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.
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 is one of the largest U.S. producers of primary aluminum, and 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 mining operation (“St. Ann”) and alumina refinery (“Gramercy”). In 2014, New Madrid produced approximately 557 million pounds (253,000 metric tonnes) of primary aluminum, representing approximately 14.6% of total 2014 U.S. primary aluminum production, based on statistics from CRU International Limited. 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.
We believe our combination of captive alumina and bauxite, a secure electric power contract and strategically located assets give us meaningful operational flexibility in our Upstream Business. St. Ann provides a secure source of bauxite to Gramercy. Gramercy provides a strategic supply of alumina to New Madrid 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 consumed internally and therefore lowers our integrated Net Cash Cost to produce primary aluminum (“Net Cash Cost”).
In addition, we have a long-term contract with Ameren Missouri, Missouri’s largest electric utility (“Ameren”) for our electricity supply at New Madrid. This contract provides a secure supply at a rate established by the Missouri Public Service Commission (“MoPSC”). Pursuant to this contract, the rate for power is subject to change as determined by the MoPSC.
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 London Metal Exchange (“LME”) aluminum price due to our realization of higher margins on third-party sales of alumina and bauxite. While we face reduced margins for both primary aluminum and alumina sales in an environment of declining LME aluminum prices, the integrated model provides us with costs unrelated to the LME aluminum price with which to counter declining prices.
Primary aluminum is a global commodity, and its price is set on global exchanges such as the LME. As the LME aluminum price is a globally quoted price which does not take into account logistics, warehousing or temporary market supply demand dynamics, our primary aluminum products typically earn a Midwest premium on top of the LME aluminum price, the sum of which is known as the Midwest Transaction Price (or “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 arms-length basis, to ensure there is sufficient metal available to meet flat-rolled demand, or when demand is weak for our value-added end-products.
Our Downstream Business is a low-cost domestic producer of aluminum rolled products. Versatile manufacturing capabilities and advantageous geographic locations provide our rolling mills with the flexibility to serve a diverse range of end-users. 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 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 or working capital requirements. 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 additional operational flexibility.
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.
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.
The IPO. On May 19, 2010, we completed an initial public offering (“IPO”) of 11.5 million shares of common stock at an $8.00 per share public offering price on the New York Stock Exchange (NYSE:NOR).
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 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.
During late 2010, we re-launched a project to expand the aluminum production capacity at our New Madrid smelter at a remaining cost of $38.0 million. The project involves a combination of additional rectifiers and upgraded equipment allowing for increased aluminum production up to 35.0 million pounds (“the Rectifier Project”). The Rectifier Project has the added benefit of greater efficiency and reliability through upgrades and redundancy of equipment. We expect efficiency gains and reliability improvements to be achieved as rectifiers and equipment upgrades are installed, independent of any increase in production level.
We spent $1.0 million on the Rectifier Project during the year ended December 31, 2014 and have spent $14.0 million since re-launching the project in late 2010. This project has been indefinitely postponed, and we have withdrawn our environmental permits. The timing of resuming the project is dependent on overall market conditions, including the LME aluminum price, obtaining a sustainable power rate, and the resolution of environmental permitting and sulfur dioxide emissions regulations.
The smelter is located beside the Mississippi River near New Madrid, Missouri. 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 2014, approximately 71% 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 155 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 2014, based on CRU data, New Madrid supplied approximately 32.7% of the rod and 13.4% 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.
In July 2012, we announced a project to build a new rod mill at our facility in New Madrid, the scope of which includes infrastructure development and construction of a new, state-of-the-art mill to produce redraw rod. We expect the new Rod mill to cost approximately $55 million and increase the facility’s redraw rod production capacity to 220 million pounds annually. We have obtained customer commitments for 220 million pounds. We are evaluating the opportunity these customer commitments, combined with our existing customers’ requirements, provide to continue operating both of our existing mills, which had a combined annual capacity of 155 million pounds as of December 31, 2014. We are scheduled to start production of the new Rod mill in December of 2015.
Source: Company data for the quarter ended December 31, 2014
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. New Madrid receives substantially all of its alumina requirements from Gramercy. We believe the strategic location of New Madrid provides a freight cost advantage relative to other smelters because of the proximity of Gramercy to St. Ann and New Madrid to Gramercy.
Gramercy Alumina Refinery. At Gramercy, bauxite is chemically refined and converted into alumina, the principal raw material used in the production of primary aluminum. Approximately 44% of alumina produced at Gramercy was sold to New Madrid in 2014, supplying substantially all of New Madrid’s alumina requirements. The remaining alumina production at Gramercy is sold in the form of smelter grade alumina and alumina hydrate, or chemical grade alumina, the margins on which effectively reduce the cost of New Madrid’s alumina supply.
St. Ann Bauxite Mining Operation. Bauxite is the principal raw material used in the production of alumina. All of the bauxite used at our Gramercy refinery is purchased from St. Ann.
We operate the St. Ann bauxite mining operation through Noranda Bauxite Limited (“NBL”), a Jamaican limited liability company. Our bauxite mining assets consist of: (1) a concession from the Government of Jamaica, or “GOJ,” to mine bauxite in Jamaica through September 2030 and (2) a 49% interest in Noranda Jamaica Bauxite Partners, 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.
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 to ensure we have sufficient reserves to meet our annual alumina requirements. The concession ensures access to sufficient reserves to allow NBL to mine 4.5 million DMT of bauxite annually from mining operations in the specified concession area through the term of the concession. The GOJ is required to provide additional concessions if the specified concession does not contain sufficient quantities of commercially exploitable bauxite to allow NBL to mine 4.5 million DMT. From time-to-time, the GOJ may provide us the option to exceed the 4.5 million DMT annual allotment, and in 2013, the GOJ granted us the option to mine up to 5.1 million DMT of bauxite during 2013 and up to 5.4 million DMT per annum for the period 2014 through 2017.
We contract most of our bauxite mining out to third party contractors, who supply their own mining equipment. Physical mining assets consist primarily of rail facilities, other mobile equipment, dryers and loading and dock facilities. The age and remaining lives of the physical mining assets vary and they may be repaired or replaced from time to time as part of NJBP’s ordinary capital expenditure plan.
Pursuant to the establishment agreement, as amended, 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, 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. We are attempting to negotiate a new fiscal structure with the GOJ. See “Risk Factors---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.” and Note 20, “Non-Controlling Interest” to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
The agreement covers the fiscal structure, as well as NBL’s commitment for certain expenditures for haulroad development, maintenance, dredging, land purchases, contract mining, training and other general capital expenditures through 2014.
We transport bauxite from St. Ann to Gramercy by oceangoing vessels under a contract which extends through December 2020 with a third party for bauxite ocean vessel freight. On February 20, 2013, we announced plans to expand our investment in the port expansion project from $11 million to up to $20 million. We expect the port expansion project to increase shipping capacity at St. Ann. The additional investment expanded the scope of the project to include improvements in railing infrastructure used in our bauxite mining operation. Capital expenditures for the year ended December 31, 2014 include $6.8 million related to the port expansion project. The project was substantially completed in February 2015. We have project specific financing in place for this investment.
Energy
Electrical Power. The smelter is located in an area with abundant sources of electrical power. New Madrid has a long-term power purchase agreement with Ameren, pursuant to which New Madrid has agreed to purchase substantially all of its electricity from Ameren. This contract is for regulated power and cannot be altered without the approval of the MoPSC. Our current rate structure with Ameren consists of two components: a base rate and a fuel adjustment clause (“FAC”).
Natural Gas. During 2014, we consumed 18 million mmbtu of natural gas, approximately 82% of which was used in our Gramercy alumina refinery. 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. 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. From time to time, we partially hedge this volatility through the use of forward swaps. Since January 1, 2013, we have not been a party to any forward swaps for natural gas.
Fuel. Fuel oils such as Bunker “C” and diesel are a significant components of the cost structure at our St. Ann bauxite mining operation. Pricing 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 multiple diesel providers in the United States by oceangoing vessel.
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 on 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 2014, we sold approximately 42% of the bauxite from St. Ann to Sherwin Alumina Company pursuant to a contract that runs through 2018.
In 2014, our ten largest Alumina customers represented 60% of that segment’s sales. In 2014, our ten largest Primary Aluminum customers represented 41% of that segment’s sales. Our target customers in the Primary Aluminum segment are located in the Midwestern United States. In 2014 approximately 69% of volume was delivered to 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.
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. 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 in 2014 approximately 77% of volume was delivered to customers 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:
(1)
Capacity includes intercompany re-roll. Effective annual capacity is 410 million pounds based on production mix at December 31, 2014.
Products. Aluminum foil has several outstanding characteristics that account for a wide range of commercial applications:

long life - the aluminum surface has a natural hard, transparent layer of oxide which substantially precludes further oxidation;

high electrical and thermal conductivity;

non-toxic and non-absorbent;

excellent moisture barrier even at thicknesses less than the diameter of a human hair;

light weight;

highly reflective and attractive in appearance;

“dead fold” for packaging applications;

the most plentiful metal in the earth’s crust;

