respect to the unhedged portion of our natural gas purchases. In addition, our actual future usage may be higher or lower than we estimated. As a result of these factors, our hedging activities may be less effective than expected in reducing the economic variability of our future costs.
Fuel
Fuel is a substantial component of the cost structure at our St. Ann bauxite mining operation. Our fuel is provided under an indexed-based contract linked to the price of oil. Our fuel costs at St. Ann may fluctuate, and we may not be able to mitigate the effect of higher fuel costs. Changes in the index will have an impact on our cost structure. Any increases in fuel costs could cause our operating costs to increase and could materially and adversely affect our business, financial condition, results of operations and cash flows.
We may encounter increases in the cost of raw materials, which could cause our cost of goods sold to increase, thereby materially and adversely affecting our business, financial condition, results of operations or cash flows and limiting our operating flexibility.
We require substantial amounts of raw materials in our business. These raw materials consist principally of bauxite, alumina, primary aluminum, recycled aluminum and aluminum scrap; however, pricing volatility of other raw materials, including carbon products and caustic soda, may have a significant impact on our costs. If raw material prices increase we may not be able to pass on the entire cost of the increases to our customers or offset fully the effects of high raw materials costs through productivity improvements, which could materially and adversely affect our business, financial condition, results of operations or cash flows.
Beginning in fourth quarter 2008 and continuing through second quarter 2009, the cost of alumina purchased from the Gramercy refinery exceeded the spot prices of alumina available from other sources. If such situations arise in the future, we may not be able to decrease Gramercy’s production in response to changes in market forces and any such decreases will increase our unit costs and limit our ability to fully recover fixed costs. We may be forced to sell excess alumina at market prices that could be substantially lower than our Net Cash Cost, which could materially and adversely affect our business, financial condition, results of operations and cash flows.
During 2011, we sold approximately 50% of St. Ann’s bauxite production to Sherwin Alumina Company pursuant to a contract that extends through 2012. Margins from these sales effectively reduce the net cost of bauxite to Gramercy. In the event Sherwin Alumina Company is unable to honor that contract, or chooses not to extend the contract upon expiration, the net cost of our bauxite could increase, which could materially and adversely affect our business, financial condition, results of operations and cash flows.
Prices for the raw materials used by our downstream business, including primary aluminum, recycled aluminum and alloying elements, are subject to continuous volatility and may increase from time to time. Our sales are generally made on the basis of a "margin over metal price," but if raw material costs other than metal increase we may not be able to pass on the entire cost of the increases to our customers or offset fully the effects of high raw materials costs through productivity improvements, which could materially and adversely affect our business, financial condition, results of operations and cash flows. In addition, a sustained material increase in raw materials prices may cause some of our customers to substitute other materials for our products.
We may be unable to continue to compete successfully in the highly competitive markets in which we operate.
We are engaged in a highly competitive industry. We compete with a number of large, well-established companies in each of the markets in which we operate. Our Primary Aluminum segment competes with a large number of other value-added metals producers on an international, national, regional and local basis. We also compete, to a much lesser extent, with primary metals producers, who typically sell to very large customers requiring regular shipments of large volumes of metals. Our Flat-Rolled Products segment competes in the production and sale of rolled aluminum products with a number of other aluminum rolling mills, including large, single-purpose sheet mills, continuous casters and other multi-purpose mills. Aluminum also competes with other materials, such as steel, copper, plastics, composite materials and glass, among others, for various applications. In the past, for certain applications customers have demonstrated a willingness to substitute other materials for aluminum. In both businesses, some of our competitors are larger than us and have greater financial and technical resources than we do. These larger competitors may be better able to withstand reductions in price or other adverse industry or economic conditions.
Similarly, competitors with superior cost positions to ours, particularly those competitors that operate smelters with access to relatively lower cost production inputs, may be better able to withstand reductions in price or other adverse industry or economic conditions. In the event that the current competitive smelter cost landscape changes such that other smelters see stability or reductions in their major input costs and/or we see increases in ours, the long-term viability of our smelter could be compromised. A current or new competitor may also add or build new capacity or increase import activity into the United States, which could diminish our profitability by decreasing the equilibrium prices in our markets. New competitors could emerge from within North America or globally, including in China, the Middle East, and South America. If we do not compete successfully, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
In addition, our Flat-Rolled Products segment competes with other rolled products suppliers, principally multi‑purpose mills, on the basis of quality, price, and timeliness of delivery, technological innovation and customer service. One primary competitive factor, particularly in the flat rolled business, is price. We may be required in the future to reduce fabrication prices or shift our production to
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products that generally yield lower fabrication prices in order to remain at full capacity, which could impact our level of profitability. In addition, technological innovation is important to our customers and if we are unable to lead or effectively meet new innovations to meet our customers’ needs, such as down-gauging, our financial performance could be materially and adversely impacted. Increased competition in any of our businesses could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
Aluminum may become less competitive with alternative materials, which could reduce our share of industry sales, lower our selling prices and reduce our sales volumes.
Aluminum competes with other materials such as steel, copper, plastics, composite materials and glass for various applications. Higher aluminum prices relative to substitute materials tend to make aluminum products less competitive with these alternative materials. Environmental or other regulations may increase our costs and be passed on to our customers, making our products less competitive. The willingness of customers to accept aluminum substitutes, or the ability of large customers to exert leverage in the marketplace to affect pricing for fabricated aluminum products, could result in a reduced share of industry sales or reduced prices for our products and services, which could decrease revenues or reduce volumes, either of which could materially and adversely affect our business, financial condition, results of operations and cash flows.
If we were to lose order volumes from any of our largest customers, our revenues and cash flows could be materially reduced.
Our business is exposed to risks related to customer concentration. In 2011, our ten largest customers were responsible for 40% of our consolidated revenues. In 2011, one customer accounted for approximately 10% of our consolidated revenues. A loss of order volumes from or a loss of industry share by, any major customer could materially and adversely affect our financial condition and results of operations by lowering sales volumes, increasing costs and lowering profitability. In addition, our customers may become involved in bankruptcy or insolvency proceedings or default on their obligations to us. Our consolidated balance sheet reflected an allowance for doubtful accounts totaling $0.1 million and $0.2 million at December 31, 2011 and 2010, respectively.
We do not have long-term contractual arrangements with a significant majority of our customers, and our revenues and cash flows could be reduced if our customers switch their suppliers.
A majority of our customer contracts have a term of one year or less, although we have long-term relationships with many of our customers. Many of our customers purchase products and services from us on a purchase order basis and may choose not to continue to purchase our products and services. The loss of these customers or a significant reduction in their purchase orders could have a material and adverse impact on our sales volume and business, or cause us to reduce our prices, which could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
Our business requires substantial capital investments that we may be unable to fulfill.
Our operations are capital intensive. Our capital expenditures were $64.6 million, $61.3 million and $46.7 million for 2011, 2010, and 2009, respectively. On a pro forma basis assuming 100% ownership for Gramercy and St. Ann, capital expenditures would have been $52.3 million for 2009.
We may not generate sufficient operating cash flows and our external financing sources may not be available in an amount sufficient to enable us to make required capital expenditures, service or refinance our indebtedness, pay dividends or fund other liquidity needs. If we are unable to make upgrades or purchase new plant and equipment, our business, financial condition, results of operations and cash flows could be materially and adversely affected by higher maintenance costs, lower sales volumes due to the impact of reduced product quality and other competitive influences.
We may be materially and adversely affected by environmental, safety, production and product regulations or concerns.
Our operations are subject to a wide variety of U.S. federal, state, local and non-U.S. environmental laws and regulations, including those governing emissions to air, discharges to waters, generation, use, storage, transportation, treatment and disposal of hazardous materials and wastes, land reclamation and employee health and safety matters. Compliance with environmental laws and regulations can be costly, and we have incurred and will continue to incur costs, including capital expenditures, to comply with these requirements. Additionally, certain of our raw material suppliers may be subject to significant compliance costs, which may be passed through to us. As these direct or indirect regulatory costs increase and are passed through to our customers, our products may become less competitive than other materials, which could reduce our sales. If we are unable to comply with environmental laws and regulations, we could incur substantial costs, including fines and civil or criminal sanctions, or costs associated with upgrades to our facilities or changes in our manufacturing processes in order to achieve and maintain compliance. In addition, environmental requirements change frequently and have tended to become more stringent over time. We cannot predict what environmental laws or regulations will be enacted or amended in the future, how existing or future laws or regulations will be interpreted or enforced, or the amount of future expenditures that may be required to comply with such laws or regulations. Our costs of compliance with current and future environmental requirements could materially and adversely affect our business, financial condition, results of operations and cash flows.
The Environmental Protection Agency ("EPA") has developed National Ambient Air Quality Standards ("NAAQS") for six compounds currently identified as criteria pollutants. The NAAQS establishes acceptable ambient air levels of each pollutant based on a review of their effects to human health and the environment. Sulfur dioxide ("SO2"), an emission from our New Madrid smelter facility,
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is one such criteria pollutant. Currently, ambient monitoring is used to determine whether emissions from our smelter meet NAAQS.
In addition, as an owner and operator of real property and a generator of hazardous waste, we may be subject to environmental cleanup liability, regardless of fault, pursuant to Superfund or analogous state or non-U.S. laws. Thus, we could incur substantial costs, including cleanup costs and costs arising from third-party property damage or personal injury claims, relating to environmental contamination at properties currently or formerly operated by us or at third-party sites at which wastes from our operations have been disposed. Contaminants have been discovered in the soil and/or groundwater at some of our facilities. The discovery of additional contaminants or the imposition of additional cleanup obligations at these or other sites could result in significant liability. In addition, because we use or process hazardous substances in our operations, we may be liable for personal injury claims or workers’ compensation claims relating to exposure to hazardous substances.
We have identified certain environmental matters at both Gramercy and St. Ann, which are disclosed in our consolidated financial statements to the extent they represent liabilities as defined by U.S. GAAP. There could be other significant environmental issues of which we are not aware. The occurrence of new environmental issues could materially and adversely affect our business, financial condition, results of operations and cash flows.
Climate change legislation or regulations may adversely impact our operations and markets.
Energy generated from fossil fuel sources such as coal, diesel and natural gas is a significant input in a number of our operations. A number of governments or governmental bodies have introduced or are contemplating legislative and regulatory changes in response to a view that consumption of energy derived from fossil fuels is a contributor to global warming. Regulatory and legislative changes may impact our operations directly or indirectly through customers or our supply chain. Assessments of the potential impact of future climate change legislation, regulation and international treaties and accords are uncertain. We may experience increased capital expenditures requirements in order to comply with revised or new legislation or regulations, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position relative to industry peers, and changes in the demand for the goods we produce, or increases to our raw material input costs.
Some of our facilities are located in areas that have been subject to natural disasters. Future natural disasters in these areas could damage our facilities and disrupt our operations.
Our aluminum smelter is located in New Madrid, Missouri on the banks of the Mississippi River and near the New Madrid fault line, in an area that may be subject to natural disasters such as floods, tornadoes, ice storms and earthquakes. As experienced during the January 2009 ice storm and subsequent power outages at our New Madrid facility, when such a disaster occurs, it can damage the facility in question and disrupt our production of aluminum. Our bauxite mine is located in St. Ann, Jamaica and our refinery is located in Gramercy, Louisiana, areas that may be exposed to hurricanes. In addition, our other facilities may be subject to natural disasters. We maintain insurance to protect us from events that may be caused by floods, earthquakes, tornadoes and hurricanes in amounts that we believe are commercially reasonable. There can be no assurance, however, that such insurance would be available on a timely basis or adequate to completely reimburse us for the losses that might be sustained or to provide funds for the reconstruction of our facilities, and in any event such insurance would not enable us to immediately reconstruct our facilities to avoid a suspension or disruption of our business while reconstruction proceeded to completion or alternative sourcing was located. In addition, our hedging arrangements could require us to deliver aluminum even if we are unable to produce such aluminum, which could cause us to incur unexpected costs in purchasing aluminum on the open market.
Our business is subject to unplanned business interruptions that may adversely affect our performance.
The production of aluminum is subject to unplanned events such as accidents, supply interruptions, transportation interruptions, human error, mechanical failure and other contingencies. Operational malfunctions or interruptions at one or more of our facilities could cause substantial losses in our production capacity. For example, during January 2009, an ice storm caused a power outage at our New Madrid smelter, causing a loss of approximately 75% of the smelter’s capacity. As such events occur; we may experience substantial business loss and the need to purchase one of our integrated raw materials at prices substantially higher than our normal cost of production, which could materially and adversely affect our business, financial condition, results of operations and cash flows. Furthermore, our vertical integration may cause operational malfunctions or interruptions at a facility in our upstream business to materially and adversely affect the performance or operation of the facilities downstream of the interrupted facility. Such interruptions may harm our reputation among actual and potential customers, potentially resulting in a loss of business. Although we maintain property and business interruption insurance to mitigate losses resulting from catastrophic events, we may be required to pay significant amounts under the deductible provisions of those insurance policies. In addition, our coverage may not be sufficient to cover all losses, or may not cover certain events. To the extent these losses are not covered by insurance, our financial condition, results of operations and cash flows could be materially and adversely affected.
We could experience labor disputes that disrupt our business.
We are a party to 6 collective bargaining agreements, all of which expire within the next five years. Our collective bargaining ag
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reements are with the following unions: the United Steelworkers of America ("USWA"); the International Association of Machinists and Aerospace Workers ("IAMAW"); the University and Allied Workers Union ("UAWU"); and the Union of Technical, Administrative and Supervisory Personnel ("UTASP"). We have recently completed the process of formalizing recognition of a third union at St. Ann with the Bustamante Industrial Trade Union ("BITU"). Negotiations are on-going with one union and two agreements expire in 2012. All other collective bargaining agreements expire within the next five years.
As customary in Jamaican labor practices, unions generally submit claims subsequent to the expiration of the collective bargaining agreements. Until a new agreement is ratified, we continue to operate under the terms of the expired agreement, and, once signed, the new agreement is retroactive to the previous expiration date.