the most recycled packaging material in the world; and

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 2014, approximately 19% of our primary aluminum production was 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 386 million pounds of metal, including purchases from New Madrid, during 2014. 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.
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 2014, our ten largest Flat-Rolled Products customers represented 62% of that segment’s sales.
Facilities. We operate four plants at three locations in the Southeastern United States and our divisional offices 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 367 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 we refer to as the East plant, and an advanced rolled aluminum production facility, 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. The West plant provides the benefit of low conversion cost (excluding metal) for foil stock production. According to CRU, the Huntingdon-West facility is one of the most advanced rolled aluminum production facilities in North America, and has one of the lowest conversion cost (excluding metal) for foil stock production in the world.
Salisbury. The Salisbury plant produces 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. During 2013, we began to reposition the Salisbury plant to produce predominately heavy gauge foil although some light gauge material is still processed at Salisbury. We transferred a portion of the light gauge product production to the Newport plant.
Newport. The Newport plant is a rolling and finishing operation and relies on intermediate gauge “reroll” supplied by Salisbury or Huntingdon.
Employees
As of December 31, 2014, approximately 1,600 (or approximately 70%) of our employees were union members.
We are a party to 7 collective bargaining agreements with five different unions. Our collective bargaining agreements are with the following unions:
In the US: the United Steelworkers of America (“USWA”); the International Association of Machinists and Aerospace Workers (“IAMAW”).
•	The agreement at Gramercy with the USWA will expire in September 2015.
•	An agreement at New Madrid with the USWA will expire in August 2017.
•	An agreement at our Salisbury rolling mill with the USWA will expire in November 2016.
•	The agreement in place with the IAMAW at our Newport rolling mill originally extended through May 2014. During April 2014, a one-year extension was ratified, extending the expiration of the agreement to May 2015.
At St. Ann, Jamaica: the University and Allied Workers Union (“UAWU”); the Union of Technical, Administrative and Supervisory Personnel (“UTASP”); and the Bustamante Industrial Trade Union (“BITU”).
•
An agreement at St. Ann with the UTASP representing supervisory and technical salaried workers expired in December 2013. We received a claim for a new contract in July 2014 and negotiations have started. It is anticipated that we will close the negotiations during the first quarter of 2015.
•
The agreement at St. Ann with the BITU expired in December 2012. This contract covered a small portion of our St. Ann workforce. We received a claim for a new contract in January 2014 and negotiations commenced in the second quarter of 2014. We closed negotiations in November 2014. We signed a three year contract, which ends December 31, 2015.
•
An agreement at St. Ann with the UAWU, covering operators, expired in April 2013. We received a claim for a new contract in June 2013 and commenced negotiations in August 2013. We closed negotiations in November 2014. We signed a three year contract, which ends April 30, 2016.
From time to time, there are shortages of skilled workers. 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.
Financial Information about Geographic Areas
Please see our notes to the consolidated financial statements located elsewhere in this Form 10-K for financial information about geographic areas, segment revenue from external customers, segment profit and loss and segment total assets.
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., Room 1580, 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: Dale W. Boyles
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.
ITEM 1A.
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 the events addressed in these risks actually occur, our business, financial condition and operating results could be materially and adversely affected. Past financial performance may not be a reliable indicator of future performance and you should not use historical trends to anticipate results or trends in future periods.
Cyclical fluctuations in the primary aluminum industry cause variability in our earnings and cash flows.
The Midwest Transaction Price for primary aluminum is a significant driver of our revenues, earnings, and cash flows. That price, comprising the underlying base metal component, which is typically based on quoted prices from global exchanges such as the LME, and the Midwest Premium, which represents the incremental price over the base LME component and is associated with the physical delivery of metal to a particular region has historically been volatile, as illustrated in the chart below:
The Midwest Transaction Price components are each subject to regional and global market 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 rates. Specifically, the proposed LME warehousing rules require metal warehouses, under certain conditions, to deliver out more aluminum than they take in. Increasing the aluminum supply in the market may decrease the LME aluminum price and Midwest premium. Extended periods 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 provide internally, and our New Madrid power contracts are not tied to the LME aluminum price. As a result, as the LME aluminum price decreases, absent corresponding decreases in our raw material costs or productivity gains, 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 aluminum prices, we currently have no such hedges in place. We are under no obligation under our debt agreements 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 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 aluminum 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.”
Aluminum prices could decrease due to proposed London Metal Exchange warehousing rules
In 2013, the London Metal Exchange (“LME”) announced new rules scheduled to take effect on April 1, 2014 that would require LME warehouses, under certain conditions, to deliver out more aluminum than they take in. Although a court in the United Kingdom ruled in March 2014 that the LME’s consultation process in developing the new rules had been unfair and unlawful, in October 2014, a court of appeal in the United Kingdom upheld the LME’s consultation process as being fair. The new warehousing rules, which took effect on February 1, 2015, could cause an increase in the supply of aluminum to enter the physical market and may cause regional delivery premiums, product premiums and LME aluminum prices to fall. Decreases in regional delivery and product premiums, decreases in LME aluminum prices and increases in the supply of aluminum could have a material adverse effect on our business, financial condition, and results of operations or cash flow.
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. A sustained decline in either the United States or the 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 conditions in regions outside the United States, may have a negative impact on demand for our products. Such negative impacts may include, among others, lower LME aluminum prices, which are set globally, increased competition due to excess supply or 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 typically 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.
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.
In the production of our products, we require substantial amounts of purchased raw materials, including carbon products and caustic soda. Pricing volatility of purchased raw materials can 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 the increases through productivity improvements, in which case our business, financial condition, results of operations or cash flows could be materially and adversely affected.
If the cost of alumina produced by the Gramercy refinery or the cost of bauxite produced by the St. Ann mining operation exceeds the spot prices of alumina or bauxite available from other sources, we may not be able to immediately decrease production in response to changes in market forces. Therefore, our unit costs will increase and our ability to fully recover fixed costs will be limited. We may be forced to sell excess alumina or bauxite at market prices that could be substantially lower than our cost to produce them, which could materially and adversely affect our business, financial condition, results of operations and cash flows.
During 2014, we sold approximately 42% of the bauxite from St. Ann to Sherwin Alumina Company pursuant to a contract that runs through 2018. 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, in which case our business, financial condition, results of operations and cash flows could be materially and adversely affected. 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. Aluminum also competes with other materials, such as steel, copper, plastics, composite materials and glass, among others, for various applications. In the past, customers have demonstrated a willingness to substitute other materials for aluminum in certain applications. In both our Primary Aluminum and Flat-Rolled Products 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 raw material, electric power or other production costs, 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 production 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. New competitors could emerge from within North America or globally. 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, 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 products that generally yield lower fabrication prices in order to remain at full productive capacity, which could adversely affect our profitability. In addition, technological innovation is important to our customers, and if we are unable to lead or effectively meet our competitors’ new innovations to address our customers’ needs, 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. 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.
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 long-term power supply agreement with Ameren, pursuant to which we have agreed to purchase substantially all the electricity required at New Madrid. The power supply contract provides that the rate for power will be established by the MoPSC based on two components: a base rate and a fuel adjustment charge. The MoPSC determines whether to make changes to the base rate and fuel adjustment charge.
Ameren may increase the rates it charges its customers, including Noranda, subject to the approval of the MoPSC. Once a rate case is commenced by the filing of a rate increase request, the MoPSC has eleven months to issue its ruling on the request. Since 2008 Ameren has filed four rate cases with the MoPSC which has resulted in an approximately $44 million annual increase in the Company’s cost of goods sold related to electricity, including FAC, at our New Madrid facility. The outcome of 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 flow.
In addition to base rate adjustments, our electric power costs are subject to a fuel adjustment clause, under which additional charges may be incurred, based on Ameren’s fuel costs and off-system sales volume and prices. The fuel adjustment clause resulted in additional fuel charges recorded in cost of goods sold of $13.2 million, $17.9 million and $9.0 million in 2014, 2013 and 2012, respectively. The impact of the fuel adjustment clause may have a dramatic and unpredictable effect on our future operating results and cash flows.
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 a price based on the Henry Hub Index natural gas price. Our Downstream Business purchases natural gas on the open market. The price of natural gas can be particularly volatile as supply and demand are affected by unpredictable weather and other factors. During early 2015, an improvement in weather, as compared to 2014, has driven the Henry Hub Index natural gas price to an average of under $3.00 per million BTU, compared to average natural gas prices of $4.35 per million BTU in 2014, $3.73 in 2013 and $2.75 in 2012. 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 natural gas 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 have, from time to time, entered into forward swaps to mitigate the effect of fluctuations in natural gas prices. Since January 1, 2013, we have not been a party to any forward swaps for natural gas.
Fuel
Fuel is a substantial component of the cost structure at our St. Ann bauxite mining operation. Our fuel costs at St. Ann may fluctuate based on the price of oil and we may not be able to mitigate the effect of higher fuel costs. 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.
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. 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. We may ultimately experience shorter pot lives or higher failure rates as a result of damage from an equipment shutdown resulting from a smelter power outage, which most recently occurred in January 2009.
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. Certain of our insurance policies do not cover any losses we may incur if our electric power suppliers are unable to provide us with power during periods of unusually high demand.
If we are unable to successfully finalize regulatory power issues at our New Madrid facility, we may have to curtail this facility.
On February 13, 2014, we filed a petition with the MoPSC to change the rate design for Ameren customers in Missouri in order to provide the New Madrid smelter with a lower, sustainable power rate. On July 3, 2014, Ameren filed a request with the MoPSC to approve a 9.6% increase in its Missouri rates (the “July 2014 General Rate Case”). On August 20, 2014, the MoPSC denied the relief sought under our rate design petition. In its ruling, the MoPSC encouraged the parties to continue to pursue negotiations on a compromise position that can be presented for consideration as part of the July 2014 General Rate Case, which is expected to be decided by May 2015. While we intend to vigorously pursue the matter, there can be no assurance that our efforts to secure a lower power rate for New Madrid will be successful.
In addition, uncertainty regarding the future operation of this smelter may damage our relationships with our customers, suppliers, employees and other stakeholders, whether or not this plant is ultimately curtailed. We may also need to take actions to terminate customer and supply contracts or curtail individual potlines well in advance of any plant closure. Customers and suppliers may also become unwilling to renew existing contracts or enter into new contracts with us. It may also become more difficult to attract and retain employees. Such actions and events could have a material adverse effect on our business, financial position, results of operations and liquidity.
Curtailing unprofitable production to reduce our operating costs requires us to incur substantial expense, both at the time of the curtailment and on an ongoing basis. Our facilities are subject to contractual and other fixed costs that continue even if we curtail operations at these facilities. These costs reduce the cost saving advantages of curtailing unprofitable aluminum production.
If any production curtailment or other restructuring does not achieve sufficient reduction in operating expenses, we may have to seek bankruptcy protection for some or all of our subsidiaries; we could also be forced to divest some or all of these subsidiaries. If we were to seek bankruptcy protection for any of these subsidiaries, we would face additional risks. Such action could cause concern among our customers and suppliers, distract our management and our other employees and subject us to increased risks of lawsuits. Other negative consequences could include negative publicity, which could have an impact on the trading price of our securities and affect our ability to raise capital in the future.