As we renew bargaining agreements, labor negotiations may not conclude successfully and, in that case, may result in a significant increase in the cost of labor or may break down and result in work stoppages or labor disturbances, disrupting our operations. Any such cost increases, stoppages or disturbances could materially and adversely affect our business, financial condition, results of operations and cash flows by limiting plant production, sales volumes and profitability.
Our operations have been and will continue to be exposed to various business and other risks, changes in conditions and events beyond our control in foreign countries.
We have production activities outside the United States via our bauxite mining operations in St. Ann, Jamaica. We are, and will continue to be, subject to financial, political, economic and business risks in connection with our non-U.S. operations. These risks include those associated with political or financial instability, expropriation, renegotiation or nullification of existing agreements, and changes in local government laws, regulations and policies, including those related to taxation, employment regulations and repatriation of earnings. While the impact of these factors is difficult to predict and beyond our control, any one or more of them could adversely affect our business, financial condition or operating results. In addition to the business risks inherent in operating outside the U.S., economic conditions may be more volatile, legal and regulatory systems less developed and predictable and the possibility of various types of adverse governmental action more pronounced.
In addition, our revenues, expenses, cash flows and results of operations could be affected by actions in foreign countries that more generally affect the global market for primary aluminum products, including inflation, fluctuations in currency and interest rates, competitive factors, civil unrest and labor problems. Our operations and the commercial markets for our products could also be materially and adversely affected by acts of war, terrorism or the threat of any of these events as well as government actions such as controls on imports, exports and prices, tariffs, new forms of taxation or changes in fiscal regimes and increased government regulation in countries engaged in the manufacture or consumption of aluminum products. Unexpected or uncontrollable events or circumstances in any of these markets could materially and adversely affect our business, financial condition, results of operations or cash flows.
The loss of certain members of our management may have an adverse effect on our operating results.
Our success will depend, in part, on the efforts of our senior management and other key employees. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills that are critical to the operation of our business. If we lose or suffer an extended interruption in the services of one or more of our senior officers, our business, financial condition, results of operations and cash flows may be materially and adversely affected. Moreover, the market for qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise.
Past and future acquisitions or divestitures may adversely affect our financial condition.
We have grown partly through the acquisition of other businesses, including the transaction whereby we became sole owner of Gramercy and St. Ann during 2009. As part of our strategy, we may continue to pursue acquisitions, divestitures or strategic alliances, which may not be completed or, if completed, may not be ultimately beneficial to us. There are numerous risks commonly encountered in business combinations, including the risk that we may not be able to complete a transaction that has been announced, effectively integrate businesses acquired or generate the cost savings and synergies anticipated. Failure to do so could materially and adversely affect our business, financial condition, results of operations and cash flows.
The insurance that we maintain may not fully cover all potential exposures.
We maintain property, casualty and workers’ compensation insurance, but such insurance does not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage, of our insurance policies, including liabilities for environmental compliance or remediation. In addition, from time to time, various types of insurance for companies in our industries have not been available on commercially acceptable terms or, in some cases, have not been available at all. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain. In addition, the outage at our New Madrid smelter could have an impact on our ability in the future to obtain insurance at similar levels and costs, which could materially and adversely affect our business, financial conditions, results of operations and cash flows.
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Future changes to healthcare legislation could materially affect our business, financial condition, results of operations and cash flows.
The requirements of the Health Care Reform Act that impacted our healthcare plans included the following: (i) dependents up to age 26 can be covered under the health plans, (ii) lifetime dollar limits are removed on essential health benefits, and (iii) pre-existing condition exclusions are removed for individuals under age 19. While we currently judge that the changes required by the Health Care Reform Act will not have a material impact on our costs in 2012, future revisions and clarifications to the legislation could materially and adversely affect our business, financial condition, results of operation and cash flows.
Apollo controls us and its interests may conflict with or differ from your interests.
Our equity sponsor, Apollo, beneficially owns approximately 63.6% of our common stock. As a result, Apollo has the power to elect all of our directors. Therefore, Apollo effectively has the ability to approve or to prevent any transaction that requires the approval of the Board or our stockholders, including significant corporate transactions such as mergers and the sale of substantially all of our assets. In addition, following a reduction of the equity owned by Apollo to below 50% of our outstanding common stock, Apollo will retain the right to cause the Board to nominate a number of Apollo designees for the Board. Thus, Apollo will continue to be able to significantly influence or effectively control our decisions.
The interests of Apollo could conflict with or differ from stockholder interests. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of Noranda or impede a merger, takeover or other business combination that stockholders or debtholders may otherwise view favorably. If we encounter financial difficulties or are unable to pay our debts as they mature, Apollo may have an interest in pursuing acquisitions, divestitures, financings or other transactions that in their judgment could enhance their equity investment, even though these transactions might involve risk to our shareholders or debt holders. Additionally Apollo is in the business of making or advising on investments in companies and holds, and may from time to time in the future acquire interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Apollo may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. A sale of a substantial number of shares of stock in the future by funds affiliated with Apollo could cause our stock price to decline.
Risks Related to our Indebtedness
We have indebtedness, which could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from servicing our debt.
As of December 31, 2011, our total indebtedness was $428.5 million. On February 29, 2012, we refinanced our 2007 Senior Secured Credit Facilities, including both the 2007 Term B Loan and 2007 Revolver, and entered into the 2012 Term B Loan and the 2012 Revolver (collectively "the 2012 Refinancing.") On March 8, 2012, pursuant to a "Dutch Auction" tender offer, the aggregate principal amount of AcquisitionCo Notes outstanding was decreased by $75.0 million ("the 2012 Tender Offer.")
Based on the amount of indebtedness outstanding and interest rates immediately following the execution of our 2012 Refinancing and 2012 Tender Offer (see "Description of Certain Indebtedness" for the full discussion), our total indebtedness was $600.3 million and our annualized cash interest expense is approximately $33.3 million, all of which represents interest expense on floating-rate obligations and is subject to increase in the event interest rates rise.
Our subsidiaries’ ability to generate sufficient cash flow from operations to make scheduled payments on their and our debt depends on a range of economic, competitive and business factors, many of which are outside their and our control. Our subsidiaries’ inability to generate cash flow sufficient to satisfy their and our debt obligations, or to refinance their and our obligations on commercially reasonable terms, could materially and adversely affect our business, financial condition, results of operations or cash flows and could require us and our subsidiaries to do one or more of the following:
• | raise additional capital through debt or equity issuances or both; |
• | cancel or scale back current and future business initiatives; or |
• | sell businesses or properties. |
Our and our subsidiaries’ indebtedness could have important consequences, including:
• | making it more difficult for us to satisfy our obligations under our indebtedness; |
• | limiting our ability to borrow money for our working capital, capital expenditures, debt service requirements or other Corporate purposes; |
• | requiring our subsidiaries to dedicate a portion of their cash flow to payments on their and our indebtedness, which will reduce the amount of cash flow available for working capital, capital expenditures, product development and other Corporate requirements; |
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• | increasing our vulnerability to general economic and industry conditions; |
• | placing us at a competitive disadvantage to our less leveraged competitors; |
• | limiting our ability to respond to business opportunities; and |
• | subjecting us and our subsidiaries to restrictive covenants, which, if we and our subsidiaries fail to comply with, could result in an event of default under their and our debt which, if not cured or waived, could materially and adversely affect our business, financial condition, results of operations and cash flows. |
Restrictive covenants under the indenture governing our AcquisitionCo Notes and our senior secured credit facilities may adversely affect our operational flexibility.
The indenture governing the AcquisitionCo Notes and our senior secured credit facilities contain, and any future indebtedness we incur may contain, a number of restrictive covenants that could impose significant operating and financial restrictions on us and our subsidiaries, including restrictions on our and our subsidiaries’ ability to, among other things:
• | incur or guarantee additional debt; |
• | pay dividends or make distributions to our shareholders; |
• | repurchase or redeem capital stock; |
• | make loans, capital expenditures, acquisitions or investments; |
• | sell assets including stock of subsidiaries; |
• | create or incur liens; |
• | merge or consolidate with other companies or transfer all or substantially all of our assets; |
• | enter into transactions with our affiliates; and |
• | engage in certain business activities. |
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.
A failure to comply with the covenants contained in our senior secured credit facilities, the indenture governing the AcquisitionCo Notes or any future indebtedness could result in an event of default under the senior secured credit facilities, the indenture governing the AcquisitionCo Notes or such future indebtedness, which, if not cured or waived, could materially and adversely affect our business, financial condition, results of operations and cash flows. The events of default contained in our existing indebtedness are customary for senior secured credit facilities and indentures of companies similar to the Company. Certain of such events of default, generally defaults based on volitional acts that violate prohibitions on our taking certain actions such as incurring debt or paying dividends beyond permitted amounts, are not subject to notice or cure periods. In the event of any default under the senior secured credit facilities, the indenture governing the AcquisitionCo Notes or any future material indebtedness, our and our subsidiaries’ debt holders and lenders:
• | will not be required to lend any additional amounts to us and our subsidiaries; |
• | could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable; |
• | may have the ability to require us to apply all of our available cash to repay these borrowings; or |
• | may prevent us and our subsidiaries from making debt service payments under our and our subsidiaries’ other agreements, any of which could result in an event of default under such agreements. |
See "Description of Certain Indebtedness."
Despite our indebtedness, we and our subsidiaries may still be able to incur significantly more debt. This could increase the risks associated with our leverage, including our ability to service our indebtedness.
The indenture governing the AcquisitionCo Notes and our senior secured credit facilities contain restrictions on our and our subsidiaries’ ability to incur additional indebtedness. These restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Accordingly, we and our subsidiaries could incur significant additional indebtedness in the future, much of which could constitute secured or senior indebtedness. The more leveraged we and our subsidiaries become, the more we and our subsidiaries, and in turn our security holders, become exposed to the risks described above under the heading "We have indebtedness, which could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from servicing our debt."
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Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.
Substantially all of our and our subsidiaries’ indebtedness, including the AcquisitionCo Notes and borrowings under the 2012 Senior Secured Credit Facilities, are subject to variable rates of interest and expose us to interest rate risk. See "Description of Certain Indebtedness." If interest rates increase, our debt service obligations on the variable rate indebtedness would increase, resulting in a reduction of our net income, even though the amount borrowed remained the same.
Based on the amount of indebtedness outstanding and interest rates immediately following the 2012 Refinancing and the 2012 Tender Offer, our total indebtedness was $600.3 million and our estimated annualized cash interest expense is approximately $33.3 million. A 1% increase in the interest rates would increase our annual interest expense by an estimated $6.0 million.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
ITEM 2. | PROPERTIES |
Our upstream business is a vertically integrated producer of primary aluminum, consisting of an aluminum smelter in New Madrid, Missouri, Bauxite mining operations in St. Ann, Jamaica and an alumina refinery in Gramercy, Louisiana.
Our downstream business is a manufacturer of aluminum foil and light sheet. We own and operate four rolling mills facilities located in the southeastern United States, two in Huntingdon, Tennessee, and one each in Salisbury, North Carolina and Newport, Arkansas, with a combined maximum annual production capacity of 410 to 495 million pounds, depending on product mix.
Our corporate headquarters are located in Franklin, Tennessee and consist of leased office space aggregating approximately 30,000 square feet.
For additional information about the location and productive capacity of our facilities see Item 1, "Business."
ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we are involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. We believe the resolution of these matters and the incurrence of their related costs and expenses should not have a material adverse effect on our consolidated financial position, results of operations or liquidity. While it is not feasible to predict the outcome of all pending suits and claims, the ultimate resolution of these matters as well as future lawsuits could have a material adverse effect on our business, financial condition, results of operations or reputation.
ITEM 4. | MINE SAFETY DISCLOSURES |
We believe ensuring the safety of our workforce is our number one accountability as an employer. We are committed to continuing and improving upon each facility’s focus on safety in the workplace. We have a number of safety programs in place, which include regular bi-weekly safety meetings and training sessions to teach proper safe work procedures.
Our executive management, along with site managers and union leadership, are actively involved in supporting and promoting the ongoing emphasis on workplace safety. Improvement in safety performance is a key metric used in determining annual incentive awards for our U.S. employees.
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 of this report, which is incorporated herein by reference.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information and Holders
Our common stock began trading on the New York Stock Exchange under the symbol "NOR" following our initial public offering in May 2010. Before then, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by the New York Stock Exchange:
2011 | 2010 | ||||||||||||
High | Low | Dividends | High | Low | Dividends | ||||||||
$ | $ | $ | $ | $ | $ | ||||||||
First quarter | 17.23 | 13.79 | — | — | — | — | |||||||
Second quarter | 17.43 | 13.02 | — | 9.35 | 6.33 | — | |||||||
Third quarter | 15.48 | 8.35 | — | 8.59 | 5.87 | — | |||||||
Fourth quarter | 10.39 | 6.87 | 1.03 | 14.70 | 8.14 | — | |||||||
As of February 29, 2012 we had approximately 180 holders of record of our common stock. Investment funds associated with Apollo beneficially own approximately 63.6% of our capital stock. During the year ended December 31, 2011, the Company made no common stock repurchases.
Dividends
The payment of any cash dividend on our common stock is considered a restricted payment under our credit facilities and the indentures governing our Notes, and we are restricted from paying any cash dividend on our common stock unless we satisfy certain conditions, including satisfying certain financial thresholds and the absence of any event of default. At December 31, 2011 and 2010, we met all required performance ratios contained in the indentures.
On November 1, 2011, the Board declared a regular quarterly cash dividend of $0.03 per share on our outstanding shares of common stock. In addition, on November 1, 2011, the Board declared a supplemental cash dividend of $1.00 per share on our outstanding common stock. The regular and supplemental dividends were paid on November 22, 2011 to shareholders of record as of the close of business on November 14, 2011.