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 2014, our ten largest customers were responsible for approximately 41% of our consolidated revenues. In 2014, one customer accounted for approximately 9% 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.
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 decide to use other suppliers.
A majority of our customer contracts have a term of one year or less. 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 $93.5 million, $72.7 million and $87.9 million for 2014, 2013 and 2012, respectively.
We may not generate sufficient operating cash flows, and sufficient external financing sources may not be available to enable us to make required capital expenditures, service or refinance our indebtedness, pay dividends and fund other liquidity needs. Our inability to make upgrades or purchase new plant and equipment could result in higher maintenance costs, lower sales volumes due to the impact of reduced product quality and other competitive detriments, in which case our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Construction of our Rod mill at our New Madrid facility has been temporarily delayed. Substantial delay in the completion of, or failure to complete, this project may increase its cost, subject us to losses and impose other risks to completion that are not foreseeable at this time.
Construction of the Rod mill has been temporarily delayed in response to ongoing negotiations with Ameren. New Madrid cannot be certain when it will complete the Rod mill construction or if the New Madrid smelter would operate in a profitable manner. We will not realize any return on our significant investment in the Rod mill until we are able to commence operations in a profitable manner. If we fail to complete construction, we may have to recognize a loss on our investment, which would have a material adverse impact on our earnings.
Many of the contractual arrangements related to the Rod mill have time periods for performance. The delay in restarting major construction and completing the Rod mill has caused New Madrid to renegotiate and extend, or undertake to renegotiate and extend, existing contractual commitments, including with respect to power, transmission, technology, equipment and construction. There can be no assurance that the contractual arrangements and conditions, including extensions, necessary to proceed with construction of the Rod mill will be obtained or satisfied on a timely basis or at all. Furthermore, unforeseen technical difficulties could increase the cost of the project, delay the project or render the project infeasible. Further delay in the completion of the project or increased costs could have a material adverse effect on our business, financial condition, results of operations and liquidity. We are scheduled to start production of the new Rod mill in December of 2015.
We may be required to write down the book value of certain assets.
We are required to perform various analyzes related to the carrying value of various assets whenever events or circumstances transpire, indicating that their net carrying amount may not be recoverable. We may need to significantly adjust the carrying value of our assets due to critical changes in our industry, global economic conditions and the extent that our assets are being utilized, all of which impact our assumptions used for the future in such analyses. We will continue to assess our assets for impairments, which could significantly impact their values. Any such adjustments could have a material adverse effect on our business, financial position and results of operation.
If our goodwill or other intangible assets become impaired in the future, we would be required to record a material, non-cash charge to earnings, which would also reduce our stockholders’ equity.
Under U.S. GAAP, goodwill is reviewed for impairment on an annual basis (or more frequently if events or circumstances indicate that their carrying value may not be recoverable) and other intangible assets if events or circumstances indicate that their carrying value may not be recoverable. If our goodwill or other intangible assets are determined to be impaired in the future, we will be required to record a material, non-cash charge to earnings during the period in which the impairment is determined.
Adverse decline in pension liability discount rate, lower than expected investment return on pension assets and other factors could affect our results of operations or amount of pension funding contributions in future periods.
Our results of operations may be negatively affected by the amount of expense we record for our pension and other postretirement benefit plans, reductions in the fair value of plan assets and other factors. We are required to calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in key economic indicators. The most significant year-end assumptions used to estimate pension or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities and the expected long-term rate of return on plan assets. In addition, we are required to make an annual measurement of plan assets and liabilities, which may result in a significant charge to shareholders’ equity.
Although U.S. GAAP expense and pension funding contributions are impacted by different regulations and requirements, the key economic factors that affect expense would also likely impact the amount of cash or securities we would contribute to the pension plans. Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve
the plans’ funded status. Adverse capital market conditions could result in reductions in the fair value of plan assets and increase our liabilities related to such plans, negatively impacting our liquidity and earnings.
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 2009 power 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.
Our operations present significant risk of injury or death. We may be subject to claims that are not covered by or exceed our insurance.
Because of the heavy industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors, notwithstanding the safety precautions we take. Our operations are subject to regulation by various federal, state and local agencies responsible for employee health and safety, including the Occupational Safety and Health Administration, which in the past has levied fines against us for certain isolated incidents. While we have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future. These types of incidents may not be covered by or may exceed our insurance coverage and could materially and adversely effect on our business, financial condition, results of operations and cash flows.
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 foreign 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. 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 environmental compliance costs, which they may pass 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 on human health and the environment. Sulfur dioxide (“SO2”), an emission from our New Madrid smelter facility, is one such criteria pollutant. To determine our smelter’s compliance with NAAQS, we measure emissions using currently acceptable methods.
In 2010, the EPA issued regulations that increased the stringency of the SO2 NAAQS. Federal and state regulators are in the process of developing measurement methods and time-lines that will govern the implementation of those regulations. Once finalized, these implementation requirements may present material implications for our smelter’s compliance with NAAQS. Failure to meet NAAQS may require us to incur material capital and operational costs to bring our smelter into compliance and could have negative implications for permits necessary to support increases in production volumes at our smelter.
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, 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.
In several of our operations, we consume energy generated from fossil fuel sources such as coal, diesel and natural gas. 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 to favor carbon risk management, among other actions, 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. When such a disaster occurs, it can damage the facility in question, or lead to interruptions in our power supply, which may disrupt our production of aluminum. Our bauxite mining operation is located in St. Ann, Jamaica and our alumina 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 is located. In addition, any 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, information system breakdowns and other contingencies. Operational malfunctions or interruptions at one or more of our facilities could cause substantial losses in our production 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 further along our integrated production chain. 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.
Cyber attacks and security breaches may threaten the integrity of our sensitive information, disrupt our business operations, and result in reputational harm and other negative consequences that could have a material adverse effect on our financial condition and results of operation.
Cyber security attacks and security breaches may include, but are not limited to, attempts to access information, computer viruses, denial of service and other electronic security breaches. These could range from uncoordinated individual attempts to advanced persistent threats directed at us. We have experienced such attacks in the past, and based on information known to date, they have not had a material impact on our financial condition or results of operations. However, due to the evolving nature and sophistication of cybersecurity threats, the scope and impact of any future incident cannot be predicted. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent attacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse effect on our financial condition.
We could experience labor disputes that disrupt our business.
We are a party to seven collective bargaining agreements with five different unions. Our collective bargaining agreements are with the following unions:
In the US: the United Steelworkers of America (“USWA”); the International Association of Machinists and Aerospace Workers (“IAMAW”).
At St. Ann, Jamaica: the University and Allied Workers Union (“UAWU”); the Union of Technical, Administrative and Supervisory Personnel (“UTASP”); and the Bustamante Industrial Trade Union (“BITU”).
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.
Labor negotiations for renewal of bargaining agreements may not conclude successfully and, in that case, may result in a significant increase in the cost of labor, or result in work stoppages or labor disturbances, disrupting our operations. Any such cost increases, stoppages or disturbances could materially limit plant production, sales volumes and profitability, in which case our business, financial condition, results of operations and cash flows could be materially and adversely affected.
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 operation in St. Ann, Jamaica. We are, and will continue to be, subject to financial, political, economic and business risks in connection with our foreign operations. These risks include those associated with political or financial instability, expropriation, renegotiation or nullification of 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 materially and adversely affect our business, financial condition or operating results. In addition to the business risks inherent in operating outside the United States, 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. We are attempting to negotiate with the GOJ a new fiscal structure; an unfavorable outcome, including an inability to reach an agreement, could materially and adversely affect our business, financial condition, results of operations and cash flows. The terms of any new fiscal structure, as well as our ability to utilize all or part of the prepaid taxes, are subject to the outcome of the negotiations of any new fiscal structure or to the determination of our rights and obligations in connection with the existing arrangements. See Note 20, “Non-Controlling Interest” to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
In addition, our revenues, expenses, cash flows and results of operations could be affected by matters 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.
We may not be able to successfully realize our liquidity, CORE, performance, safety, or capital expansion project goals established at the levels or by the dates targeted by such goals.
We have established targets for each of our segments and company as a whole, which includes but is not limited to our liquidity, CORE, performance, safety and capital expansion project goals. For more information regarding our targets, see Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of this report. There can be no assurance that any of these targets or other goals will be completed as anticipated. Market conditions or other factors may prevent us from accomplishing our goals at the levels or by the dates targeted, if at all, and failure to do so may have a material adverse effect on our business, financial condition, results of operations or the market price of our securities.
Past and future acquisitions or divestitures may adversely affect our financial condition.
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 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.
Apollo has the ability to substantially influence our company and the outcome of matters voted upon by our shareholders, and to prevent actions which a shareholder may otherwise view favorably.
As of December 31, 2014, Apollo owned approximately 33.1% of our common stock. As long as Apollo owns more than 10% of our common stock, it will have the right to cause the Board of Directors to nominate to our Board of Directors at least four Apollo designees. Thus, Apollo has the ability to significantly influence our decisions.
The interests of Apollo could conflict with or differ from stockholder interests as a holder of our common stock. 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. 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 substantial 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, 2014, our total indebtedness was $668.0 million. Based on the amount of indebtedness outstanding at December 31, 2014 and the interest rates in effect on such date, our 2015 estimated cash interest expense is approximately $50.0 million, some 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 and results of operations 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;
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cancel or scale back current and future business initiatives; or
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sell businesses or properties.
Our and our subsidiaries’ indebtedness could have important consequences, including:
•
limiting our ability to borrow money for our working capital, capital expenditures, debt service requirements or other corporate purposes;
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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;
•
increasing our vulnerability to general economic and industry conditions;
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placing us at a competitive disadvantage to our less leveraged competitors;
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limiting our ability to respond to business opportunities; and
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subjecting us and our subsidiaries to restrictive covenants, which, if not complied with, could result in an event of default under their and our debt; if the default is not cured or waived, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Restrictive covenants under the indenture governing our AcquisitionCo Notes and our senior secured credit facilities may restrict and 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:
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incur or guarantee additional debt;
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pay dividends or make distributions to our shareholders;
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repurchase or redeem capital stock;