Cash payments related to the November 2011 regular and supplemental dividends totaled approximately $71.1 million in aggregate, comprising $69.3 million of dividends on outstanding shares of common stock and $1.8 million of cash payments to holders of stock options. We paid these amounts entirely from available cash balances.
On February 15, 2012, the Board declared a regular quarterly dividend of $0.04 per share to be paid on March 21, 2012 to shareholders of record as of February 27, 2012. The Board anticipates declaring this dividend in future quarters on a regular basis; however, changes in the Company's financial condition and cash needs could result in dividends being declared in different amounts, or not at all.
On February 29, 2012, the Board declared a supplemental dividend of $1.25 per share to be paid on March 19, 2012 to shareholders of record as of March 12, 2012. Cash payments related to the supplemental dividend will total approximately $88 million in aggregate. We expect to pay these amounts from the net proceeds from the 2012 Refinancing discussed above.
Use of Proceeds
Initial Public Offering. On May 13, 2010, our registration statement (File No. 333-150760) was declared effective for our initial public offering, pursuant to which we registered the offering and sale of 11.5 million shares of common stock (including the underwriters’ right to purchase up to an additional 1.5 million shares to cover over-allotments) at a public offering price of $8.00 per share. We completed our IPO on May 19, 2010. Aggregate gross offering proceeds were $92.0 million. The representatives for the underwriters were Merrill Lynch, Pierce, Fenner and Smith Incorporated; Morgan Stanley and Co., Incorporated; Credit Suisse Securities (USA) LLC; Goldman, Sachs and Co; and UBS Securities LLC.
The net proceeds from the offering, after underwriting discounts and commission of $5.6 million, and additional offering-related fees and expenses of $3.5 million, were $82.9 million. We used the net proceeds, together with $95.9 million of proceeds from settling all our outstanding fixed price aluminum hedges, to repurchase all outstanding Holdco Notes, of which $66.3 million was remaining, and to repay $110.0 million principal amount outstanding under the 2007 Term B loan. The remaining $2.5 million was used for general Corporate purposes.
Follow-on Offering. On December 6, 2010, our registration statement (File No. 333-170620) was declared effective for our follow-on public offering, pursuant to which we registered the offering and sale of 11.5 million shares of common stock (including the underwriters’ right to purchase up to an additional 1.5 million shares to cover over-allotments) at a public offering price of $11.35 per share. We
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completed the follow-on offering on December 10, 2010 and the over-allotment on December 22, 2010. Aggregate gross offering proceeds were $130.5 million. The representatives for the underwriters were Merrill Lynch, Pierce, Fenner & Smith Incorporated; Morgan Stanley and Co., Incorporated; Citigroup Global Markets, Inc.; Credit Suisse Securities (USA) LLC; Goldman, Sachs & Co; and UBS Securities LLC.
The net proceeds from the offering, after underwriting discounts and commission of $5.9 million, and additional offering-related fees and expenses of $1.6 million, were $123.1 million. We used the net proceeds to repay $122.3 million principal amount outstanding under the term B loan. The remaining $0.8 million was used for general Corporate purposes.
Securities Authorized for Issuance Under Equity Compensation Plans
See "Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 10, 2012, which is incorporated herein by reference.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock from May 14, 2010 (the date of our IPO) to December 31, 2011 with the cumulative total returns of the Russell 2000 Index and the S&P 600 SmallCap Materials Index over the same period. The comparison assumes $100 was invested on May 14, 2010, in shares of our common stock and in each of the indices shown and assumes that all of the dividends were reinvested. The historical stock price performance shown on this graph is not necessarily indicative of future performance.
6/10 | 8/10 | 10/10 | 12/10 | 2/11 | 4/11 | 6/11 | 8/11 | 10/11 | 12/11 | |
Noranda Aluminum | 73.07 | 90.57 | 112.73 | 165.91 | 179.20 | 193.07 | 172.05 | 129.20 | 105.23 | 105.11 |
Russell 2000 | 87.99 | 87.08 | 101.93 | 113.84 | 119.77 | 126.12 | 120.91 | 106.40 | 108.77 | 109.09 |
S&P 600 SmallCap Materials | 83.34 | 87.88 | 105.83 | 115.34 | 118.99 | 128.58 | 125.55 | 107.72 | 105.52 | 104.26 |
Source: Research Data Group, Inc.
This performance graph shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Noranda Aluminum Holding Corporation under the Securities Act of 1933, as amended, or the Exchange Act.
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ITEM 6. | SELECTED FINANCIAL DATA |
Selected Historical Consolidated Financial Data
The following tables present our selected historical consolidated financial data. This information should be read in conjunction with the sections entitled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and with the audited consolidated financial statements of Noranda Aluminum Holding Corporation and their notes included elsewhere in this report, as well as the other financial information included herein.
Noranda HoldCo, Noranda AcquisitionCo and Noranda Intermediate Holding Corporation did not engage in any business or other activities prior to the Apollo Acquisition except in connection with their formation, the Apollo Transactions and the Special Dividend. The Apollo Transactions means collectively the Apollo Acquisition and related financings. Special Dividend means the June 2007 dividend of $216.1 million paid to Noranda stockholders, along with the related financing. Accordingly, all financial and other information herein relating to periods prior to the completion of the Apollo Transactions and the Special Dividend is that of Noranda Aluminum, Inc.
The financial information for the periods from January 1, 2007 to May 17, 2007 includes the results of operations, cash flows and financial condition for Noranda Aluminum, Inc. on a basis reflecting the stepped-up values of Noranda Aluminum, Inc. prior to the Apollo Acquisition and is referred to as "Predecessor." The financial information for the period from May 18, 2007 to December 31, 2007, as of December 31, 2007, and as of and for the years ended December 31, 2010, 2009 and 2008 includes the results of operations, cash flows and financial condition for Noranda HoldCo on a basis reflecting the impact of the purchase allocation of the Apollo Acquisition, and is referred to as "Successor."
The consolidated statements of operations and cash flow data for the years ended December 31, 2011, 2010 and 2009 and the consolidated balance sheet data as of December 31, 2011 and 2010 have been derived from our consolidated financial statements included elsewhere in this report. Other prior period operations data, cash flow data and balance sheet data have been derived from our consolidated financial statements which are not included in this report.
The unaudited supplemental pro forma condensed consolidated statements of operations for the year 2007 is based on the historical consolidated statements of operations for the Predecessor period from January 1, 2007 to May 17, 2007 and the Successor period from May 18, 2007 to December 31, 2007.
The following information should be read in conjunction with, and is qualified by reference to, our "Management’s Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and the notes included elsewhere in this report, as well as the other financial information included in this report.
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Successor | Pro forma predecessor and successor (1) | ||||||||||||||
(in millions, except per share data and where noted) | Year ended and as of December 31, | ||||||||||||||
2011 | 2010 | 2009 (2) | 2008 | 2007 | |||||||||||
Statements of operations data: | |||||||||||||||
Sales | $ | 1,559.8 | $ | 1,294.9 | $ | 769.9 | $ | 1,266.4 | $ | 1,395.1 | |||||
Operating costs and expenses: | |||||||||||||||
Cost of sales | 1,344.5 | 1,112.4 | 779.5 | 1,122.9 | 1,205.0 | ||||||||||
Selling, general and administrative expenses | 93.9 | 115.0 | 76.0 | 73.6 | 56.8 | ||||||||||
Goodwill and other intangible asset impairment | — | — | 108.0 | 25.5 | — | ||||||||||
Excess insurance proceeds | — | — | (43.5 | ) | — | — | |||||||||
Other recoveries charges, net | — | — | — | (0.5 | ) | ||||||||||
Total operating costs and expenses | 1,438.4 | 1,227.4 | 920.0 | 1,222.0 | 1,261.3 | ||||||||||
Operating income (loss): | 121.4 | 67.5 | (150.1 | ) | 44.4 | 133.8 | |||||||||
Other (income) expense: | |||||||||||||||
Interest expense, net | 21.5 | 31.1 | 53.5 | 88.0 | 106.8 | ||||||||||
(Gain) loss on hedging activities, net | (86.4 | ) | (65.6 | ) | (111.8 | ) | 69.9 | 44.1 | |||||||
Equity in net (income) loss of investments in affiliates | — | — | 79.7 | (7.7 | ) | (11.5 | ) | ||||||||
(Gain) loss on debt repurchase | — | 0.1 | (211.2 | ) | 1.2 | 2.2 | |||||||||
Gain on business combination | — | — | (120.3 | ) | — | — | |||||||||
Total other (income) expense: | (64.9 | ) | (34.4 | ) | (310.1 | ) | 151.4 | 141.6 | |||||||
Income (loss) before income taxes | 186.3 | 101.9 | 160.0 | (107.0 | ) | (7.8 | ) | ||||||||
Income tax expense (benefit) | 45.4 | 35.0 | 58.6 | (32.9 | ) | 1.7 | |||||||||
Net income (loss) for the period | $ | 140.9 | $ | 66.9 | $ | 101.4 | $ | (74.1 | ) | $ | (9.5 | ) | |||
Net income (loss) per common share: | |||||||||||||||
Basic | $ | 2.10 | $ | 1.30 | $ | 2.33 | $ | (1.70 | ) | $ | (0.22 | ) | |||
Diluted | $ | 2.06 | $ | 1.27 | $ | 2.33 | $ | (1.70 | ) | $ | (0.22 | ) | |||
Weighted-average common shares outstanding: | |||||||||||||||
Basic | 67.06 | 51.56 | 43.53 | $ | 43.44 | $ | 43.07 | ||||||||
Diluted | 68.35 | 52.80 | 43.53 | $ | 43.44 | $ | 43.07 | ||||||||
Cash dividends declared per common share | $ | 1.03 | $ | — | $ | — | $ | 2.35 | $ | 5.00 | |||||
Balance sheet data(4): | |||||||||||||||
Cash and cash equivalents | $ | 42.7 | $ | 33.8 | $ | 167.2 | $ | 184.7 | $ | 75.6 | |||||
Property, plant and equipment, net | 699.8 | 719.9 | 745.5 | 599.6 | 657.8 | ||||||||||
Total assets | 1,377.5 | 1,414.7 | 1,697.6 | 1,936.2 | 1,650.5 | ||||||||||
Long-term debt (including current portion)(5) | 428.5 | 419.7 | 951.7 | 1,346.6 | 1,151.7 | ||||||||||
Common stock subject to redemption | 2.0 | 2.0 | 2.0 | 2.0 | — | ||||||||||
Equity (deficiency) | 259.6 | 295.7 | 92.2 | 36.6 | (0.1 | ) | |||||||||
Working capital(6) | 126.4 | 171.5 | 387.9 | 336.0 | 211.5 | ||||||||||
Cash flow data: | |||||||||||||||
Operating activities | $ | 140.6 | $ | 270.9 | $ | 220.5 | $ | 65.5 | — | ||||||
Investing activities | (62.0 | ) | (61.1 | ) | (24.0 | ) | (51.1 | ) | — | ||||||
Financing activities | (69.7 | ) | (343.2 | ) | (214.0 | ) | 94.7 | — | |||||||
Financial and other data: | |||||||||||||||
EBITDA(7) | $ | 305.5 | $ | 231.7 | $ | 306.9 | $ | 79.3 | — | ||||||
Average realized Midwest Transaction Price (per pound)(8) | $ | 1.17 | $ | 1.04 | $ | 0.81 | $ | 1.21 | $ | 1.23 | |||||
Net Cash Cost (per pound shipped)(11) | $ | 0.75 | $ | 0.70 | $ | 0.77 | $ | 0.82 | — | ||||||
Shipments: | |||||||||||||||
Third party shipments: | |||||||||||||||
Bauxite (kMts)(9) | 2,499.9 | 1,738.0 | 482.9 | — | — | ||||||||||
Alumina (kMts)(9) | 635.1 | 683.6 | 245.0 | — | — | ||||||||||
Primary Aluminum (pounds, in millions) | 513.0 | 438.8 | 291.4 | 509.5 | 523.4 | ||||||||||
Flat-Rolled Products (pounds, in millions) | 362.6 | 346.4 | 309.3 | 346.1 | 371.6 | ||||||||||
Intersegment shipments: | |||||||||||||||
Bauxite (kMts) | 2,643.6 | 2,565.5 | 835.1 | — | — | ||||||||||
Alumina (kMts) | 487.5 | 467.4 | 116.5 | — | — | ||||||||||
Primary Aluminum (pounds, in millions) | 68.4 | 121.7 | 60.2 | 80.4 | 31.2 | ||||||||||
See accompanying notes to this table
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(in millions, except per share data and where noted) | Predecessor | Successor | ||||||
Period from | Period from | |||||||
May 18, 2007 to December 31, 2007 | ||||||||
January 1, 2007 to May 17, 2007 | and as of | |||||||
December 31, 2007 | ||||||||
Statements of operations data: | ||||||||
Sales | $ | 527.7 | $ | 867.4 | ||||
Operating costs and expenses: | ||||||||
Cost of sales | 424.3 | 767.9 | ||||||
Selling, general and administrative expenses | 17.0 | 39.3 | ||||||
Other (recoveries) charges, net | — | (0.5 | ) | |||||
441.3 | 806.7 | |||||||
Operating income | 86.4 | 60.7 | ||||||
Other expenses (income): | ||||||||
Interest expense net | 6.2 | 65.0 | ||||||
(Gain) loss on hedging activities, net | 56.6 | (12.5 | ) | |||||
Equity in net income of investments in affiliates | (4.3 | ) | (7.3 | ) | ||||
Loss on debt repurchase | — | 2.2 | ||||||
Income before income taxes | 27.9 | 13.3 | ||||||
Income tax expense | 13.6 | 5.1 | ||||||
Net income for the period | $ | 14.3 | $ | 8.2 | ||||
Net income per common share:(3) | ||||||||
Basic | $ | — | $ | 0.19 | ||||
Diluted | $ | — | $ | 0.19 | ||||
Weighted-average common shares outstanding: | ||||||||
Basic | — | 43.21 | ||||||
Diluted | — | 43.33 | ||||||
Cash dividends declared per common share | $ | — | $ | 5.00 | ||||
Balance sheet data (4): | ||||||||
Cash and cash equivalents | $ | — | $ | 75.6 | ||||
Property, plant and equipment, net | — | 657.8 | ||||||
Total assets | — | 1,650.5 | ||||||
Long-term debt (including current portion)(5) | — | 1,151.7 | ||||||
Shareholders’ equity (deficiency) | — | (0.1 | ) | |||||
Working capital(6) | — | 211.5 | ||||||
Cash flow data: | ||||||||
Operating activities | $ | 41.2 | $ | 160.8 | ||||
Investing activities | 5.1 | (1,197.7 | ) | |||||
Financing activities | (83.7 | ) | 1,112.5 | |||||
Financial and other data: | ||||||||
Average realized Midwest Transaction Price (per pound)(8) | $ | 1.31 | $ | 1.21 | ||||
Shipments: | ||||||||
Third party shipments: | ||||||||
Primary Aluminum (pounds, in millions) | 202.3 | 321.1 | ||||||
Flat-Rolled Products (pounds, in millions) | 135.6 | (10) | 236.0 | (10) | ||||
Intersegment shipments: | ||||||||
Primary Aluminum (pounds in millions) | 12.1 | 19.1 | ||||||
(1) | Pro forma financial data is presented. See table on following page for historical financial data. For a reconciliation of the pro forma financial data to the historical data, see "Unaudited Supplemental Pro Forma Condensed Consolidated statements of Operations." |
(2) | See Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Company Overview — Joint Venture Transaction" for a summary of the Joint Venture Transaction which closed on August 31, 2009. |
(3) | Net income (loss) per common share is not presented for the Predecessor historical periods because Noranda was a wholly owned subsidiary during those periods. |
(4) | Historical balance sheet data is presented. |
(5) | Long-term debt includes long-term debt due to related parties and to third parties, including current installments of long-term debt, but does not include issued and undrawn letters of credit under the revolving credit facility. |
(6) | Working capital is defined as current assets net of current liabilities. |
(7) | EBITDA represents net income (loss) before income taxes, net interest expense and depreciation and amortization. We have provided EBITDA herein because we believe it provides investors with additional information to measure our performance. We use EBITDA as one criterion for evaluating our performance relative to our peers. We believe that EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. |
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EBITDA is not a measure of financial performance under U.S. GAAP and may not be comparable to similarly titled measures used by other companies in our industry. EBITDA should not be considered in isolation from or as an alternative to net income, operating income (loss) or any other performance measures derived in accordance with U.S. GAAP.
For example, EBITDA excludes certain tax payments that may represent a reduction in cash available to us; does not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; does not reflect capital cash expenditures, future requirements for capital expenditures or contractual commitments; does not reflect changes in, or cash requirements for, our working capital needs; and does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness. The following table reconciles net income (loss) to EBITDA for the periods presented (in millions):
Year ended December 31, | ||||||
2011 | 2010 | 2009 | ||||
$ | $ | $ | ||||
Net income | 140.9 | 66.9 | 101.4 | |||
Income tax expense | 45.4 | 35.0 | 58.6 | |||
Interest expense, net | 21.5 | 31.1 | 53.5 | |||
Depreciation and amortization | 97.7 | 98.7 | 93.4 | |||
EBITDA | 305.5 | 231.7 | 306.9 | |||
(8) | The price for primary aluminum consists of two components: the price quoted for primary aluminum ingot on the LME and the Midwest transaction premium, a premium to LME price reflecting domestic market dynamics as well as the cost of shipping and warehousing, the sum of which is known as the Midwest Transaction Price. As a majority of our value-added products are sold at the prior month’s MWTP, we calculate a "realized" MWTP which reflects the specific pricing of sale transactions in each period. |
(9) | External alumina and bauxite shipments are recorded subsequent to the August 31, 2009 Joint Venture Transaction. Additionally, from time-to-time, the New Madrid smelter sells excess alumina. Alumina and bauxite are exchanged and priced in metric tonnes. One metric tonne represents 2,204.6 pounds. For the year ended December 31, 2009, our sales included 540.1 million pounds of alumina sold to third parties, and 1.1 billion pounds of bauxite sold to third parties. |
(10) | For purposes of comparability to other periods, brokered metal sales are excluded from pounds shipped in the flat rolled products segment because the related metal was sold without fabrication premiums. Brokered metal sales excluded were $8.1 million for the period from January 1, 2007 to May 17, 2007, and $43.2 million for the period from May 18, 2007 to December 31, 2007. |
(11) | Net Cash Cost represents our costs of producing a pound of commodity grade aluminum, including the benefits of the Midwest premium, as well as the profit margin realized from value-added, alumina and bauxite sales to external customers. |
. | We have provided Net Cash Cost because we believe it provides investors with additional information to measure our operating performance. Using this metric, investors are able to assess the prevailing LME price plus Midwest premium per pound versus our unit net costs per pound shipped. Net Cash Cost is positively or negatively impacted by changes in primary aluminum, alumina and bauxite production and sales volumes, natural gas and oil related costs, seasonality in our electrical contract rates, and increases or decreases in other production related costs. Net Cash Cost is not a measure of financial performance under U.S. GAAP and may not be comparable to similarly titled measures used by other companies in our industry and should not be considered in isolation from or as an alternative to any performance measures derived in accordance with U.S. GAAP. |
Year ended December 31, | |||||||||
2011 | 2010 | 2009 | |||||||
Total primary aluminum cash cost (in millions) (a) | $ | 436.0 | $ | 391.2 | $ | 271.6 | |||
Total shipments (pounds in millions) | 581.4 | 560.5 | 351.6 | ||||||
Net Cash Cost (per pound shipped) | $ | 0.75 | $ | 0.70 | $ | 0.77 | |||
(a) Total primary aluminum cash cost is calculated below (in millions): | |||||||||
Total primary aluminum revenue | $ | 724.1 | $ | 621.3 | $ | 340.3 | |||
Less fabrication premiums and other revenue | (46.6 | ) | (37.1 | ) | (55.8 | ) | |||
Realized Midwest transaction price revenue | 677.5 | 584.2 | 284.5 | ||||||
Primary Aluminum segment profit | 140.3 | 112.2 | 4.9 | ||||||
Alumina segment profit (loss) | 78.4 | 61.9 | (2.3 | ) | |||||
Bauxite segment profit | 18.5 | 23.8 | 12.3 | ||||||
Profit Eliminations | 4.3 | (4.9 | ) | (2.0 | ) | ||||
Total | 241.5 | 193.0 | 12.9 | ||||||
Total primary aluminum cash cost (in millions) | $ | 436.0 | $ | 391.2 | $ | 271.6 | |||
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UNAUDITED SUPPLEMENTAL PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007
(in millions, except per share data)
The following unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2007 is based on the historical consolidated statements of operations of the Predecessor period from January 1, 2007 to May 17, 2007 and the Successor period from May 18, 2007 to December 31, 2007 and gives effect to the Apollo Transactions and Special Dividend as if they had occurred on January 1, 2007.
Predecessor | Successor | ||||||||||||
Period from | Period from | Year ended | |||||||||||
January 1, 2007 to May 17, 2007(1) | May 18, 2007 to December 31, 2007 | Pro forma adjustments | December 31, 2007 | ||||||||||
Sales | $ | 527.7 | $ | 867.4 | $ | — | $ | 1,395.1 | |||||
Operating costs and expenses: | |||||||||||||
Cost of sales | 424.3 | 767.9 | 12.8 | (2) | 1,205.0 | ||||||||
Selling, general and administrative expenses | 17.0 | 39.3 | 0.5 | (3) | 56.8 | ||||||||
Other charges (recoveries), net | — | (0.5 | ) | — | (0.5 | ) | |||||||
441.3 | 806.7 | 13.3 | 1,261.3 | ||||||||||
Operating income | 86.4 | 60.7 | (13.3 | ) | 133.8 | ||||||||
Other expenses (income): | |||||||||||||
Interest expense, (income), net: | |||||||||||||
Parent and related party | 7.2 | — | (7.2 | ) | — | ||||||||
Other | (1.0 | ) | 65.0 | 42.8 | (5) | 106.8 | |||||||
(Gain) loss on hedging activities, net | 56.6 | (12.5 | ) | — | 44.1 | ||||||||
Equity in net (income) loss of investments in affiliates | (4.3 | ) | (7.3 | ) | 0.1 | (6) | (11.5 | ) | |||||
Gain on debt repurchase | — | 2.2 | — | 2.2 | |||||||||
Total other expenses, net | 58.5 | 47.4 | 35.7 | 141.6 | |||||||||
Income (loss) before income taxes | 27.9 | 13.3 | (49.0 | ) | (7.8 | ) | |||||||
Income tax expense (benefit) | 13.6 | 5.1 | (17.0 | ) | (7) | 1.7 | |||||||
Net income (loss) | $ | 14.3 | $ | 8.2 | $ | (32.0 | ) | $ | (9.5 | ) | |||
Net income (loss) per common share: | |||||||||||||
Basic | $ | 0.19 | $ | (0.22 | ) | ||||||||
Diluted | $ | 0.19 | $ | (0.22 | ) | ||||||||
Weighted-average common shares outstanding: | |||||||||||||
Basic | 43.21 | 43.07 | |||||||||||
Diluted | 43.33 | 43.07 | |||||||||||
(1) | Represents the historical consolidated results of operations. |
(2) | Reflects an increase of $12.5 million for the year ended December 31, 2007 of depreciation resulting from fair value adjustments to property, plant and equipment as a result of the Apollo Acquisition. The adjustment also reflects an increase of $0.3 million for the year ended December 31, 2007 resulting from the fair value adjustment to inventory as a result of the Apollo Acquisition. |
(3) | Includes an increase of $0.5 million for the year ended year ended December 31, 2007 of amortization resulting from fair value adjustments to amortizable intangible assets as a result of the Apollo Acquisition. |
(4) | Reflects the elimination of historical intercompany interest income and expenses, related to intercompany balances which were not acquired as part of the Apollo Acquisition. |
(5) | Reflects the net effect of the increase in interest expense related to the additional indebtedness, incurred in the Apollo Transactions and the Special Dividend in the aggregate principal amount of $1,227.8 million, bearing interest at a weighted-average interest rate of 8.3%. The interest rates used for pro forma purposes are based on assumptions of the rates at the time of the acquisition. The adjustment assumes straight-line amortization of related deferred financing costs. A 0.125% change in the interest rates on our pro forma indebtedness would change our annual pro forma interest expense by $1.5 million. |
(6) | Reflects an increase of amortization of excess of carrying value of investment over Noranda’s share of the investments’ underlying net assets resulting from the fair value adjustments to Noranda’s joint ventures as a result of the Apollo Acquisition. |
(7) | Reflects the estimated tax effect of the pro forma adjustments at Noranda’s statutory tax rate. |
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ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion of our results of operations and financial condition with the "Selected Historical Consolidated Financial Data," and the audited consolidated financial statements and related notes included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and that involve numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this report. Actual results may differ materially from those contained in any forward-looking statements. See "Cautionary Statement Concerning Forward-Looking Statements."
Introduction
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided to supplement the consolidated financial statements and the related notes included elsewhere in this report to help provide an understanding of our financial condition, changes in financial condition and results of our operations. The MD&A is organized as follows:
Company Overview. This section provides a general description of our business as well as recent developments that we believe are necessary to understand our financial condition and results of operations and to anticipate future trends in our business.
Critical Accounting Policies and Estimates. This section discusses the accounting policies and estimates that we consider being important to our financial condition and results of operations and that require significant judgment and estimates on the part of management in their application.
Selected Quarterly Consolidated Financial Data. This section provides the unaudited quarterly financial information for each of our years ended December 31, 2011 and 2010.
Results of Operations. This section provides a discussion of the results of operations on a historical basis for each of our years ended years ended December 31, 2011, 2010 and 2009.
Liquidity and Capital Resources. This section provides an analysis of our cash flows for each of our years ended December 31, 2011, 2010 and 2009 and availability of funds at December 31, 2011.
Description of Certain Indebtedness. This section provides a general description of our senior secured credit facilities, our Notes and governing indentures, including covenant compliance and financial ratios as of December 31, 2011.
Contractual Obligations and Contingencies. This section provides a discussion of our commitments as of December 31, 2011.
Company Overview
We are a leading North American integrated producer of value-added primary aluminum and high quality rolled aluminum coils. We have two businesses: our upstream business and downstream business. Our upstream business consists of three reportable segments: Primary Aluminum, Alumina, and Bauxite. These three segments are closely integrated and consist of a smelter near New Madrid, Missouri, which we refer to as "New Madrid," and supporting operations at our bauxite mine and alumina refinery. In 2011, New Madrid produced approximately 583 million pounds (264,000 metric tonnes) of primary aluminum, representing approximately 13% of total 2011 U.S. primary aluminum production, based on statistics from CRU. Our downstream business comprises our Flat-Rolled Products segment, which is one of the largest aluminum foil producers in North America and consists of four rolling mill facilities with a combined maximum annual production capacity of 410 to 495 million pounds, depending on production mix.
Joint Venture Transaction
Through August 31, 2009, we held a 50% interest in Gramercy and in St. Ann. Our investments in these non‑controlled entities, in which we had the ability to exercise equal or significant influence over operating and financial policies, were accounted for by the equity method. On August 3, 2009, we entered into an agreement with Century whereby we would become the sole owner of both Gramercy and St. Ann. The transaction closed on August 31, 2009 and is discussed further in Note 22, "Joint Venture Transaction" to our consolidated financial statements, included elsewhere in this report.
In the transaction, Noranda and Gramercy released Century from certain obligations. These obligations included (i) approximately $23.5 million Century owed Gramercy for pre-transaction alumina purchases, and (ii) Century’s guarantee to fund future payments of environmental and asset retirement obligations.