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make loans, acquisitions or investments;
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sell assets including stock of subsidiaries;
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create or incur liens;
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merge or consolidate with other companies or transfer all or substantially all of our assets;
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enter into transactions with our affiliates; and
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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;
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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Description of Certain Indebtedness,” in Item 7 of this report.
Despite our substantial 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 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 substantial 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.”
Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.
Certain of our and our subsidiaries’ indebtedness, including borrowings under the Senior Secured Credit Facilities, are subject to variable rates of interest and expose us to interest rate risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Description of Certain Indebtedness,” in Item 7 of this report. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase, even though the amount borrowed remained the same, and our net income would decrease. Although we may enter into interest rate swaps, involving the exchange of floating for fixed rate interest payments, to reduce interest rate volatility, we cannot assure you that we will be able to do so.
Based on the amount of indebtedness outstanding at December 31, 2014 and the interest rates in effect on such date, our 2015 estimated cash interest expense is approximately $50.0 million for 2015. A 1% increase in the interest rates would increase our annual interest expense by an estimated $4.7 million, excluding the senior fixed rate notes.
Any further downgrade of our credit ratings could limit our ability to obtain future financing, increasing our borrowing costs, increase the pricing of our credit facilities, adversely affect the market price of our securities, trigger letter of credit or other collateral postings, or otherwise impair our business, financial condition, and results of operations.
In the fourth quarter of 2014, Standard and Poor’s lowered our credit rating to B- from B. There can be no assurance that one or more other rating agencies will not take further negative actions with respect to our ratings. Increased debt levels, adverse aluminum market or macroeconomic conditions, a contraction in the Company’s liquidity, or other factors could potentially trigger such actions. A rating agency may lower, suspend or withdraw entirely a rating or place it on negative outlook or watch if, in that rating agency’s judgment, circumstances so warrant.
Any additional or further downgrade of our credit ratings by one or more rating agencies could also adversely impact the market price of our securities, adversely affect existing financing, limit access to the capital or credit markets or otherwise adversely affect the availability of other new financing on favorable terms, result in more restrictive covenants in agreements governing the terms of any future indebtedness that the Company incurs, increase the cost of borrowing or fees on undrawn credit facilities, result in vendors or counterparties seeking collateral or letters of credit from us, or otherwise impair our business, financial condition and results of operations.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
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 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 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.
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.
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.
PART II
ITEM 5.
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 closing prices of our common stock as reported by the New York Stock Exchange:
As of February 20, 2015, we had approximately 5,800 holders of record of our common stock, including shareholders whose shares are held in nominee, or “street” name by brokers. Investment funds associated with Apollo owned approximately 33.1% of our capital stock as of December 31, 2014. During the year ended December 31, 2014, 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 senior secured credit facilities and the indenture governing the AcquisitionCo 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, 2014 and 2013, we met all required performance ratios contained in our senior secured credit facilities and the indenture governing the AcquisitionCo Notes related to the payment of dividends consistent with our current dividend policy.
The following table summarizes the dividends we paid to shareholders during 2014 and 2013:
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, 2014 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.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected Historical Consolidated Financial Data
The following tables present our selected historical consolidated financial data. 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.
The consolidated statements of operations and cash flow data for the years ended December 31, 2014, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014 and 2013 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.
See accompanying notes to this table
(1)
Long-term debt includes long-term debt due 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.
(2)
Working capital is defined as current assets net of current liabilities.
(3)
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.
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):
(4)
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 aluminum 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.
(5)
Net Cash Cost represents our integrated new 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.
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 aluminum 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.
ITEM 7.
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 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, 2014 and 2013.
Results of Operations. This section provides a discussion of the results of operations on a historical basis for each of our years ended December 31, 2014, 2013 and 2012.
Liquidity and Capital Resources. This section provides an analysis of our cash flows for each of our years ended December 31, 2014, 2013 and 2012 and availability of funds at December 31, 2014.
Description of Certain Indebtedness. This section provides a general description of our senior secured credit facilities, our AcquisitionCo Notes and governing indenture.
Contractual Obligations and Contingencies. This section provides a discussion of our commitments as of December 31, 2014.
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 is one of the largest U.S. producers of primary aluminum, and 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 mining operation ("St. Ann") and alumina refinery (Gramercy). In 2014, New Madrid produced approximately 557 million pounds (253,000 metric tonnes) of primary aluminum, representing approximately 14.6% of total 2014 U.S. primary aluminum production, based on statistics from CRU International Limited. 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.
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 Midwest transaction price which consists of the LME aluminum price plus a Midwest premium. The average LME aluminum price for 2014 was $0.85 per pound. In 2013 and 2012, the average LME aluminum price was $0.84 per pound and $0.92 per pound, respectively. Declining LME aluminum prices have had a significant negative impact on our Upstream Business and our operating results.
Profit margins in the Flat-Rolled Products segment are generally unaffected by short-term volatility in the underlying LME aluminum 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, and 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 global 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, 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 derivative instruments. See “Critical Accounting Policies and Estimates” for further discussion of our accounting for these derivative instruments.
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 aluminum 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 requirements, and allow us to retain the economic differential between LME aluminum 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 2014, 2013 and 2012 our Primary Aluminum segment produced approximately 557 million pounds, 586 million pounds and 575 million pounds, respectively, of primary aluminum.
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 contract with Ameren for our electricity supply at New Madrid. This contract provides a secure supply at a rate established by MoPSC, and cannot be altered without the MoPSC’s approval. The power supply contract provides that the rate for power will be established by the MoPSC based on two components: a base rate and a fuel adjustment charge. The MoPSC determines whether to make changes to the base rate and fuel adjustment charge.
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 on market terms. Margins from these third-party sales effectively reduce the cost for producing smelter grade alumina for our smelter in New Madrid, thus lowering our Net Cash Cost.
Historically, natural gas prices have shown a high level of volatility. Henry Hub Index natural gas prices averaged $4.35 per million BTU in 2014, $3.73 in 2013 and $2.75 in 2012. We have, from time to time, entered into forward swaps to mitigate the effect of fluctuations in natural gas prices. Since January 1, 2013, we have not been a party to any forward swaps for natural gas.
During 2014, in our Downstream Business, aluminum metal units, which represent a pass-through cost to our customers, accounted for 75% of production costs with value-added conversion costs accounting for the remaining 25%. Conversion costs include labor, energy and operating supplies, including maintenance materials. Energy includes natural gas and electricity, which made up approximately 12% of conversion costs during 2014.
Productivity Program
CORE stands for “Cost-Out, Reliability, and Effectiveness,” and represents our productivity program. We believe CORE is an effective part of our efforts to improve our cash flow generation while also investing in the business. During the three year period 2011-2013, we achieved $195 million in savings through our CORE productivity program, surpassing our three-year goal of $140 million.
On October 30, 2013, we announced productivity targets totaling $225 million for the three year period from 2014 to 2016. These targets include $140 million of productivity gains to offset the normal effects of inflation and unplanned events, plus an additional $85 million of gains from functional streamlining, improving production processes, and changes in strategic sourcing of input costs.
Seasonality and the effects of inflation
We are subject to seasonality associated with the demand cycles of many of our end-use customers, which results in lower shipment levels from November to February each year. To match this demand seasonality, working capital is typically a use of cash in the first quarter of each year, and provides cash in the third and fourth quarter of 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.
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 foreign 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. 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 environmental compliance costs, which they may pass 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 on human health and the environment. Sulfur dioxide (“SO2”), an emission from our New Madrid smelter facility, is one such criteria pollutant. To determine our smelter’s compliance with NAAQS, we measure emissions using currently acceptable methods.
In 2010, the EPA issued regulations that increased the stringency of the SO2 NAAQS. Federal and state regulators are in the process of developing measurement methods and time-lines that will govern the implementation of those regulations. Once finalized, these implementation requirements may present material implications for our smelter’s compliance with NAAQS. Failure to meet NAAQS may require us to incur material capital and operational costs to bring our smelter into compliance and could have negative implications for permits necessary to support increases in production volumes at our smelter.
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 environmental-related liabilities of $20.3 million and $20.8 million at December 31, 2014 and 2013, respectively, comprised the following:
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Reclamation obligations at St. Ann to rehabilitate the land disturbed by the Bauxite mining operations;
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Asset retirement obligations at New Madrid related to spent pot liners;
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Asset retirement obligations at Gramercy related to red mud lakes; and
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Environmental remediation obligations at Gramercy for clean-up costs.
All accrued amounts have been recorded without giving effect to any possible future recoveries. With respect to ongoing environmental compliance costs, including maintenance and monitoring, we expense the costs when incurred.
Additionally, at December 31, 2014 and 2013, we had $10.5 million and $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.
For the year ended December 31, 2014, we incurred $5.5 million of capital expenditures related to compliance with environmental regulations. We anticipate environmental capital expenditures of $3.6 million in 2015. 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.
Significant ongoing negotiations
On February 13, 2014, we filed a petition with the MoPSC to change the rate design for Ameren customers in Missouri in order to provide the New Madrid smelter with a lower, sustainable power rate. On July 3, 2014, Ameren filed the July 2014 General Rate Case. On August 20, 2014, the MoPSC denied the relief sought under our rate design petition. In its ruling, the MoPSC encouraged the parties to continue to pursue negotiations on a compromise position that can be presented for consideration as part of the July 2014 General Rate Case, which is expected to be decided by May 2015. We are collaborating with our power provider and consumer groups to develop a global settlement that would include a reduction of the electricity rate at the smelter. See “Risk Factors---If we are unable to successfully finalize regulatory power issues at our New Madrid facility, we may have to curtail this facility.”
Pursuant to the establishment agreement, as amended, 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, 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. In addition, the terms of the establishment agreement, as amended, 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. We utilized $1.3 million of these prepaid income taxes in 2011 leaving a balance of $12.7 million at December 31, 2014. We believe these prepaid taxes can be used into perpetuity subject to an annual limitation.
We are attempting to negotiate a new fiscal structure with the GOJ. The terms of any new fiscal structure, as well as our ability to utilize all or part of the prepaid taxes, are subject to the outcome of the negotiations of any new fiscal structure or to the determination of our rights and obligations in connection with the existing arrangements. An unfavorable outcome could materially and adversely affect our business, financial condition, results of operations and cash flows. See “Risk Factors---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.” and Note 20, “Non-Controlling Interest” to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
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. Significant accounting policies, including areas of critical management judgments and estimates, include the following financial statement areas:

Revenue recognition

Asset retirement obligations

Impairment of long-lived assets

Land obligations

Goodwill and other intangible assets

Derivative instruments and hedging activities

Inventory valuation

U.S. pension benefits
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. We evaluate the recoverability of our long-lived assets for possible impairment when events or circumstances indicate that the carrying amounts may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest levels for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. If it is determined that the carrying amounts of such long-lived assets are not recoverable, the assets are written down to their estimated fair value.
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 indefinite-lived 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. Effective January 1, 2012, we adopted new accounting standards that allow a qualitative assessment to determine whether further impairment testing is necessary. We elected to continue to evaluate goodwill and other indefinite-lived intangible assets for impairment using a two-step process, which is based on a quantitative assessment. 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 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 future impairment charges may be necessary.
The carrying value of our Primary Aluminum segment’s goodwill was $137.6 million at December 31, 2014. As of October 1, 2014, the date of our last annual goodwill impairment test, the fair value of the Primary Aluminum segment exceeded its carrying value by approximately 33%. Our 2014 fair value analysis included assumptions about key factors affecting the Primary Aluminum segment’s future profitability and cash flows, including the long-term price for primary aluminum. We will continue to monitor our Primary Aluminum segment’s expected future cash flows for risk of impairment in the future. Factors that could cause a decline in expected future cash flows include a further decline in expected aluminum prices without corresponding decreases in expected prices for production inputs, significant increases in cost of production inputs such as electricity, potential negative effects of proposed legislation related to sulfur dioxide (“SO2”), emissions, or a significant increase in cash flow discount rates. Additionally, a sustained decline in our stock price or a downgrading of our credit ratings, when combined with the factors noted above, may cause us to further evaluate our impairment risk.
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 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 aluminum prices fluctuate, our inventory will be subject to market valuation reserves. In periods when the LME aluminum price at a given balance sheet date is higher than the LME aluminum 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, 2014, given certain specified changes in inventory costs:
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 obligations
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 Obligations 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 obligations.
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 Obligations and the Predecessor Land Obligations 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 additional expense in the period of revision.
Derivative instruments and hedging activities
Derivatives are reported on the balance sheet at fair value. For derivative instruments not designated as cash flow hedges, changes in the fair values are recognized in the consolidated statement of operations in the period of change. 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.
For derivatives that were designated and qualify as cash flow hedges, the effective portion of changes in fair value was initially recorded in accumulated other comprehensive income (“AOCI”) as a separate component of equity and reclassified into earnings in the period during which the hedged transaction was recognized in earnings. The ineffective portion of changes in fair value was reported in (gain) loss on hedging activities immediately. Forecasted sales represent a sensitive estimate in our designation of derivatives as cash flow hedges. Forecasted sales also represent a sensitive estimate in our accounting for derivatives because they impacted the determination of when amounts in AOCI should be reclassified into earnings. As of December 31, 2014 and December 31, 2013, respectively, none of our derivative instruments were designated and qualified as fair value or cash flow hedges.
U.S. Pension Benefits
We sponsor defined benefit pension plans for which we recognize expenses, assets and liabilities based on actuarial assumptions regarding the valuation of benefit obligations and the future performance of plan assets. We recognize the funded status of the plans as an asset or liability in the consolidated financial statements, measure defined benefit pension plan assets and obligations as of the end of our fiscal year, and recognize the change in the funded status of defined benefit pension plans in accumulated other comprehensive income (“AOCI”). The primary assumptions used in calculating pension expense and liabilities are related to the discount rates at which the future obligations are discounted to value the liability, the expected long-term rate of return on plan assets and assumptions related to the employee workforce including projected salary increases, retirement age and mortality. These rates are estimated annually as of December 31.
Pension expense includes the actuarially computed cost of benefits earned during the current service periods, the interest cost on accrued obligations, the expected return on plan assets based on fair market value and the straight-line amortization of net actuarial gains and losses and adjustments due to plan amendments. All net actuarial gains and losses are amortized over the expected average remaining service life of the employees.
The interest rate used to discount future estimated liabilities is determined using a Company-specific yield curve model developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors, including finance and banking, consumer products, transportation, insurance, and pharmaceutical, among others. The yield curve model parallels the plans’ projected cash flows, which have an average duration of 16.4 years, and the underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times. In 2014, 2013, and 2012, the weighted average discount rate used to determine benefit obligations for U.S. pension plans was 4.0%, 4.8%, and 3.9%, respectively. The impact on the liabilities at December 31, 2014 of an increase in the discount rate of one fourth of 1% would be approximately $17.7 million and either a debit or credit of $1.2 million to pre-tax earnings in 2015.
The expected long-term rate of return on U.S. pension plan assets is developed by management and represents an estimate of future experience for trust asset returns, and reflects current and expected future market conditions. For 2014, 2013, and 2012, management used 7.0%, 7.0% and 7.5%, respectively, as its expected long-term rate of return, which was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. This rate falls within the respective range of the 20-year moving average of actual performance and the expected future return developed by asset class. For 2015, management determined that 7.0% will
be the expected long-term rate of return. A change in the assumption for the expected long-term rate of return on plan assets of one fourth of 1% would impact pre-tax earnings by approximately $0.8 million for 2015.
Recent Relevant Accounting Pronouncements
A discussion of recent relevant accounting pronouncements is included in Note 1 to the unaudited condensed consolidated financial statements.
Selected Quarterly Consolidated Financial Data
The following table presents our unaudited quarterly financial information as required by Item 302 of Regulation S-K (in millions, except per share data):
The special items outlined below significantly impacted the comparability of our unaudited quarterly financial results (in millions):
(1)
The Company recorded $0.8 million related to workforce reductions at its Newport, AR light gauge facility and Primary Aluminum facility, and $0.3 million related to various other termination expenses in fourth quarter 2014. The Company recorded expense of $0.8 million related to an executive separation agreement in fourth quarter 2013 and $6.4 million for severance and other termination benefits in connection with its October 2013 workforce reduction at its Salisbury, NC Flat-Rolled Products facility and its Company-wide workforce reduction in December 2013.
(2)
The Company accelerated depreciation of $2.3 million and recorded impairment expense of $3.2 million in selling, general and administrative expenses to reduce the carrying value of certain fixed assets and other assets in connection with the workforce reduction at its Salisbury, NC Flat-Rolled Products facility.
(3)
Debt refinancing expense for the twelve months ended December 31, 2013 includes the write-off of deferred financing costs and third party fees related to the AcquisitionCo Notes due 2015 in connection with the first quarter 2013 Refinancing.
(4)
Prior periods have been recalculated to conform to the current period calculation of the special items impact of gain (loss) on hedging activities.
Results of Operations
We have provided the following discussion to aid the reader in understanding the results of operations. 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:
The following chart indicates the percentages of segment profit (loss) represented by each of our segments for the periods presented:
Discussion of results for the year ended December 31, 2014 compared to the year ended December 31, 2013
The following table sets forth certain consolidated financial information for the years ended December 31, 2014 and 2013 (in millions, except per share data and where noted):
Sales
Sales in the year ended December 31, 2014 were $1,355.1 million compared to $1,343.5 million in the year ended December 31, 2013, an increase of 0.9%. Of the $11.6 million increase in sales, higher LME aluminum prices and Midwest premiums increased sales $42.5 million. Increased shipment volumes in the Bauxite, Alumina and Flat-Rolled Products segments increased sales $28.8 million. Offsetting these improvements was a 10% decrease in external Primary Aluminum shipments which had a $56.0 million unfavorable impact, driven by lower production levels in the second half of 2014.
Sales to external customers from our Primary Aluminum segment decreased 3.5% to $524.6 million in the year ended December 31, 2014 from $543.8 million in the year ended December 31, 2013.
•
Our average realized MWTP for 2014 was $1.03 per pound compared to $0.95 per pound in 2013. The 8.4% increase in average realized MWTP in 2014 compared to 2013 increased external Primary Aluminum segment sales by approximately $36.8 million.
•
Lower external shipments from the Primary Aluminum segment decreased sales by $56.0 million in 2014 driven by the weather-related disruptions in first quarter, and lower production levels caused by an unusually high concentration of reduction cell (pot) failures in the second half of 2014.
Sales to external customers from our Alumina segment for the year ended December 31, 2014 were $206.3 million compared to $196.6 million for the year ended December 31, 2013. The increase in sales was driven by higher volume of $8.8 million.
Sales to external customers from our Bauxite segment for the year ended December 31, 2014 were $47.4 million compared to $46.8 million for the year ended December 31, 2013. External shipment volumes were higher by 9.2% resulting in a $4.3 million external sales increase, partially offset by lower external sales prices resulting in a $3.7 million sales decrease.
Sales to external customers from our Flat-Rolled Products segment were $576.8 million in the year ended December 31, 2014 compared to $556.3 million in the year ended December 31, 2013. The $20.5 million increase was due to a higher realized pricing impact of $4.8 million and an increase in shipment volume of $15.7 million.
Cost of sales
Cost of sales for the year ended December 31, 2014 was $1,261.8 million compared to $1,271.9 million in the year ended December 31, 2013.
Total cost of sales in the Primary Aluminum segment decreased to $564.6 million in the year ended December 31, 2014 from $596.6 million in the year ended December 31, 2013. The decrease primarily relates to lower second half production volume and CORE productivity savings of $5.6 million.
Total cost of sales in the Alumina segment was $345.1 million during the year ended December 31, 2014 compared to $347.3 million during the year ended December 31, 2013. The decrease in cost of sales was primarily due to a favorable impact from lower bauxite and caustic soda prices, improved LME-linked Alumina prices in relation to inventory valuation and by incremental CORE productivity savings. These favorable impacts partially offset by extreme weather conditions resulting in higher natural gas prices and production costs during the first quarter 2014.
Total cost of sales in the Bauxite segment was $116.2 million during the year ended December 31, 2014 compared to $117.1 million during the year ended December 31, 2013. The decrease in cost of sales is driven by favorable production costs such as lower fuel prices, shorter hauling distances and by incremental CORE productivity savings.
Flat-Rolled Products segment cost of sales increased to $541.7 million in the year ended December 31, 2014 from $520.4 million in the year ended December 31, 2013. The increase related principally to higher shipment volumes, partially offset by favorable metal timing and by incremental CORE productivity savings.
Selling, general and administrative expenses
Selling, general and administrative expenses in the year ended December 31, 2014 were $76.2 million compared to $97.1 million in the year ended December 31, 2013. Selling, general and administrative expenses decreased primarily due to lower compensation expenses and benefits as a result of 2013 workforce reductions and decreased relocation, severance and professional fees. Expenses in 2014 also decreased $1.0 million due to receipt of payment in the second quarter related to grant of easement rights for pass through of natural gas lines at our alumina facility. Additionally, 2013 included impairment charges of $5.5 million in our Flat-Rolled Products segment.
Operating income
Operating income in the year ended December 31, 2014 was $17.1 million compared to operating loss of $25.5 million in the year ended December 31, 2013. The increase primarily related to lower selling, general and administrative expenses and increases in realized MWTP prices in our Primary segment.
Interest expense, net
Interest expense during year ended December 31, 2014 increased to $50.4 million compared to $47.5 million for the year ended December 31, 2013. Our average outstanding indebtedness increased to $676.5 million during the year ended December 31, 2014 from $634.5 million in the year ended December 31, 2013.
Gain (loss) on hedging activities, net
Gain on hedging activities was $4.6 million in the year ended December 31, 2014 compared to a loss on hedging activities of $2.3 million in the year ended December 31, 2013. During the year ended December 31, 2013, we reclassified $6.4 million of aluminum and natural gas hedge net gains from AOCI into earnings. There were no remaining derivative gains or losses on hedging activities in AOCI to reclassify into earnings during the year ended December 31, 2014.
Debt refinancing expense
In the year ended December 31, 2013, we recorded debt refinancing expense of $2.5 million related to the 2013 Refinancing representing the write-off of deferred financing costs and third-party fees related to the AcquisitionCo Notes due 2015.
Income (loss) before income taxes