Key factors affecting our results of operations
Prices and markets. Primary aluminum is a global commodity, and its price is set on the LME. Our primary aluminum typically earns the LME price plus a Midwest premium. As a result of the global economic contraction, the monthly average LME price dropped from a peak of $1.49 per pound in July 2008 to a low of $0.57 per pound in February 2009. The average LME price for 2010 was $0.99
30
per pound, which had a significant negative impact on our upstream business and our 2010 operating results. By December 31, 2010, LME prices had risen to $1.12 per pound. During 2011 the average LME cash price was $1.09 per pound and the average Midwest premium was $0.08 per pound.
Profit margins in the Flat-Rolled Products segment are generally unaffected by short-term volatility in the underlying LME price, except in periods of rapid change, which could create significant differences between the cost of metal purchased and the price of metal sold to customers. The price of any given end-product is equal to the cost of the metal, the MWTP, plus a negotiated fabrication premium. These fabrication premiums are determined in large part by industry capacity utilization, which in turn is driven by supply-demand fundamentals for our products.
Because primary aluminum is a global commodity, we have experienced and expect to continue to be subject to volatile primary aluminum prices. This price volatility is influenced primarily by the world supply-demand balance for those commodities and related processing services, and other related factors such as speculative activities by market participants, production activities by competitors and political and economic conditions, as well as production costs in major production regions. Increases or decreases in primary aluminum prices result in increases and decreases in our revenues (assuming all other factors are unchanged). At times, since the Apollo Acquisition, we have partially hedged this volatility through the use of derivative financial instruments. See Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," for further discussion of fixed price aluminum swaps. See "Critical Accounting Policies and Estimates" for further discussion of our accounting for these hedges.
Demand. We are a North American producer with a majority of our primary aluminum sales in the form of value-added products delivered within a one-day delivery radius of New Madrid. Therefore, while global market trends determine the LME price and impact our margins, domestic supply and demand for our value-added products also directly impact our margins.
Our integrated operations provide us the flexibility to shift a portion of our upstream production to our downstream business, reducing our overall external purchase commitments, and allowing us to retain the economic differential between LME pricing and our production costs.
Production. Our rolling mills have a combined maximum annual production capacity of 410 to 495 million pounds, depending on our product mix.
In 2011, 2010 and 2009 our Primary Aluminum segment produced approximately 583 million pounds, 553 million pounds, and 316 million pounds, respectively, of primary aluminum. In January 2009, an ice storm disrupted the power grid throughout Southeastern Missouri. The resulting power outage completely disabled two of New Madrid’s three production lines and partially disabled the third, initially reducing our daily production to 25% of pre-outage levels. This event had a substantial negative impact on our 2009 operating results, resulting in an average operating rate of 58% of capacity for the year. This operating rate is significantly below our operating rate for the past 20 years of 99%. We reached a settlement with our insurance providers with respect to this incident pursuant to which we collected approximately $67.5 million in the second and third quarters of 2009.
Our smelter became fully operational in the first quarter of 2010. Shipments of value-added products in the year ended December 31, 2010, were 45.7% higher than in the year ended December 31, 2009.
Source: Company data as of December 31, 2011
Production costs. The key cost components at our smelter are power and alumina; however, other integrated input costs, such as wages, carbon products and caustic soda may affect our results as well.
We have a long-term, secure power contract at New Madrid that extends through 2020. This contract is for regulated power and cannot be altered without the approval of the Missouri Public Service Commission ("MoPSC"). Our power contract with Ameren includes
31
two components: a base rate and a fuel adjustment clause. The fuel adjustment clause increased cost of goods sold by $14.7 million in 2011, by $5.4 million in 2010, and decreased cost of goods sold by $0.2 million in 2009. Though we are not able to predict future fuel adjustment charges, as they are dependent on Ameren’s fuel costs and off system sales volume and prices, we do not expect the impact of fuel adjustment charges in 2012 to increase our Net Cash Cost.
On September 3, 2010, Ameren filed a new rate case with the MoPSC seeking an 11% base rate increase. In July 2011, the MoPSC ruled on this rate case approving Ameren to increase its base rates, which increased our base rate by 5.2% effective July 31, 2011. On February 3, 2012, Ameren filed a new rate case with the MoPSC seeking a 14.6% base rate increase. As we have been in previous rate cases, we expect to be an active participant in the MoPSC rate setting process. We expect a ruling on this request by January 3, 2013. Any increase approved would be effective at the beginning of the month following the MoPSC's ruling.
We are currently a party to the appeal of several rate-related issues, including rate increases approved by the MoPSC in January 2009, May 2010, and July 2011, and the amount of cost increases related to the FAC. Despite these appeals, our consolidated financial statements reflect our payment of power costs at the enacted rates, with disputed amounts held in escrow by the Missouri Circuit Court. As of December 31, 2011 and 2010, other current assets (see Note 3, "Supplemental Financial Statement Information" to our consolidated financial statements) included $30.1 million and $9.8 million, respectively, for amounts held in escrow related to these appeals, with corresponding liabilities recorded in accrued liabilities.
On November 7, 2011, the Missouri Court of Appeals issued a decision to uphold the MoPSC's January 2009 rate increase approval. The parties to the appeal, including Noranda, are evaluating whether to request rehearing of the Court of Appeals' decision or to appeal that decision to the Missouri Supreme Court. If the parties decide not to file additional appeals, or if such appeals are filed and are not successful, a substantial portion of the escrowed funds will be released to Ameren. At December 31, 2011, such amount of released funds would have been $20.8 million. The release of these funds will not result in any impact to our operating results, our net working capital, or our net assets.
Our vertical integration with Gramercy provides us with a secure supply of alumina at a cost effectively equal to Gramercy and St. Ann’s combined cost of production, net of bauxite and alumina sales to third parties. St. Ann sells bauxite to third parties and Gramercy sells chemical and smelter grade alumina to third parties. Margins from these third-party sales effectively reduce the cost for producing smelter grade alumina for our smelter in New Madrid. Upon becoming sole owner of Gramercy, we began selling smelter grade alumina under contract to third parties on market terms. The margin from these sales effectively lowers the cost of our alumina supply and therefore lowers our Net Cash Cost.
The following chart presents our New Madrid smelter’s placement on the aluminum cost curve:
Source: CRU data as of January 2012
Historically, natural gas prices have shown a high level of volatility. Average natural gas prices were $4.00 per million BTU in 2011, $4.37 in 2010 and $3.94 in 2009, based on end of day prices at the Henry Hub. At December 31, 2011, we are a party to forward swaps for natural gas, effectively fixing our cost for approximately 45% of our natural gas exposure through 2012 at an average price of $7.37 per million BTU.
During 2011 in our downstream business, aluminum metal units, which represent a pass-through cost to our customers, accounted for 76% of production costs with value-added conversion costs accounting for the remaining 24%. Conversion costs include labor, energy
32
and operating supplies, including maintenance materials. Energy includes natural gas and electricity, which made up about 13% of conversion costs during 2011.
CORE stands for "Cost-Out, Reliability, and Effectiveness," and represents our productivity program. We believe CORE is an effective part of our efforts to manage for productivity, where we identify opportunities throughout the organization to either remove existing costs, or to affect processes or business arrangements. We then utilize project teams to address the opportunity. Although results will vary from year to year, our overarching aim is to use CORE projects to offset the effects of inflation and to mitigate the impact of unexpected cost increases. Our CORE program has generated savings of over $189.0 million since its inception in 2009. For the year ended December 31, 2011, our results reflected approximately $62.5 million in cost savings and $6.9 million in capital expenditure savings achieved towards our three year $140.0 million program goal (2011 through 2013.)
We believe the impact of CORE is evident in the Net Cash Cost, which declined from $0.82 per pound for the full year ended December 31, 2008 to $0.75 per pound for the year ended December 31, 2011.
Seasonality and the effects of inflation
We are subject to seasonality associated with the demand cycles of our end-use customers, which results in lower shipment levels from November to February each year. Our power contracts have seasonally adjusted pricing which results in fluctuations in our cost of production; the rates from June to September are approximately 45% higher than the rates from October to May.
We experience inflationary pressures for input costs, such as wages, carbon products such as coke, chemical products such as caustic soda, and other key inputs. We may not be able to offset fully the inflationary impact from these input costs or energy costs through price increases, productivity improvements or cost reduction programs. We expect full year 2012 Net Cash Cost to be unfavorably impacted by approximately 1 to 2 cents per pound for chemical products, carbon-based products and fuel, and an additional 2 to 3 cents related to increased wages and benefits. Based on the current forward natural gas curve, we expect lower natural gas prices to favorably impact Net Cash Cost by 2 to 3 cents per pound.
Off balance sheet arrangements
We do not have any significant off balance sheet arrangements.
Government regulations and environmental matters
Our operations are subject to a wide variety of U.S. federal, state, local and non-U.S. environmental laws and regulations, including those governing emissions to air, discharges to waters, generation, use, storage, transportation, treatment and disposal of hazardous materials and wastes, land reclamation and employee health and safety matters. Compliance with environmental laws and regulations can be costly, and we have incurred and will continue to incur costs, including capital expenditures, to comply with these requirements. Additionally, certain of our raw material suppliers may be subject to significant compliance costs, which may be passed through to us. As these direct or indirect regulatory costs increase and are passed through to our customers, our products may become less competitive than other materials, which could reduce our sales. If we are unable to comply with environmental laws and regulations, we could incur substantial costs, including fines and civil or criminal sanctions, or costs associated with upgrades to our facilities or changes in our manufacturing processes in order to achieve and maintain compliance. In addition, environmental requirements change frequently and have tended to become more stringent over time. We cannot predict what environmental laws or regulations will be enacted or amended in the future, how existing or future laws or regulations will be interpreted or enforced, or the amount of future expenditures that may be required to comply with such laws or regulations. Our costs of compliance with current and future environmental requirements could materially and adversely affect our business, financial condition, results of operations and cash flows.
The Environmental Protection Agency ("EPA") has developed National Ambient Air Quality Standards ("NAAQS") for six compounds currently identified as criteria pollutants. The NAAQS establishes acceptable ambient air levels of each pollutant based on a review of their effects to human health and the environment. Sulfur dioxide ("SO2"), an emission from our New Madrid smelter facility, is one such criteria pollutant. Currently, ambient monitoring is used to determine whether emissions from our smelter meet NAAQS.
Changes to the stringency of the NAAQS could present material implications for the compliance of our smelter. Failure to meet NAAQS may require us to incur significant capital or operational costs to bring our smelter into compliance and could have negative implications for the permits that we currently have in place in support of our smelter expansion project.
Changes to the stringency of the NAAQS could present material implications for the compliance of our smelter. Failure to meet NAAQS may require us to incur significant capital or operational costs to bring our smelter into compliance and could have negative implications for the permits that we currently have in place in support of our smelter expansion project.
We accrue for costs associated with environmental investigations and remedial efforts when it becomes probable that we are liable and the associated costs can be reasonably estimated. Our aggregate environmental-related liabilities at December 31, 2011 and 2010 were $24.4 million and $28.6 million, respectively. Additionally, at December 31, 2011 and 2010, we had $9.2 million of restricted cash in an escrow account as security for the payment of red mud lake closure obligations that would arise under state environmental laws upon the termination of operations at the Gramercy facility. With regard to our New Madrid smelter, we have asset retirement obligations related to the disposal of certain spent pot liners. Related to St. Ann, we have land reclamation liabilities to rehabilitate the land disturbed by St. Ann’s mining operations. With respect to the Gramercy refinery, we have asset-retirement obligations associated with the future closure and post-closure care of the "red mud lakes," where Gramercy disposes of non‑hazardous red mud wastes from its refining process. We also have an environmental liability for the remediation of certain hazardous waste contamination at the Gramercy refinery.
All accrued amounts have been recorded without giving effect to any possible future recoveries. With respect to ongoing
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environmental compliance costs, including maintenance and monitoring, we expense the costs when incurred.
For the year ended December 31, 2011, we incurred $10.4 million of capital expenditures related to compliance with environmental regulations. In each of the years ending 2012 , 2013 and 2014, we anticipate from $13.0 million to $18.0 million of environmental capital expenditures. We have incurred, and in the future will continue to incur, operating expenses related to environmental compliance. As part of our general capital expenditure plan, we also expect to incur capital expenditures for other capital projects that may, in addition to improving operations, reduce certain environmental impacts.
Critical Accounting Policies and Estimates
Our principal accounting policies are described in Note 1, "Accounting Policies" of the audited consolidated financial statements included elsewhere in this report. The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make significant judgments and estimates. Some accounting policies have a significant impact on amounts reported in our consolidated financial statements. Our financial position and results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. The preparation of interim financial statements involves the use of certain estimates that are consistent with those used in the preparation of our annual consolidated financial statements. Significant accounting policies, including areas of critical management judgments and estimates, include the following financial statement areas:
Ÿ | Revenue recognition | Ÿ | Asset retirement obligations |
Ÿ | Impairment of long-lived assets | Ÿ | Land obligation |
Ÿ | Goodwill and other intangible assets | Ÿ | Derivative instruments and hedging activities |
Ÿ | Inventory valuation | ||
Revenue recognition
Revenue is recognized when title and risk of loss pass to customers in accordance with contract terms.
Impairment of long-lived assets
Our long-lived assets, primarily property, plant and equipment, comprise a significant amount of our total assets. We evaluate our long-lived assets and make judgments and estimates concerning the carrying value of these assets, including amounts to be capitalized, depreciation and useful lives. The carrying values of these assets are reviewed for impairment periodically whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This evaluation requires us to make long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for our products and future market conditions. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.
Goodwill and other intangible assets
Goodwill represents the excess of acquisition consideration paid over the fair value of identifiable net tangible and identifiable intangible assets acquired. Goodwill and other indefinite-lived intangible assets are not amortized, but are reviewed for impairment at least annually, in the fourth quarter, or upon the occurrence of certain triggering events. We evaluate goodwill for impairment using a two-step process. The first step is to compare the fair value of each of our reporting units to their respective book values, including goodwill. If the fair value of a reporting unit exceeds its book value, reporting unit goodwill is not considered impaired and the second step of the impairment test is not required. If the book value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the book value of that goodwill. If the book value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
Our analysis includes assumptions about future profitability and cash flows of our segments, which reflect our best estimates at the date the valuations was performed. The estimates are based on information that was known or knowable at the date of the valuations. It is at least reasonably possible that the assumptions we employ will be materially different from the actual amounts or results, and that additional impairment charges may be necessary.
Inventory valuation
Inventories are stated at the lower of cost or market ("LCM"). We use the last-in-first-out ("LIFO") method of valuing raw materials, work-in-process and finished goods inventories at our New Madrid smelter and our rolling mills. Inventories at Gramercy and St. Ann and supplies at New Madrid are valued at weighted-average cost. The remaining inventories (principally supplies) are stated at cost using
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the first-in first-out ("FIFO”) method. Inventories in our Flat-Rolled Products segment, our Bauxite segment and our Alumina segment are valued using a standard costing system, which gives rise to cost variances. Variances are capitalized to inventory in proportion to the quantity of inventory remaining at period end to quantities produced during the period. Variances are recorded such that ending inventory reflects actual costs on a year-to-date basis.
As of the date of the Apollo Acquisition, a new base layer of LIFO inventories was established at fair value, such that FIFO basis and LIFO basis were equal. For layers added between the acquisition date and period end, we use a dollar-value LIFO approach where a single pool for each segment represents a composite of similar inventory items. Increases and decreases in inventory are measured on a pool basis rather than item by item. In periods following the Apollo Acquisition, LIFO cost of sales generally reflect sales at current production costs, which are substantially lower than the fair value cost recorded at the date of acquisition, to the extent that quantities produced exceed quantities sold. In periods when quantities sold exceed quantities produced, cost of goods sold generally reflect the higher fair value cost per unit.
As LME prices fluctuate, our inventory will be subject to market valuation reserves. In periods when the LME price at a given balance sheet date is higher than the LME price at the time of the Apollo Acquisition (the date used to determine the fair value of the majority of our inventory), no reserves will be necessary.
The following table illustrates the sensitivity of our LIFO adjustment by showing the amount by which pre-tax income would have changed for the year ended December 31, 2011, given certain specified changes in inventory costs:
Inventory item | Sensitivity | Increase (decrease)in pre-tax income ($ in millions) |
Primary aluminum segment: | ||
Coke | 10% increase in price | (0.7) |
Alumina | $0.10 increase in LME per pound | (1.7) |
Flat rolled products segment: | ||
Metal | $0.10 increase in LME per pound | (5.2) |
Asset retirement obligations
We record our costs for legal obligations associated with the retirement of a tangible long-lived asset that results from its acquisition, construction, development or normal operation as asset retirement obligations. We recognize liabilities, at fair value, for our existing legal asset retirement obligations and adjust these liabilities for accretion costs and revision in estimated cash flows. The related asset retirement costs are capitalized as increases to the carrying amount of the associated long-lived assets and depreciation on these capitalized costs is recognized.
Land obligation
In cases where land to be mined is privately owned, St. Ann agrees to purchase the residents’ property, including land, crops, homes, and other improvements in exchange for consideration paid in the form of cash, a commitment to relocate the residents to another area, or a combination of these two options (the "St. Ann Land Obligation"). We account for the costs associated with fulfilling the St. Ann Land Obligation by recording an asset (included in other assets in our consolidated balance sheets) for the estimated cost of the consideration, with a corresponding liability (included in accrued liabilities and other long-term liabilities in our consolidated balance sheets). We amortize those costs over a three-year period, representing the approximate time the land is used for mining purposes (the "Mining Period").
We record the costs to acquire and develop the assets to be used to satisfy the obligations, such as land, land improvements, and housing, as property, plant and equipment in our consolidated balance sheets. As cash is paid or title to land, land improvements and houses is transferred, we remove those assets from our consolidated financial statements and reduce the land obligation.
Relocating residents occurs often over several years, requiring management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the consolidated financial statements. Actual results could differ from these estimates. As such, estimates of the cost to fulfill the St. Ann Land Obligation and the Predecessor Land Obligation are subject to revision; therefore, it is reasonably possible that further adjustments to our liabilities may be necessary.
As revisions are made, we amortize such adjustments prospectively over the remaining amortization period in cases where the Mining Period has not been completed. As revisions are made in cases where the Mining Period is complete, we record such adjustments as additional amortization expense in the period of revision.
Derivative instruments and hedging activities
Derivatives that have not been designated for hedge accounting are adjusted to fair value through earnings in (gain) loss on hedging activities in the consolidated statements of operations. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of any gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) ("AOCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness
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are recognized in current earnings. Amounts recorded in AOCI are reclassified into earnings in the periods during which the hedged transaction affects earnings, unless it is determined that it is probable that the original forecasted transactions will not occur, at which point a corresponding amount of AOCI is immediately reclassified into earnings.
Forecasted sales represent a sensitive estimate in our designation of derivatives as cash flow hedges. As a result of the New Madrid power outage in January 2009, management concluded that certain hedged sale transactions were no longer probable of occurring, and we discontinued hedge accounting for all our aluminum fixed price sale swaps on January 29, 2009. At that date, the accounting for amounts in AOCI did not change. Forecasted sales represent a sensitive estimate in our accounting for derivatives because they impact the determination of whether any amounts in AOCI should be reclassified into earnings in the current period.
We determine the fair values of our derivative instruments using industry standard models that incorporate inputs which are observable throughout the full term of the instrument. Key inputs include quoted forward prices for commodities (aluminum and natural gas) and interest rates, and credit default swap spread rates for non‑performance risk. Our derivative assets are adjusted for the non‑performance risk of our counterparties using their credit default swap spread rates, which are updated quarterly. Likewise, in the case of our liabilities, our nonperformance risk is considered in the valuation, and are also adjusted quarterly based on current default swap spread rates on entities we consider comparable to us. We present the fair value of our derivative contracts net of cash paid pursuant to collateral agreements on a net-by-counterparty basis in our consolidated balance sheets when we believe a legal right of set-off exists under an enforceable master netting agreement.
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Selected Quarterly Consolidated Financial Data
The following table presents unaudited quarterly financial information as required by Item 302 of Regulation S‑K (in millions, except per share data):
2011 quarter ended | 2010 quarter ended | |||||||||||||||
First quarter | Second quarter | Third quarter (1) | Fourth quarter | First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||
Sales | 394.6 | 426.3 | 400.4 | 338.5 | 301.5 | 334.9 | 314.2 | 344.3 | ||||||||
Gross profit | 66.3 | 73.2 | 50.0 | 25.8 | 36.8 | 44.1 | 40.2 | 61.4 | ||||||||
Operating income | 41.4 | 52.6 | 23.2 | 4.2 | 7.6 | 0.8 | 20.1 | 39.0 | ||||||||
Net income (loss) | 38.3 | 47.4 | 30.8 | 24.4 | (0.1 | ) | 6.9 | 25.2 | 34.9 | |||||||
Net income (loss) per common share: | ||||||||||||||||
Basic | 0.57 | 0.71 | 0.46 | 0.36 | — | 0.14 | 0.46 | 0.60 | ||||||||
Diluted | 0.56 | 0.69 | 0.45 | 0.36 | — | 0.14 | 0.45 | 0.59 | ||||||||
(1) At September 30, 2011, we determined that the information that gave rise to revisions recorded to our St. Ann Land Obligation during 2011 was known or knowable at December 31, 2010. As a result, cost of goods sold was overstated in third quarter 2011 by $3.0 million, excluding income tax effects.
The special items outlined below significantly impacted the comparability of our unaudited quarterly financial results (in millions):
2011 quarter ended | 2010 quarter ended | |||||||||||||||
First quarter | Second quarter | Third quarter | Fourth quarter | First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||
Pre‑tax impact of special items: | ||||||||||||||||
Release of indemnification receivable related to uncertain tax positions | — | — | (3.4 | ) | (1.1 | ) | — | — | — | — | ||||||
Early retirement benefits | — | — | — | (0.7 | ) | — | — | — | — | |||||||
Restructuring | — | — | — | — | (4.4 | ) | (3.2 | ) | — | — | ||||||
Management agreement termination | — | — | — | — | — | (12.5 | ) | — | — | |||||||
Modification of stock options | — | — | — | — | — | (3.2 | ) | — | — | |||||||
Transaction related legal costs | — | — | — | — | (0.3 | ) | (5.2 | ) | — | — | ||||||
Executive separation agreement | — | — | — | — | — | — | — | (3.3 | ) | |||||||
Impact of special items on operating income (loss) | — | — | (3.4 | ) | (1.8 | ) | (4.7 | ) | (24.1 | ) | — | (3.3 | ) | |||
Gain on hedging activities | 21.8 | 24.3 | 19.5 | 20.8 | 1.7 | 20.6 | 21.7 | 21.6 | ||||||||
Gain (loss) on debt repurchase | — | — | — | — | (0.1 | ) | (2.5 | ) | 3.5 | (1.0 | ) | |||||
Pre-tax impact of special items | 21.8 | 24.3 | 16.1 | 19.0 | (3.1 | ) | (6.0 | ) | 25.2 | 17.3 | ||||||
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Results of Operations
To aid the reader in understanding the results of operations of each of these distinctive periods, we have provided the following discussion. You should read the following discussion of the results of operations and financial condition with the consolidated financial statements and related notes included herein.
The following chart indicates the percentages of sales represented by each of our segments for the periods presented:
Year ended December 31, | ||||||
2011 | 2010 | 2009 | ||||
% | % | % | ||||
Bauxite | 10 | 9 | 5 | |||
Alumina | 26 | 28 | 11 | |||
Primary Aluminum | 46 | 49 | 44 | |||
Flat-Rolled Products | 39 | 40 | 53 | |||
Eliminations | (21 | ) | (26 | ) | (13 | ) |
Total | 100 | 100 | 100 | |||
The following chart indicates the percentages of segment profit (loss) represented by each of our segments for the periods presented:
Year ended December 31, | ||||||
2011 | 2010 | 2009 | ||||
% | % | % | ||||
Bauxite | 7 | 11 | 63 | |||
Alumina | 30 | 29 | (12 | ) | ||
Primary Aluminum | 54 | 51 | 25 | |||
Flat-Rolled Products | 18 | 23 | 179 | |||
Corporate | (11 | ) | (12 | ) | (145 | ) |
Eliminations | 2 | (2 | ) | (10 | ) | |
Total | 100 | 100 | 100 | |||
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Discussion of results for the year ended December 31, 2011 compared to the year ended December 31, 2010
The following table sets forth certain consolidated financial information for the years ended December 31, 2011 and 2010 (in millions, except per share data and where noted):
Year ended December 31, | ||||
2011 | 2010 | |||
$ | $ | |||
Statements of operations data: | ||||
Sales | 1,559.8 | 1,294.9 | ||
Operating costs and expenses: | ||||
Cost of sales | 1,344.5 | 1,112.4 | ||
Selling, general and administrative expenses | 93.9 | 115.0 | ||
Total operating costs and expenses | 1,438.4 | 1,227.4 | ||
Operating income | 121.4 | 67.5 | ||
Other expenses (income): | ||||
Interest expense, net | 21.5 | 31.1 | ||
Gain on hedging activities, net | (86.4 | ) | (65.6 | ) |
Loss on debt repurchase | — | 0.1 | ||
Total other income | (64.9 | ) | (34.4 | ) |
Income before income taxes | 186.3 | 101.9 | ||
Income tax expense | 45.4 | 35.0 | ||
Net income | 140.9 | 66.9 | ||
Net income per common share: | ||||
Basic | 2.10 | 1.30 | ||
Diluted | 2.06 | 1.27 | ||
Weighted-average common shares outstanding: | ||||
Basic | 67.06 | 51.56 | ||
Diluted | 68.35 | 52.80 | ||
Cash dividends declared per common share | 1.03 | — | ||
Sales by segment: | ||||
Bauxite | 151.0 | 120.4 | ||
Alumina | 403.1 | 365.4 | ||
Primary Aluminum | 724.1 | 621.3 | ||
Flat-Rolled Products | 611.2 | 521.4 | ||
Eliminations | (329.6 | ) | (333.6 | ) |
Total | 1,559.8 | 1,294.9 | ||
Segment profit (loss): | ||||
Bauxite | 18.5 | 23.8 | ||
Alumina | 78.4 | 61.9 | ||
Primary Aluminum | 140.3 | 112.2 | ||
Flat-Rolled Products | 48.3 | 50.0 | ||
Corporate | (27.9 | ) | (26.9 | ) |
Eliminations | 4.3 | (4.9 | ) | |
Total | 261.9 | 216.1 | ||
Financial and other data: | ||||
Average realized Midwest transaction price (per pound) | 1.17 | 1.04 | ||
Net Cash Cost (per pound shipped) | 0.75 | 0.70 | ||
Shipments: | ||||
Third party shipments: | ||||
Bauxite (kMts) | 2,499.9 | 1,738.0 | ||
Alumina (kMts) | 635.1 | 683.6 | ||
Primary Aluminum (pounds, in millions) | 513.0 | 438.8 | ||
Flat-Rolled Products (pounds, in millions) | 362.6 | 346.4 | ||
Intersegment shipments: | ||||
Bauxite (kMts) | 2,643.6 | 2,565.5 | ||
Alumina (kMts) | 487.5 | 467.4 | ||
Primary Aluminum (pounds, in millions) | 68.4 | 121.7 | ||
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Sales
Sales in the year ended December 31, 2011 were $1,559.8 million compared to $1,294.9 million in the year ended December 31, 2010, an increase of 20.5%. Of the increase in sales, $148.4 million was attributable to higher realized prices. LME aluminum price averaged $1.09 in 2011, compared to $0.99 in 2010. The remaining $116.5 million increase in sales was attributable primarily to higher volumes in the Bauxite, Primary Aluminum and Flat-Rolled Products segments.