Loss before income taxes was $28.7 million in the year ended December 31, 2014 compared to loss before income taxes of $77.8 million in the year ended December 31, 2013. The special items outlined below impacted the comparability of our pre-tax income (in millions):
(1)
The Company recorded $0.8 million related to workforce reductions at its Newport, AR light gauge facility and Primary Aluminum facility, and $0.3 million related to various other termination expenses in fourth quarter 2014. The Company recorded expense of $0.8 million related to an executive separation agreement in fourth quarter 2013 and $6.4 million for severance and other termination benefits in connection with its October 2013 workforce reduction at its Salisbury, NC Flat-Rolled Products facility and its Company-wide workforce reduction in December 2013.
(2)
The Company accelerated depreciation of $2.3 million and recorded impairment expense of $3.2 million in selling, general and administrative expenses to reduce the carrying value of certain fixed assets and other assets in connection with the workforce reduction at its Salisbury, NC Flat-Rolled Products facility.
(3)
Debt refinancing expense for the twelve months ended December 31, 2013 includes the write-off of deferred financing costs and third party fees related to the AcquisitionCo Notes due 2015 in connection with the first quarter 2013 Refinancing.
(4)
Prior periods have been recalculated to conform to the current period calculation of the special items impact of gain (loss) on hedging activities.
Income tax expense (benefit)
Income tax benefit was $2.1 million in the year ended December 31, 2014 compared to income tax benefit of $30.2 million in the year ended December 31, 2013.
The effective tax rate was 7.3% for 2014 and 38.8% for 2013. The effective income tax rate for the year ended December 31, 2014 was primarily impacted by state income taxes, the Internal Revenue Code Section 199 manufacturing deduction and a foreign deferred tax asset valuation allowance. The effective income tax rate for the year ended December 31, 2013 was primarily impacted by state income taxes, the Internal Revenue Code Section 199 manufacturing deduction, foreign deferred tax asset valuation allowance and accrued interest related to unrecognized tax benefits.
The decrease in the effective income tax rate for the year ended December 31, 2014 compared to the year ended December 31, 2013 is primarily due to not recognizing a tax benefit from increased foreign losses because they are offset by a valuation allowance for the year ended December 31, 2014, and recognizing a $3.2 million income tax benefit resulting from enacted changes in state income tax laws for the year ended December 31, 2013.
Net income (loss)
Net loss was $26.6 million in the year ended December 31, 2014, compared to net loss of $47.6 million in the year ended December 31, 2013. The increase in net income resulted from a $42.6 million increase in operating income, a $6.9 million increase in gain on hedging activities, partially offset by a $2.9 million increase in interest expense and net $28.1 million increase in income tax expense.
Discussion of segment results for the year ended December 31, 2014 compared to year ended December 31, 2013
Bauxite
Segment loss in the year ended December 31, 2014 was $6.6 million compared to a profit of $8.2 million in the year ended December 31, 2013. Bauxite segment results reflect a $13.6 million negative impact of adjustments to the internal transfer pricing for bauxite sold to the Alumina segment, partially offset by favorably lower fuel prices and shorter haul distances.
Alumina
Segment profit in 2014 was $8.5 million compared to $13.6 million in 2013. Lower Alumina segment profit reflects the combination of the $9.3 million impact of extreme winter weather conditions in the first quarter 2014 and $12.1 million higher natural gas prices, offset by results from the transfer price adjustment discussed above.
Primary Aluminum
Segment profit in the year ended December 31, 2014 was $95.6 million compared to $51.9 million in the year ended December 31, 2013. This improvement was driven by higher realized Midwest Transaction Prices ($45.9 million, net), favorable petroleum coke prices and CORE productivity savings, partially offset by the effects of first quarter weather disruptions and lower second half 2014 production levels.
Flat-Rolled Products
Segment profit in 2014 was $55.9 million compared to $50.0 million in 2013. Segment profit increased primarily due to higher shipment volume, CORE productivity savings and favorable metal timing, partially offset by higher natural gas prices.
Corporate
Corporate costs in the year ended December 31, 2014 were $25.0 million, compared to $31.1 million in the year ended December 31, 2013. Corporate costs decreased primarily due to the impact of CORE productivity savings and lower professional fees.
Discussion of results for the year ended December 31, 2013 compared to the year ended December 31, 2012
The following table sets forth certain consolidated financial information for the years ended December 31, 2013 and 2012 (in millions, except per share data and where noted):
Sales
Sales in the year ended December 31, 2013 were $1,343.5 million compared to $1,394.9 million in the year ended December 31, 2012, a decrease of 3.7%. The $51.4 million decrease in sales, was primarily attributable to $48.5 million of lower realized prices in the Alumina, Primary Aluminum, and Flat-Rolled Products segments, primarily due to lower LME aluminum prices in 2013. LME aluminum prices averaged $0.84 in 2013 compared to $0.92 in 2012. In the Flat-Rolled segment, the effects of planned fourth quarter 2013 mill turnarounds and heavier fourth quarter customer destocking contributed to the remaining year-over-year revenue decline.
Sales to external customers from our Primary Aluminum segment decreased 2.0% to $543.8 million in the year ended December 31, 2013 from $555.1 million in the year ended December 31, 2012, driven primarily by lower LME prices.
•	Our average realized MWTP for 2013 was $0.95 per pound compared to $1.01 per pound in 2012. The 5.9% decrease in average realized MWTP in 2013 compared to 2012 decreased external Primary Aluminum segment sales by approximately $20.4 million.
•	Strong operational performance and stable demand in the Primary Aluminum segment drove improved shipment volumes. The increase in external shipments from the Primary Aluminum segment increased external sales by $8.1 million in 2013 compared to 2012.
Sales to external customers from our Alumina segment for the year ended December 31, 2013 were $196.6 million compared to $208.0 million for the year ended December 31, 2012. This decrease is primarily attributable to restocking the internal supply chain in the first quarter 2013.
Sales to external customers from our Bauxite segment for the year ended December 31, 2013 were $46.8 million compared to $50.9 million for the year ended December 31, 2012. External shipment volumes decreased by 14.0% due to timing of shipments, resulting in a $7.1 million unfavorable impact to revenues while pricing was favorable by $3.0 million.
Sales to external customers from our Flat-Rolled Products segment were $556.3 million in the year ended December 31, 2013 compared to $580.9 million in the year ended December 31, 2012. The $24.6 million decrease was due to a lower realized pricing impact of $14.0 million and a decrease in shipment volumes which decreased revenue by $10.6 million.
Cost of sales
Cost of sales for the year ended December 31, 2013 was $1,271.9 million compared to $1,277.7 million in the year ended December 31, 2012 due to higher natural gas prices and power costs, offset by lower raw material input costs.
Total cost of sales in the Primary Aluminum segment increased to $596.6 million in the year ended December 31, 2013 from $585.7 million in the year ended December 31, 2012. The increase primarily related to higher power costs during the year ended December 31, 2013 due to a rate increase that went into effect in January 2013.
Total cost of sales in the Alumina segment was $343.7 million during the year ended December 31, 2013 compared to $329.6 million during the year ended December 31, 2012. The increase in cost of sales was primarily due to higher natural gas prices during the year ended December 31, 2013.
Total cost of sales in the Bauxite segment was $117.1 million during the year ended December 31, 2013 compared to $124.3 million during the year ended December 31, 2012. Improved operating efficiency in our shipping operations resulted in lower demurrage costs in the year ended December 31, 2013.
Flat-Rolled Products segment cost of sales decreased to $520.4 million in the year ended December 31, 2013 from $534.7 million in the year ended December 31, 2012. The decrease related principally to lower shipment volumes and lower pass through cost of metal due to lower LME aluminum prices.
Selling, general and administrative expenses
Selling, general and administrative expenses in the year ended December 31, 2013 were $97.1 million compared to $82.6 million in the year ended December 31, 2012. This $14.5 million increase was primarily due to the impact of the following non-recurring items: (i) a $4.5 million gain realized upon the sale of idle mill equipment in 2012 which lowered selling general and expenses in 2012, (ii) $5.9 million of 2013 impairment charges related to construction in progress, equipment and other long term assets in our Flat-Rolled Products segment and (iii) one-time termination benefits of $5.6 million related to the fourth quarter 2013 workforce reduction.
Operating income
Operating loss in the year ended December 31, 2013 was $25.5 million compared to operating income of $34.6 million in the year ended December 31, 2012. The decrease in operating income relates to a sales margin decline of $45.6 million coupled with the $14.5 million increase in selling, general and administrative expenses discussed above.
Sales margin was $71.6 million for the year ended December 31, 2013 compared to $117.2 million in the year ended December 31, 2012. This decrease resulted from the unfavorable impacts of lower LME aluminum prices and lower external shipment volumes.
Interest expense, net
Interest expense during year ended December 31, 2013 increased to $47.5 million compared to $33.1 million for the year ended December 31, 2012. An increase in the outstanding Term B Loan and an increase in the interest rate on the AcquisitionCo Notes due 2019 compared to the AcquisitionCo Notes due 2015 contributed to the increase in interest expense. As part of the 2013 Refinancing, we paid $1.1 million of interest on the AcquisitionCo Notes due 2015 for the period after the AcquisitionCo Notes due 2015 were called for redemption and the related indenture discharged, but prior to the actual redemption thereof. Our average outstanding indebtedness increased to $634.5 million during the year ended December 31, 2013 from $573.6 million in the year ended December 31, 2012.
(Gain) loss on hedging activities, net
Loss on hedging activities was $2.3 million in the year ended December 31, 2013 compared to a gain on hedging activities of $81.2 million in the year ended December 31, 2012. Reclassifications of aluminum and natural gas hedge gains and losses from AOCI into earnings in 2013 were $6.4 million compared to $84.2 million in 2012. As of December 31, 2013 there were no remaining derivative gains or losses on hedging activities in AOCI.
Debt refinancing expense
In the year ended December 31, 2013, we recorded debt refinancing expense of $2.5 million related to the 2013 Refinancing representing the write-off of deferred financing costs and third-party fees related to the AcquisitionCo Notes due 2015. In the year ended December 31, 2012, we recorded debt refinancing expense of $8.1 million related to the refinancing of our credit facilities at that time, comprising $5.7 million of creditor fees related to the new senior secured credit facilities and $2.4 million of deferred financing fees related to the existing senior secured credit facilities.
Income (loss) before income taxes
Loss before income taxes was $77.8 million in the year ended December 31, 2013 compared to income before income taxes of $74.6 million in the year ended December 31, 2012. The special items outlined below significantly impacted the comparability of our pre-tax income (in millions):
(1)
We recorded expense of $0.8 million related to an executive separation agreement in fourth quarter 2013 and $6.4 million for severance and other termination benefits in connection with the workforce reduction at our Salisbury, NC Flat-Rolled Products facility announced in October 2013 and our Company-wide workforce reduction in December 2013.
(2)
We accelerated depreciation of $2.3 million and recorded impairment expense of $3.2 million in selling, general and administrative expenses to reduce the carrying value of certain fixed assets and other assets in connection with the workforce reduction at our Salisbury, NC Flat-Rolled Products facility.
(3)
Includes, for year ended December 31, 2013, debt refinancing expense representing the write-off of deferred financing fees and third party fees related to the AcquisitionCo Notes due 2015. Includes, for the year ended December 31, 2012, $8.1 million of costs related to the 2012 Refinancing and the related tender offer, including creditor and third-party fees as well as the write-off of deferred financing fees.
(4)
In 2012, we expensed $4.1 million of contingency costs related to assembling a back-up labor force during the renegotiation of its collective bargaining agreement at our New Madrid smelter.
(5)
During the year ended December 31, 2012, holders of stock options, service-vesting restricted stock and restricted stock units were paid cash for the $1.25 per share supplemental dividend. We accelerated $1.2 million of share-based payment compensation expense in connection with this award modification. Share-based payment compensation cost related to the modified awards of $0.4 million would have been recognized ratably throughout second, third and fourth quarter 2012 had the modification not occurred.
Income tax expense (benefit)
Income tax benefit was $30.2 million in the year ended December 31, 2013 compared to income tax expense of $25.1 million in the year ended December 31, 2012.
The effective tax rate was 38.8% for 2013 and 33.6% for 2012. The effective tax rate for each period was primarily impacted by the Internal Revenue Code Section 199 manufacturing deduction, state income taxes and accrued interest related to unrecognized tax benefits. In regards to state income taxes, our effective income tax rate for the year ended December 31, 2013 was impacted by enacted
changes in state income tax laws which affected apportionment methods and income tax rates in certain states. As a result of these changes, we recorded a $3.2 million income tax benefit for the year ended December 31, 2013.
Net income (loss)
Net loss was $47.6 million in the year ended December 31, 2013, compared to net income of $49.5 million in the year ended December 31, 2012. The decrease in net income resulted from a $60.1 million decrease in operating income, a $83.5 million decrease in gain on hedging activities and a $14.4 million increase in interest expense, net, offset by a $55.3 million decrease in income tax expense.
Discussion of segment results for the year ended December 31, 2013 compared to year ended December 31, 2012
Bauxite
Segment profit in the year ended December 31, 2013 was $8.2 million compared to a loss of $0.2 million in the year ended December 31, 2012. Segment profit for the year ended December 31, 2013 reflected the positive impact of improved operating efficiency in the segment’s shipping operations, which led to a more favorable mix between internal and external shipments and to lower demurrage costs. These favorable effects were partially offset by lower internal selling prices and higher diesel fuel prices.