Sales to external customers from our Primary Aluminum segment increased 30.2% to $645.7 million in the year ended December 31, 2011 from $495.9 million in the year ended December 31, 2010, driven primarily by higher realized prices for aluminum, and higher third-party shipments.
• | The average LME price improved to $1.09 per pound during 2011 from $0.99 per pound during 2010. Our average realized MWTP for 2011 was $1.17 per pound, compared to $1.04 per pound in 2010. |
• | Demand remained strong during 2011, particularly for billet and rod in the Primary Aluminum segment. |
Sales to our external customers in our Flat-Rolled Products segment increased 17.2% to $611.2 million during the year ended December 31, 2011 from $521.3 million in the year ended December 31, 2010, primarily due to the increase in LME prices and also to increased sales volume.
• | Rising LME prices contributed $65.5 million to the sales increase. Fabrication premiums were relatively unchanged. |
• | Higher shipment volumes increased sales by $24.4 million. Shipment volumes from our Flat-Rolled Products segment increased 4.7%. |
Sales to external customers from our Bauxite and Alumina segments for the year ended December 31, 2011 were $68.0 million and $234.9 million, respectively, compared to $54.9 million and $222.8 million, respectively, in the year ended December 31, 2010. The increase is primarily due to more favorable pricing in the Alumina segment and higher third-party shipment volumes in the Bauxite segment, resulting from slightly higher production. These increases were partially offset by lower realized pricing in the Bauxite segment and lower shipment volumes in the Alumina segment.
Cost of sales
Cost of sales for the year ended December 31, 2011 was $1,344.5 million compared to $1,112.4 million in the year ended December 31, 2010. The increase in cost of sales is mainly the result of higher shipment volumes in the Primary Aluminum and Flat-Rolled Products segments, as well as the increase in LME prices, reflected in the pass-through nature of the Flat-Rolled Products segment.
• | Total cost of sales in the Primary Aluminum segment increased to $621.5 million in the year ended December 31, 2011 from $550.1 million in the year December 31, 2010. The increase primarily related to an increase in total shipments of primary aluminum and the effects of rising carbon based products prices. |
• | Flat-Rolled Products segment cost of sales increased to $585.0 million in the year ended December 31, 2011 from $485.0 million in the year ended December 31, 2010. The increase related principally to the increase in the LME aluminum price, since much of that segment’s product cost represents the pass-through cost of metal. |
• | Cost of sales in the Bauxite and Alumina segments, before the effects of intercompany eliminations, were $128.6 million and $339.7 million, respectively, during the year ended December 31, 2011 compared to $94.0 million and $315.8 million, respectively, during the year ended December 31, 2010. Cost of sales in the Alumina segment for the year ended December 31, 2011 reflected a $4.5 million favorable cumulative impact of negotiations to reduce our maintenance obligations for ships transporting bauxite to Gramercy from St. Ann. Cost of sales in the Alumina and Bauxite segments for the year ended December 31, 2011 reflects $16.5 million from scheduled alumina and bauxite maintenance activities whose impact on costs and lost volume exceeded management's expectations. |
◦ | Excessive amounts of scale were identified during maintenance of Gramercy's largest bauxite digester. As a result, the digester experienced an extended outage and subsequently performed at less than normal flow rates. Coincident with the extended digester maintenance, Gramercy experienced the failure of equipment that screens incoming bauxite and prevents rock and other material from entering the production process. This failure further restricted production until the piping and vessels were cleared. We estimate that the combined impact of these two events on cost of sales was $14.5 million. |
◦ | At St. Ann, the conveyor belt which transports dried bauxite to the storage dome failed prior to a planned outage. This failure limited bauxite movement and led to additional costs for demurrage and re-drying bauxite. We estimate that the impact of this event on cost of sales was $2.0 million. |
Selling, general and administrative expenses
Selling, general and administrative expenses in the year ended December 31, 2011 were $93.9 million compared to $115.0 million in the year ended December 31, 2010. This $21.1 million change reflected the favorable impact of the following decreases in expense in
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2011 compared to 2010: (i) no management fees in 2011 compared to $13.5 million of Apollo management consulting fees in 2010 ($12.5 million related to the termination of the agreement in connection with our IPO); (ii) $7.2 million of restructuring costs related to our 2010 workforce and contract mining restructuring plans, for which there were no comparable charges during 2011; (iii) $2.4 million lower severance payments; (iv) $1.4 million lower pension costs associated with settlement and termination benefits; (v) $1.8 million in lower consulting and legal fees and (vi) $0.6 million lower stock compensation expense; offset by the following increases in expense during 2011 compared to 2010: (i) $4.5 million related to the release of an indemnification receivable from our previous owner associated with a portion of our uncertain tax positions; (ii) increased other post-retirement benefit plan ("OPEB") expenses of $0.9 million and (iii) increased insurance premiums of $0.8 million. The indemnification receivable was released because the statute of limitations expired on the uncertain tax position, which resulted in a reversal against income tax expense of a $4.5 million liability.
Operating income
Operating income in the year ended December 31, 2011 was $121.4 million compared to $67.5 million in the year ended December 31, 2010. The increase in operating income relates to sales margin improvements of $32.8 million and the decrease in selling, general and administrative expenses discussed previously.
Sales margin was $215.3 million for the year ended December 31, 2011 compared to $182.5 million in the year ended December 31, 2010. This increase resulted from the favorable impacts of higher external shipment volumes and realized prices coupled with cost savings achieved through our CORE program, partially offset by the Alumina and Bauxite segments maintenance activities described above.
Interest expense, net
Interest expense in the year ended December 31, 2011 was $21.5 million compared to $31.1 million in the year ended year ended December 31, 2010. The $9.6 million decrease resulted from the repayment of debt during 2010. Average debt outstanding was $425.6 million during 2011 and $613.4 million during 2010.
As described in "Description of Certain Indebtedness," on February 29, 2012 we entered into the 2012 Term B Loan ($325.0 million) and repaid the remaining $78.2 million balance of the 2007 Term B Loan ("2012 Refinancing"). The 2012 Refinancing and the related transactions as described in "Description of Certain Indebtedness," resulted in a $246.8 million increase in our outstanding indebtedness.
• | Had the 2012 Refinancing and the related transactions been completed on January 1, 2011, our 2011 interest expense would have been approximately $35.0 million, a $13.5 million increase over our actual 2011 interest expense. |
• | On this pro forma basis, our interest expense would have comprised $33.3 million of cash interest expense at a rate of 5.75%, and $1.7 million amortization of deferred financing costs and original issuance discount. |
• | The 2012 Term B Loan interest rate is determined by the combination of a base rate or an adjusted eurodollar rate (each with a floor) and an applicable margin. |
Gain on hedging activities, net
Gain on hedging activities was $86.4 million in the year ended December 31, 2011 compared to $65.6 million in the year ended December 31, 2010. Reclassifications of aluminum and natural gas hedge gains and losses from AOCI into earnings in 2011 were $98.7 million, compared to $82.1 million in the year ended December 31, 2010.
Loss on debt repurchase
We did not repurchase any debt during the year ended December 31, 2011. During the year ended December 31, 2010 we used net proceeds from our completed IPO, our December 2010 follow-on public offering, available cash balances and proceeds from the termination of fixed price aluminum swaps to repay $249.9 million and $215.9 million of aggregate principal balances on the 2007 Term B Loan and 2007 Revolver, respectively, and to repurchase $66.3 million and $20.6 million aggregate principal balance of our HoldCo Notes and AcquisitionCo Notes, respectively. The 2010 debt repurchases resulted in a $0.1 million net loss.
Income before income taxes
Income before income taxes was $186.3 million in the year ended December 31, 2011, compared to $101.9 million in the year ended December 31, 2010. The special items outlined below significantly impacted the comparability of our pre‑tax income (in millions):
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Year ended December 31, | ||||
2011 | 2010 | |||
$ | $ | |||
Pre-tax impact of special items: | ||||
Release of indemnification receivable related to uncertain tax positions | (4.5 | ) | — | |
Early retirement benefits | (0.7 | ) | — | |
Restructuring | — | (7.6 | ) | |
Loss on debt repurchase | — | (0.1 | ) | |
Executive separation agreement | — | (3.3 | ) | |
Management agreement termination | — | (12.5 | ) | |
Modification of stock options | — | (3.2 | ) | |
Transaction related legal costs | — | (5.5 | ) | |
Gain on hedging activities | 86.4 | 65.6 | ||
Total pre-tax impact of special items | 81.2 | 33.4 | ||
Income tax expense
Income tax expense was $45.4 million in the year ended December 31, 2011, compared to $35.0 million in the year ended December 31, 2010.
The effective tax rate was 24.4% for 2011 and 34.3% for 2010. The effective income tax rate for 2011 was impacted by the release of a portion of our reserve for uncertain tax positions which reduced income tax expense by $6.3 million, of which $4.5 million was indemnified by Xstrata. Our effective tax rate in both periods was impacted by state income taxes, the Internal Revenue Code Section 199 manufacturing deduction, the release of valuation allowances and accrued interest related to unrecognized tax benefits.
Net income
Net income was $140.9 million in the year ended December 31, 2011, compared to $66.9 million in the year ended December 31, 2010. The increase in net income resulted from a $53.9 million increase in operating income, a $20.8 million increase in gain on hedging activities and a $9.6 million reduction in interest expense, net, offset by a $10.4 million increase in income tax expense.
Year ended December 31, 2011 compared to year ended December 31, 2010 discussion of segment results
Bauxite
Sales to external customers from our Bauxite segment for the year ended December 31, 2011 were $68.0 million, compared to $54.9 million for the year ended December 31, 2010. Sales volume to external customers increased by 43.8% resulting in a $24.1 million favorable impact to revenues, partially offset by lower realized pricing.
Segment profit in the year ended December 31, 2011 was $18.5 million compared to $23.8 million in the year ended December 31, 2010. The higher bauxite sales discussed above were more than offset by the impact of costs and inefficiencies associated with scheduled maintenance of equipment used in processing mined bauxite for shipping as well as the impact of higher demurrage and fuel costs and lower realized prices.
Alumina
Sales to external customers from our Alumina segment for the year ended December 31, 2011 were $234.9 million compared to $222.8 million for the year ended December 31, 2010. This increase is primarily pricing related, as reflected by the LME-indexed nature of alumina pricing, and is partially offset by lower sales volumes to external customers and the impact of lost volumes associated with scheduled maintenance at the refinery.
Segment profit in 2011 was $78.4 million compared to $61.9 million in 2010. The 2011 segment profit reflects an increase in average LME prices combined with savings from our CORE program, offset in part by increased input costs for bauxite and caustic soda as well as costs, inefficiencies and lost volumes resulting from the maintenance activities at the refinery mentioned above.
Primary Aluminum
Sales to external customers from our Primary Aluminum segment increased to $645.7 million in the year ended December 31, 2011 from $495.9 million in the year ended December 31, 2010.
• | A 12.5% increase in average realized MWTP in 2011 compared to 2010 increased external Primary Aluminum segment revenue by approximately $65.9 million. |
• | A 16.9% increase in external primary aluminum shipments generated approximately $83.9 million of additional revenue comparing 2011 to 2010. Shipment increases in 2011 compared to 2010 were driven by the increased volume of value-added shipments. |
Primary Aluminum segment costs increased in 2011 compared to 2010, primarily due to increased power and raw materials costs,
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such as alumina, as well as upward cost pressure in carbon-based products. Fuel adjustment charges of $14.7 million were recorded in cost of goods sold during 2011 compared to $5.4 million during 2010.
• | Our Net Cash Cost was $0.75 per pound in 2011 compared to $0.70 per pound in 2010. The negative effects of maintenance projects in the Alumina and Bauxite segments contributed to the increase in Net Cash Cost. |
Segment profit in the year ended December 31, 2011 was $140.3 million compared to $112.2 million in the year ended December 31, 2010. The 2011 results were most significantly impacted by increased realized pricing and higher shipments, which were offset in part by higher power costs and increased raw materials costs. The 2010 results reflect lower realized prices and the lingering negative impact of the New Madrid power outage on volumes and Net Cash Cost.
Flat-Rolled Products
External sales in our Flat-Rolled Products segment were $611.2 million in the year ended December 31, 2011 compared to $521.3 million in the year ended December 31, 2010. The $89.9 million increase was primarily due to the increase in LME prices, as well as higher shipment volumes to external customers.
• | Rising LME prices contributed $65.5 million to the sales increase. Fabrication premiums were relatively unchanged. |
• | A 4.7% increase in shipment volumes contributed $24.4 million to the revenue increase, primarily due to higher end-market demand associated with the U.S. economic recovery. |
Flat-Rolled Products segment costs increased due to the increase in the LME price, since the majority of flat rolled product cost represents the pass-through cost of metal.
Segment profit in 2011 was $48.3 million compared to $50.0 million in 2010 reflecting the impact of higher shipments resulting from increased customer demand, offset by higher electricity and freight costs.
Corporate
Corporate costs in the year ended December 31, 2011 were $27.9 million and Corporate costs in the year ended December 31, 2010 were $26.9 million. The increase reflects the variability in legal and consulting fees.