Alumina
Segment profit in 2013 was $13.6 million compared to $35.0 million in 2012. The 2013 segment profit reflects the negative impact on internal and external revenues, lower LME-indexed alumina prices, coupled with higher 2013 natural gas costs. A change in the basis for the estimated market price of bauxite assumed in the Alumina segment’s lower of cost or market adjustment reduced the inventory reserve, favorable impacting segment profit in the year ended December 31, 2013.
Primary Aluminum
Segment profit in the year ended December 31, 2013 was $51.9 million compared to $76.7 million in the year ended December 31, 2012. The decrease in segment profit reflected the impact from lower LME aluminum prices and higher power costs, offset in part by more favorable raw materials prices for alumina.
Flat-Rolled Products
Segment profit in 2013 was $50.0 million compared to $51.4 million in 2012. Compared to the year ended December 31, 2012, segment profit was relatively stable, as higher 2013 fabrication premiums partially offset the negative impact of metal timing losses and higher natural gas prices.
Corporate
Corporate costs in the year ended December 31, 2013 were $31.1 million, substantially consistent with the $29.5 million in the year ended December 31, 2012.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash balances, cash provided by operating activities and available borrowings under our ABL and project specific financing arrangements.
At December 31, 2014, we had $20.5 million of cash and cash equivalents. As of December 31, 2014 and December 31, 2013 cash and cash equivalents includes $1.8 million and $7.0 million, respectively, of cash intended to be used for ongoing capital and operational productivity improvements in Jamaica.
As of December 31, 2014, available borrowing capacity under the Company’s asset-based revolving credit facility was $137.8 million, which is net of $39.8 million in outstanding letters of credit. The Company’s total available liquidity as of December 31, 2014 was $158.3 million.
As of December 31, 2014, our total indebtedness was $668.0 million. Based on the amount of indebtedness outstanding and interest rates at December 31, 2014, our annualized cash interest expense is approximately $50 million for 2015. This amount includes interest expense on floating-rate obligations and is subject to increase in the event interest rates rise.
On February 18, 2015, the Board declared a regular quarterly dividend of $0.01 per share to be paid on March 25, 2015 to shareholders of record as of March 2, 2015. Cash payments related to the dividend will total approximately $0.7 million. In the year ended December 31, 2014, we made cash dividend payments to shareholders totaling $2.7 million.
As of December 31, 2013, we had $59.5 million of deferred tax liabilities related to taxable cancellation of debt income generated prior to 2011. Those gains will be included in our taxable income from 2014 through 2018 and will therefore increase our cash tax payments by approximately $14.8 million annually during that period. Our 2013 cash tax payments included no similar items.
In addition to financing the working capital needs of our business, our primary continuing liquidity requirements are to (i) fund capital expenditures (ii) meet debt service obligations and (iii) pay dividends. Based on our current level of operations, we believe
the combination of cash flow from operations and available cash and borrowings will be adequate to meet our short-term liquidity needs. Our ability to make scheduled payments of principal, pay interest on, or to refinance our indebtedness, to pay dividends or to fund planned capital expenditures, will depend on our ability to generate cash in the future. This ability is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
Discussion of certain historical cash flow information for the years ended December 31, 2014 and 2013
The following table sets forth consolidated cash flow information for the periods indicated (in millions):
Operating activities
Operating activities generated $30.6 million of cash in the year ended December 31, 2014 compared to $64.2 million in the year ended December 31, 2013.
In 2014, we generated $127.3 million of Adjusted EBITDA, comprised solely of segment profit (Adjusted EBITDA is defined and discussed under the following “Adjusted EBITDA” section). During 2014, we paid interest of $50.0 million, and made income tax payments of $10.8 million. Operating working capital used $12.6 million of cash in 2014.
Investing activities
Capital expenditures were $93.5 million in the year ended December 31, 2014 and $72.7 million in the year ended December 31, 2013. Property, plant and equipment accrued as a liability and not yet paid were $3.0 million for the year ended December 31, 2014 and $5.0 million for the year ended December 31, 2013 and are not reflected as capital expenditures in the accompanying consolidated statements of cash flows. In 2015, we expect to invest approximately $75.0 million related to sustaining projects, and $25.0 million to complete the Rod mill and port expansion projects.
On February 20, 2013, we announced plans to expand our investment in the port expansion project from $11 million to up to $20 million. We expect the port expansion project to increase shipping capacity at St. Ann. The additional investment expanded the scope of the project to include improvements in railing infrastructure used in our bauxite mining operation. Capital expenditures for the year ended December 31, 2014 include $6.8 million related to the port expansion project. The project was substantially completed in February 2015. We have project specific financing in place for this investment.
We previously announced a project to build a new rod mill at our facility in New Madrid, Missouri, the scope of which includes infrastructure development and construction of a new, state-of-the-art mill to produce redraw rod for a total cost of approximately $55 million. In 2013, we entered into a financing arrangement with a third party to finance the off-site construction of the rod production line, which comprises certain machinery, equipment and other components. Pursuant to the terms of the third party arrangement, upon delivery of the production line to our facility, we repaid the third party for amounts paid to the construction company throughout the construction phase, plus interest and fees, and assume any remaining payments. Closing on the new production line was completed in October 2014. Consistent with previous expectations, the Company spent approximately $19.3 million on the project during fourth quarter 2014, of which $12.9 million related to equipment already manufactured and delivered. We are scheduled to start production of the new Rod mill in December of 2015.
Financing activities
In December 2012, we entered into a financing agreement with a third party (the “project specific financing” arrangement) which allowed us to borrow a maximum of $20.0 million to fund capital improvements related to port expansion and railing improvements designed to increase shipping capacity and improve the cost structure at our St. Ann bauxite mining operation. The outstanding balance as of December 31, 2013 was $11.0 million. During the first quarter of 2014, we borrowed $6.5 million from this project specific financing arrangement. On December 16, 2014, we amended our credit agreement to increase the borrowing capacity from $20.0 to $22.5 million. During December 2014 we borrowed the remaining $5.0 million resulting in an outstanding balance as of December 31, 2014 of $22.5 million.
The following table summarizes the cash dividends paid during 2014 and 2013.
Discussion of certain historical cash flow information for the years ended December 31, 2013 and 2012
The following table sets forth consolidated cash flow information for the periods indicated (in millions):
Operating activities
Operating activities generated $64.2 million of cash in the year ended December 31, 2013 compared to $18.9 million in the year ended December 31, 2012.
In 2013, we produced $93.1 million of Adjusted EBITDA, comprised solely of segment profit (Adjusted EBITDA is defined and discussed under the following “Adjusted EBITDA” section). During 2013, we paid interest of $46.1 million, and made income tax payments of $3.7 million, offset by other net cash provided of $0.8 million. Operating working capital provided $20.1 million of cash in 2013.
Investing activities
Capital expenditures were $72.7 million in the year ended December 31, 2013 and $87.9 million in the year ended December 31, 2012. Property, plant and equipment accrued as a liability and not yet paid were $5.0 million for the year ended December 31, 2013 and $3.7 million for the year ended December 31, 2012 and are not reflected as capital expenditures in the accompanying consolidated statements of cash flows.
On February 20, 2013, we announced plans to expand our investment in the port expansion project from $11 million to up to $20 million. We expect the port expansion project to increase shipping capacity at St. Ann. The additional investment expanded the scope of the project to include improvements in railing infrastructure used in our bauxite mining operation. Capital expenditures for the year ended December 31, 2013 include $4.0 million related to the port expansion project. We expect to substantially complete the project during the first half of 2014. We have project specific financing in place for this investment.
In July 2012, we announced a project build a new rod mill at our facility in New Madrid, the scope of which includes infrastructure development and construction of a new, state-of-the-art mill to produce redraw rod. We expect the new rod mill to cost approximately $55 million and increase the facility’s redraw rod production capacity to 220 million pounds annually. We have obtained customer commitments for 220 million pounds. We are evaluating the opportunity these customer commitments, combined with our existing customers’ requirements, provide to continue operating both of our existing mills, which had a combined annual capacity of 155 million pounds as of December 31, 2013. We are scheduled to start production of the new Rod mill in December of 2015.
In April 2013, we entered into a financing arrangement with a third party to finance the off-site construction of the rod production line, which comprises certain machinery, equipment and other components. Pursuant to the terms of the third party arrangement, upon delivery of the production line to our facility, we will repay the third party for amounts paid to the construction company throughout the construction phase, plus interest and fees, and assume any remaining payments. We anticipate delivery of the Rod production line in September 2014. Total payments related to the construction of the rod production line are expected to be approximately €11.5 million in the aggregate, however the amount and timing of the payments are subject to variability due to the progression of the construction.
During late 2010, we re-launched a project to expand the aluminum production capacity at our New Madrid smelter at a remaining cost of $38.0 million. The project involves a combination of additional rectifiers and upgraded equipment allowing for increased aluminum production up to 35.0 million pounds (“the Rectifier Project”). The Rectifier Project has the added benefit of greater efficiency and reliability through upgrades and redundancy of equipment. We expect efficiency gains and reliability improvements to be achieved as rectifiers and equipment upgrades are installed, independent of any increase in production level.
We spent $2.7 million on the Rectifier Project during the year ended December 31, 2013 and have spent $13.0 million since re-launching the project in late 2010. We anticipate spending an additional $0.4 million related to the achievement of reliability improvements, to be incurred in 2014. The timing of the remaining spending is dependent on overall market conditions, including the LME aluminum price, and the resolution of environmental permitting and sulfur dioxide emissions regulations.
Description of Certain Indebtedness
We summarize below the principal terms of the agreements that govern the senior secured credit facilities and the senior unsecured notes. This summary is not a complete description of all of the terms of the relevant agreements. Copies of the senior secured credit facilities and the indenture governing the AcquisitionCo Notes have been filed with the SEC.
Noranda AcquisitionCo has the following senior secured credit facilities and senior unsecured notes outstanding as of December 31, 2014:
•
a Term B Loan that matures February 2019 with an aggregate original principal amount of $485.0 million, consisting of an initial borrowing of $325.0 million (the “Term B Loan”) and incremental borrowings totaling $160.0 million
•
a $250.0 million asset based revolving credit facility that matures in February 2017, which includes borrowing capacity available for letters of credit and for borrowing on same-day notice (the “ABL”);
•
an incremental asset-based revolving credit facility, consisting of $15.0 million in additional borrowing capacity on a FILO basis, under our existing asset-based revolving credit facility (the “incremental ABL”); and
•
$175.0 million principal balance of senior unsecured 11% notes due June 2019 (the “AcquisitionCo Notes”).
Senior Secured Credit Facilities
Term B Loan
The Term B Loan consists of an initial borrowing of $325.0 million. The credit agreement governing the Term B Loan also permits Noranda AcquisitionCo to incur incremental borrowings thereunder in an aggregate principal amount equal to the greater of (1) $100.0 million and (2) an amount such that, after giving effect to such incremental borrowing, Noranda AcquisitionCo will have a total net senior secured leverage ratio of not greater than 2.25 to 1.00. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time Noranda AcquisitionCo seeks to incur such borrowings.
On March 8, 2013, we entered into an incremental term loan facility in the amount of $110.0 million under our existing term loan credit agreement (the “$110.0 million incremental Term B Loan”). The $110.0 million incremental Term B Loan agreement permitted us to incur further incremental borrowings under the existing Term B Loan in an aggregate principal amount not to exceed the greater of (1) $50.0 million and (2) an amount such that, after giving effect to such incremental borrowing, we would be in pro forma compliance with a maximum total net senior secured leverage ratio of 2.25 to 1.00. On May 29, 2013, we borrowed an additional $50.0 million, which we refer to as the “$50.0 million incremental Term B Loan.” Borrowings under the $50.0 million incremental Term B Loan were used for general corporate purposes. The $110.0 million incremental Term B Loan and the $50.0 million incremental Term B Loan are due and payable on February 28, 2019 and have the same terms as borrowings under the existing Term B Loan.
Obligations of Noranda AcquisitionCo under the Term B Loan are senior obligations guaranteed by the Company and substantially all of Noranda AcquisitionCo’s wholly owned existing and future direct and indirect U.S. subsidiaries, with certain exceptions. Currently NHB Capital LLC (“NHB”), in which we have a 100% ownership interest, is our only domestic subsidiary that has not guaranteed these obligations. Noranda AcquisitionCo and the subsidiary guarantors have pledged substantially all of their assets as security for such obligations, while the Company has pledged its shares of capital stock of Noranda AcquisitionCo. These security interests are second priority (subordinate to the liens in favor of the ABL) with respect to accounts receivable, inventory and certain related assets and first priority with respect to all other pledged assets.