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Discussion of results for the year ended December 31, 2010 compared to the year ended December 31, 2009
The following table sets forth certain consolidated financial information for the years ended December 31, 2010 and 2009 (in millions, except per share data and where noted):
Year ended December 31, | ||||
2010 | 2009 | |||
$ | $ | |||
Statements of operations data: | ||||
Sales | 1,294.9 | 769.9 | ||
Operating costs and expenses: | ||||
Cost of sales | 1,112.4 | 779.5 | ||
Selling, general and administrative expenses and other | 115.0 | 76.0 | ||
Goodwill and other intangible asset impairment | — | 108.0 | ||
Excess insurance proceeds | — | (43.5 | ) | |
Total operating costs and expenses | 1,227.4 | 920.0 | ||
Operating income (loss) | 67.5 | (150.1 | ) | |
Other expenses (income): | ||||
Interest expense, net | 31.1 | 53.5 | ||
Gain on hedging activities, net | (65.6 | ) | (111.8 | ) |
Equity in net loss of investments in affiliates | — | 79.7 | ||
(Gain) loss on debt repurchase | 0.1 | (211.2 | ) | |
Gain on business combination | — | (120.3 | ) | |
Total other income | (34.4 | ) | (310.1 | ) |
Income before income taxes | 101.9 | 160.0 | ||
Income tax expense | 35.0 | 58.6 | ||
Net income | 66.9 | 101.4 | ||
Net income per common share: | ||||
Basic | 1.30 | 2.33 | ||
Diluted | 1.27 | 2.33 | ||
Weighted-average common shares outstanding | ||||
Basic | 51.56 | 43.53 | ||
Diluted | 52.80 | 43.53 | ||
Sales by segment: | ||||
Bauxite | 120.4 | 34.6 | ||
Alumina | 365.4 | 84.2 | ||
Primary Aluminum | 621.3 | 340.3 | ||
Flat-Rolled Products | 521.4 | 408.4 | ||
Eliminations | (333.6 | ) | (97.6 | ) |
Total | 1,294.9 | 769.9 | ||
Segment profit (loss): | ||||
Bauxite | 23.8 | 12.3 | ||
Alumina | 61.9 | (2.3 | ) | |
Primary Aluminum Products | 112.2 | 4.9 | ||
Flat-Rolled Products | 50.0 | 35.1 | ||
Corporate | (26.9 | ) | (28.4 | ) |
Eliminations | (4.9 | ) | (2.0 | ) |
Total | 216.1 | 19.6 | ||
Financial and other data: | ||||
Average realized Midwest transaction price (per pound) | 1.04 | 0.81 | ||
Net Cash Cost (per pound shipped) | 0.70 | 0.77 | ||
Shipments: | ||||
Third party shipments: | ||||
Bauxite (kMts) | 1,738.0 | 482.9 | ||
Alumina (kMts) | 683.6 | 245.0 | ||
Primary Aluminum (pounds, in millions) | 438.8 | 291.4 | ||
Flat-Rolled Products (pounds, in millions) | 346.4 | 309.3 | ||
Intersegment shipments: | ||||
Bauxite (kMts) | 2,565.5 | 835.1 | ||
Alumina (kMts) | 467.4 | 116.5 | ||
Primary Aluminum (pounds, in millions) | 121.7 | 60.2 | ||
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Sales in the year ended December 31, 2010 were $1,294.9 million compared to $769.9 million in the year ended December 31, 2009, an increase of 68.2%.
Sales to external customers from our Primary Aluminum segment increased 70.8% to $495.9 million in the year ended December 31, 2010 from $290.4 million in the year ended December 31, 2009, driven primarily by the increase in LME prices, higher volumes of value-added shipments related to increased end-market demand and higher sow volumes related to the New Madrid power outage in the prior year.
• | A 28.4% increase in realized MWTP increased external Primary Aluminum segment revenue by $80.0 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. |
• | A 50.6% increase in external primary aluminum shipments generated $139.7 million additional revenue comparing the year ended December 31, 2010 to the year ended December 31, 2009. This increase is largely the result of the New Madrid smelter becoming fully operational during first quarter 2010. Shipments of value-added products in the year ended December 31, 2010 were 45.7% higher than in the year ended December 31, 2009. |
• | Revenues in the Primary Aluminum segment for the year ended December 31, 2009 included $14.2 million related to quantities of excess alumina shipped to external customers from our New Madrid smelter. |
Sales to our external customers in our Flat-Rolled Products segment increased 27.6% to $521.3 million during the year ended December 31, 2010 from $408.4 million in the year ended December 31, 2009, primarily due to the increase in LME prices, as well as higher shipments to external customers.
• | Rising LME prices contributed $63.9 million to the sales increase. Fabrication premiums were relatively unchanged. |
• | Higher shipment volumes increased revenues by $49.0 million. Shipment volumes from our Flat-Rolled Products segment increased 12.0% to 346.4 million pounds primarily due to higher end-market demand. |
Sales to external customers from our Alumina and Bauxite segments for the year ended December 31, 2010 were $222.8 million and $54.9 million, respectively. A comparison to 2009 is not meaningful, as we only wholly-owned the Alumina and Bauxite segments for four months during 2009.
Cost of sales
Cost of sales for the year ended December 31, 2010 was $1,112.4 million compared to $779.5 million in the year ended December 31, 2009. The increase in cost of sales is mainly the result of higher shipment volumes in the Primary Aluminum and Flat-Rolled Products segments, as well as the increase in LME prices, reflected in the pass-through nature of the Flat-Rolled Products segment.
• | Total cost of sales in the Primary Aluminum segment increased to $550.1 million in the year ended December 31, 2010 from $384.6 million in the year December 31, 2009. The increase relates to several factors, including the increase in total shipments of primary aluminum as referenced in the discussion of sales, offset by (i) decreased depreciation expense related to certain fixed assets which became fully depreciated in the year ended December 31, 2009, and (ii) a significant reduction in our Net Cash Cost of $0.70 per pound in the year ended December 31, 2010, compared to $0.77 per pound in the year ended December 31, 2009. This decrease in Net Cash Cost reflects efficiencies gained from bringing the smelter back to full capacity during the year ended December 31, 2010, as well as reduced raw materials inputs. |
• | Flat-Rolled Products segment cost of sales increased to $485.0 million in the year ended December 31, 2010 from $369.0 million in the year ended December 31, 2009. The increase related principally to the increase in the LME aluminum price, since much of that segment’s product cost represents the pass-through cost of metal. |
• | Cost of sales in the Bauxite and Alumina segments, before the effects of intercompany eliminations, totaled $94.0 million and $315.8 million, respectively during the year ended December 31, 2010 compared to $32.9 million and $91.1 million, respectively, during the year ended December 31, 2009. We became sole owner of these two segments on August 31, 2009. Cost of sales in the Alumina segment for the year ended December 31, 2010 reflects a $4.5 million favorable cumulative impact of negotiations to reduce our maintenance obligations for ships transporting bauxite to Gramercy from St. Ann. |
Selling, general and administrative expenses
Selling, general and administrative expenses in the year ended December 31, 2010 were $115.0 million compared to $76.0 million in the year ended December 31, 2009. This change reflects (i) $17.4 million of increased costs from the inclusion of St. Ann and Gramercy since the Joint Venture Transaction, (ii) $7.6 million of costs related to our workforce and contract mining restructuring plans, (iii) $11.5 million in increased fees related primarily to the termination of the Apollo management agreement, (iv) $4.3 million in increased stock compensation costs, primarily associated with accelerated vesting in connection with the IPO, and (v) $5.5 million of increased consulting costs and professional fees, which were primarily transaction-related legal fees. The cost increases were partially offset by CORE productivity savings and $3.3 million of reduced losses on fixed asset disposals.
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Goodwill and other intangible asset impairment
No goodwill impairment was recorded during the year ended December 31, 2010. We recorded $108.0 million of goodwill and other intangible asset impairments related to our Flat-Rolled Products segment in the year ended December 31, 2009.
Excess insurance proceeds
We reached an insurance settlement with our primary insurance carrier in the year ended December 31, 2009. The settlement proceeds of $67.5 million were allocated to cost of sales and selling, general and administrative expenses to the extent losses were realized and eligible for recovery under our insurance policies. The line item titled "Excess insurance proceeds" reflects the residual after applying the total proceeds recognized against losses incurred through September 30, 2009. This amount is not intended to represent a gain on the insurance claim, but only a timing difference between proceeds recognized and claim related costs incurred.
Operating income (loss)
Operating income in the year ended December 31, 2010 was $67.5 million compared to a loss of $150.1 million in the year ended December 31, 2009. The increase in operating income relates to sales margin improvements of $192.9 million, offset in part by $39.0 million increase in selling, general and administrative expenses discussed previously.
Sales margin was income of $182.5 million for the year ended December 31, 2010 compared to a loss of $10.4 million for the year ended December 31, 2009. This increase resulted from the impact of a 28.4% increase in realized MWTP, coupled with efficiencies gained in bringing the smelter back to full production.
Interest expense, net
Interest expense in the year ended December 31, 2010 was $31.1 million compared to $53.5 million in the year ended December 31, 2009, a decrease of $22.4 million. During the year ended December 31, 2010 we used net proceeds from our completed IPO, our follow-on offering, proceeds from the termination of fixed price aluminum swaps and available cash balances to repay $249.9 million and $215.9 million of aggregate principal balances on the 2007 Term B Loan and 2007 Revolver, respectively, and to repurchase $66.3 million and $20.6 million aggregate principal balance of our HoldCo Notes and AcquisitionCo Notes, respectively. The $22.4 million decrease in interest expense is primarily a result of these lower average debt balances.
Gain on hedging activities, net
Gain on hedging activities was $65.6 million in the year ended December 31, 2010 compared to $111.8 million in the year ended December 31, 2009. Reclassifications of aluminum and natural gas hedge gains and losses from AOCI into earnings in 2010 were $82.1 million, compared to $172.3 million in the year ended December 31, 2009. Of this amount in 2009, $77.8 million was reclassified into earnings related to the January 2009 re-designation of our then remaining fixed price aluminum swaps because it was probable that the original forecasted transactions would not occur.
Gain on debt repurchase
During the year ended December 31, 2010 we used net proceeds from our completed IPO, our December 2010 follow-on public offering, available cash balances and proceeds from the termination of fixed price aluminum swaps to repay $249.9 million and $215.9 million of aggregate principal balances on the 2007 Term B Loan and 2007 Revolver, respectively, and to repurchase $66.3 million and $20.6 million aggregate principal balance of our HoldCo Notes and AcquisitionCo Notes, respectively. The 2010 debt repurchases resulted in a $0.1 million net loss. During the year ended December 31, 2009, we repurchased $161.9 million and $194.5 million aggregate principal balance of our HoldCo and AcquisitionCo notes, respectively, at discounts to face value and repaid $65.4 million and $9.1 million of outstanding principal balance on the 2007 Term B Loan and 2007 Revolver borrowings, respectively. The 2009 debt repurchases resulted in a $211.2 million net gain.
Income before income taxes
Income before income taxes was $101.9 million in the year ended December 31, 2010 compared to $160.0 million in the year ended December 31, 2009. The special items outlined below significantly impacted the comparability of our pre‑tax income (in millions):
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Year ended December 31, | ||||
2010 | 2009 | |||
$ | $ | |||
Increase (decrease) to income before income taxes for special items: | ||||
Insurance recoveries in excess of costs and losses | — | 43.5 | ||
Management agreement termination | (12.5 | ) | — | |
Modification of stock options | (3.2 | ) | — | |
Other transaction related legal costs | (5.5 | ) | — | |
Restructuring | (7.6 | ) | — | |
Gain (loss) on debt repurchases | (0.1 | ) | 211.2 | |
Gain on business combination | — | 120.3 | ||
Joint venture impairment | — | (80.3 | ) | |
Executive separation agreement | (3.3 | ) | — | |
Goodwill and other intangible asset impairment | — | (108.0 | ) | |
Gain on hedging activities | 65.6 | 111.8 | ||
Total | 33.4 | 298.5 | ||
Income tax expense
Income tax expense was $35.0 million in the year ended December 31, 2010 compared to $58.6 million in the year ended December 31, 2009. The effective tax rate was 34.3% for 2010 and 36.6% for 2009.
The effective tax rate for the year ended December 31, 2010 was primarily impacted by state income taxes, the Internal Revenue Code Section 199 manufacturing deduction, and accrued interest related to unrecognized tax benefits. The effective tax rate for the year ended December 31, 2009 was primarily impacted by goodwill impairment, state income taxes, equity method investee income and bargain purchase accounting.
Net income
Net income was $66.9 million in the year ended December 31, 2010 compared to $101.4 million in the year ended December 31, 2009. The decrease in net income resulted from the net effects of (i) reductions in other income, specifically, a $46.2 million reduction in gains on hedging activities, a $211.3 million reduction in gains on debt repurchases and the prior year $120.3 million gain on business combination, offset by (ii) favorable impacts of $217.6 million of increased operating income, $80.3 million of prior year impairment losses on our investment in affiliates and $46.0 million in reduced interest and income tax expenses.
Year ended December 31, 2010 compared to year ended December 31, 2009 discussion of segment results.
Primary Aluminum. Segment profit in the year ended December 31, 2010 was $112.2 million compared to segment profit of $4.9 million in the year ended December 31, 2009. Segment profit in the year ended December 31, 2010 reflects increases in LME prices, higher volumes of value-added shipments related to increased end-market demand and lower Net Cash Cost. The year ended December 31, 2009 segment results reflect the negative impact from the power outage, as average pots in operation were only approximately 58%.
Flat-Rolled Products. Segment profit in the year ended December 31, 2010 was $50.0 million, compared to $35.1 million in the year ended December 31, 2009. Shipment volumes from our Flat-Rolled Products segment increased 12.0% to 346.4 million pounds primarily due to higher end-market demand along with increased efficiencies associated with higher production.
Corporate. Corporate costs in the year ended December 31, 2010 were $26.9 million, compared to $28.4 million in the year ended December 31, 2009 due to variability in legal and consulting fees.
Bauxite and Alumina. Segment profit for the Bauxite segment in the year ended December 31, 2010 was $23.8 million, compared to $12.3 million in the year ended December 31, 2009. Segment profit for the Alumina segment in the year ended December 31, 2010 was $61.9 million, compared to segment loss of $2.3 million in the year ended December 31, 2009. A comparison of the year ended December 31, 2010 to the year ended December 31, 2009 for our Bauxite and Alumina segments is not meaningful, as we only wholly-owned the bauxite mining operations and the alumina refinery for four months in the year ended December 31, 2009.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash balances, cash provided by operating activities and available borrowings under our 2012 Revolver.
• | In 2011, we generated $140.6 million of cash flow from operating activities. |
• | At December 31, 2011, we had $42.7 million of cash and cash equivalents. |