All outstanding principal and interest under the Term B Loan will be due and payable on February 28, 2019. The Term B Loan requires Noranda AcquisitionCo to repay borrowings outstanding thereunder in the amount of 1.00% per annum, payable in quarterly installments, with the balance due on the maturity date.
Noranda AcquisitionCo may prepay amounts outstanding under the Term B Loan at any time. If such prepayment were made on or prior to the first anniversary of the date of the Term B Loan initial borrowing as a result of certain refinancing or repricing transactions,
Noranda AcquisitionCo would have been required to pay a fee equal to 1.00% of the principal amount of the obligations so refinanced or repriced. No such fees were incurred in 2014 or 2013. Subject to certain exceptions, the Term B Loan requires Noranda AcquisitionCo to prepay certain amounts outstanding thereunder with (a) the net cash proceeds of certain asset sales and certain issuances of debt and (b) a percentage of annual excess cash flow, which percentage is based upon Noranda AcquisitionCo’s total net senior secured leverage ratio. During both 2014 and 2013, no mandatory prepayments were due pursuant to the cash flow sweep provisions of the credit agreement, nor, given our 2014 financial results, will any mandatory prepayments be due pursuant to the cash flow sweep provisions of the credit agreement during 2015.
Borrowings under the Term B Loan bear interest at a rate equal to an applicable margin plus, at Noranda AcquisitionCo’s option, either (a) a base rate calculated in a customary manner (provided such base rate shall not be less than 2.25%) or (b) an adjusted eurodollar rate calculated in a customary manner (provided that such adjusted eurodollar rate shall not be less than 1.25%). The applicable margin is 3.50% per annum with respect to base rate borrowings and 4.50% per annum with respect to eurodollar rate borrowings.
The Term B Loan contains certain customary affirmative and negative covenants, restrictions and events of default.
As of December 31, 2014, we had $470.7 million outstanding under the Term B Loan, including the incremental borrowings, net of $2.4 million of unamortized discount.
ABL
Subject to certain exceptions, maximum availability under the ABL is equal to the lesser of (1) $250.0 million and (2) a borrowing base equal to (i) 85% of the net amount of eligible accounts receivable plus (ii) the lesser of (a) 80% of the lesser of the original cost or market value of eligible inventory and (b) 90% of the orderly liquidation value of eligible inventory minus (iii) any applicable reserves. The borrowers may request the issuance of letters of credit up to an aggregate face amount of $75.0 million, and the borrowing of swingline loans, up to an aggregate amount equal to 10% of the outstanding commitments under the ABL. The ABL also permits Noranda AcquisitionCo to incur incremental commitments thereunder in an aggregate principal amount of up to $100.0 million. Incremental commitments are uncommitted and the availability thereof will depend on market conditions at the time Noranda AcquisitionCo seeks to incur such commitments.
Obligations of the borrowers under the ABL are senior obligations guaranteed by the Company, each borrower and substantially all of Noranda AcquisitionCo’s wholly owned existing and future direct and indirect U.S. subsidiaries, with certain exceptions. Currently, NHB is the only domestic subsidiary that has not guaranteed these obligations. Noranda AcquisitionCo and the subsidiary guarantors have pledged substantially all of their assets as security for such obligations, while the Company has pledged its shares of capital stock of Noranda AcquisitionCo. These security interests are first priority with respect to accounts receivable, inventory and certain related assets and second priority (subordinate to the liens in favor of the Term B Loan) with respect to all other pledged assets.
All outstanding principal and interest under the ABL will be due and payable on February 28, 2017. Noranda AcquisitionCo may prepay amounts, and/or terminate commitments, outstanding under the ABL at any time without penalty or premium.
Borrowings under the ABL bear interest at a rate equal to an applicable margin plus, at Noranda AcquisitionCo’s option, either (a) a base rate calculated in a customary manner or (b) an adjusted eurodollar rate calculated in a customary manner. The applicable margin is determined based on Noranda AcquisitionCo’s average quarterly excess availability under the ABL. The applicable margin ranges from 0.50% to 1.00% per annum with respect to base rate borrowings and from 1.5% to 2.00% per annum with respect to eurodollar rate borrowings. Noranda AcquisitionCo is also required to pay a quarterly commitment fee equal to 0.375% per annum of the average amount of unused commitments during the applicable quarter, as well as quarterly letter of credit fees equal to the product of (a) the applicable margin with respect to eurodollar borrowings and (b) the average amount available to be drawn under outstanding letters of credit during such quarter.
The ABL contains certain customary affirmative and negative covenants, restrictions and events of default. If our ABL Fixed-Charge Coverage Ratio is less than 1.0 to 1.0, we must maintain at least $20.0 million of available borrowing capacity under our ABL. As of December 31, 2014, our ABL Fixed-Charge Coverage Ratio was greater than 1.0 to 1.0.
The ABL had no outstanding balance at December 31, 2014 or December 31, 2013. Outstanding letters of credit on the ABL were $39.8 million and $34.6 million, respectively, at December 31, 2014 and December 31, 2013. Our effective borrowing capacity calculated as of December 31, 2014 was $137.8 million.
On May 15, 2013, we entered into an incremental asset-based revolving credit facility, consisting of $15.0 million in additional commitments on a FILO basis, under our existing asset-based revolving credit facility. We refer to this incremental asset-based loan as the “incremental ABL.” Loans under the incremental ABL will be used for general corporate purposes, will bear interest at a rate equal to the rate applicable to loans under our existing asset-based revolving credit facility plus 1.5% per annum, will mature in February 2017 and, except as set forth herein, will be subject to the same terms and conditions as loans under the existing asset-based loan credit agreement. The incremental ABL had no outstanding balances as of December 31, 2013 and December 31, 2014.
Senior Notes
AcquisitionCo Notes due 2019
On March 8, 2013, we completed a private offering of $175.0 million of 11.00% AcquisitionCo Notes due June 1, 2019. The AcquisitionCo Notes due 2019 are fully and unconditionally guaranteed on a senior unsecured, joint and several basis by Noranda HoldCo and the domestic subsidiaries of Noranda AcquisitionCo that guarantee the senior secured credit facilities. The indenture governing the AcquisitionCo Notes due 2019 contains certain customary affirmative and negative covenants, restrictions and events of default. In January 2014 the Company registered the AcquisitionCo Notes by exchanging these notes for identical notes, except that the exchange notes have been registered under the U.S. federal securities laws and are not subject to transfer restrictions.
As of December 31, 2014, we had $173.3 million in principal amount of AcquisitionCo Notes due 2019 outstanding, net of unamortized underwriting discount of $1.7 million.
Adjusted EBITDA
Management uses “Adjusted EBITDA”, referred to as “EBITDA” in the Company’s debt agreements, as a liquidity measure. The Company’s debt agreements do not require it to achieve any specified level of Adjusted EBITDA, or ratio of Adjusted EBITDA to any other financial metric, in order to avoid a default (subject, in the case of the senior secured revolving credit facility, to its maintaining minimum availability thereunder). As used herein, Adjusted EBITDA means net income before income taxes, net interest expense, depreciation and amortization, adjusted to eliminate certain non-cash expenses and other specified items of income or expense as outlined below (in millions):
(a)
Our New Madrid smelter and our rolling mills use the LIFO method of inventory accounting for financial reporting and tax purposes. This adjustment restates net income to the FIFO method by eliminating LIFO expenses related to inventory held at the New Madrid smelter and the rolling mills. Inventories at Gramercy and St. Ann are stated at lower of weighted-average cost or market, and are not subject to the LIFO adjustment. We also reduce inventory to the lower of cost (adjusted for purchase accounting) or market value.
(b)
We use derivative financial instruments to mitigate effects of fluctuations in interest rates, and the current price of aluminum and natural gas. This adjustment eliminates the non-cash gains and losses resulting from fair market value changes of aluminum swaps, but does not affect the following cash settlements (received)/paid (in millions):
Adjusted 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. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income, income from continuing operations, operating income or any other performance measures derived in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. For example, Adjusted 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. Adjusted EBITDA also includes incremental stand-alone costs and adds back non-cash hedging gains and losses, and certain other non-cash charges that are deducted in calculating net income. However, these are expenses that may recur, vary greatly and are difficult to predict. In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes. You should not consider our Adjusted EBITDA as an alternative to operating or net income, determined in accordance with U.S. GAAP, as an indicator of our operating performance, or as an alternative to cash flows from operating activities, determined in accordance with U.S. GAAP, as an indicator of our cash flows or as a measure of liquidity.
The following table reconciles Adjusted EBITDA to cash flow from operating activities for the periods presented (in millions):
Contractual Obligations and Contingencies
Our contractual obligations as of December 31, 2014 (in millions) were:
Obligations for operating activities
We enter into operating leases in the normal course of business, including leases on certain manufacturing and warehouse facilities. We have a long-term power contract at New Madrid and contracts for minimum nitrogen purchases in our Flat-Rolled product segment.
If the nitrogen contracts are cancelled during 2015, we would be obligated to pay contract termination fees of approximately $1.3 million. Obligations that are legally cancellable without penalty are excluded.
We have other contractual obligations that are reflected in the consolidated financial statements, including asset retirement obligations (“AROs”), environmental remediation, land and reclamation obligations. AROs are stated at the present value of the liability. In the table above, AROs for 2015 include an additional $1.7 million related to other obligations for pots at New Madrid which are recorded in other accrued liabilities in our consolidated balance sheets.
Pension and OPEB expected benefit payments have been included above at amounts estimated annually by our actuaries. To the extent that actual returns on pension fund investments are lower than our estimates, our future requirements to fund those benefit payments could increase to above historical levels. In 2015, we expect to make pension contributions totaling $17.8 million and $0.4 million for the Noranda Pension Plans and the St. Ann Pension Plans, respectively. We may elect to make additional contributions to the plans.
As of December 31, 2014, the noncurrent portion of our income tax liability, including accrued interest and penalties, related to unrecognized tax benefits, was approximately $2.0 million, which is not included in the table above. At this time, the settlement period for the noncurrent portion of our income tax liability cannot be determined.
The GOJ and NBL are parties to an Establishment Agreement, as amended, that governs the relationship between them as to the operation of our bauxite mining operation in St. Ann, Jamaica. This agreement sets the fiscal structure through December 31, 2014. The agreement provided for a commitment by NBL to make certain expenditures for haulroad development, maintenance, dredging, land purchases, contract mining, training and other general capital expenditures from 2009 through 2014. As of December 31, 2014 , we believe we have met our commitments under this agreement and will not incur any penalty that could be material to our consolidated financial statements. These commitments are not included in the table above.
Obligations for investing activities
Capital expenditures which were accrued as a liability as of December 31, 2014 of $3.0 million are included above, as these amounts will be paid during 2015.
Obligations for financing activities
Total debt and interest payments in the table above reflect our debt and interest obligations as of December 31, 2014 (based on interest rates as of December 31, 2014). The Term B Loan requires AcquisitionCo to repay borrowings outstanding thereunder in the amount of 1.00% per annum, payable quarterly, with the balance due on the maturity date.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in our operations, we are exposed to financial, market and economic risks. The following discussion provides information regarding our exposure to the risks of changing commodity prices and interest rates. Our interest rate, aluminum and natural gas contracts are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility, and to cover underlying exposures.
Commodity Price Risks
See Note 14, "Derivative Financial Instruments" to our consolidated financial statements in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NORANDA ALUMINUM HOLDING CORPORATION
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
i.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
ii.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the Company; and
iii.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting has certain inherent limitations which may not prevent or detect misstatements. In addition, changes in conditions and business practices may cause variation in the effectiveness of internal controls.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on its assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2014.
Ernst & Young LLP, an independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, as stated in their report, which is presented on the following page.
/s/ Layle K. Smith
Layle K. Smith
President and Chief Executive Officer
February 27, 2015
/s/ Dale W. Boyles
Dale W. Boyles
Chief Financial Officer
February 27, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Noranda Aluminum Holding Corporation
We have audited the accompanying consolidated balance sheets of Noranda Aluminum Holding Corporation (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Noranda Aluminum Holding Corporation at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 27, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 27, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Noranda Aluminum Holding Corporation
We have audited Noranda Aluminum Holding Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Noranda Aluminum Holding Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Noranda Aluminum Holding Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2014 of Noranda Aluminum Holding Corporation and our report dated February 27, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 27, 2015
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share information)
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(in millions)
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Organization, Consolidation and Basis of Presentation
Noranda Aluminum Holding Corporation (“Noranda,” “Noranda HoldCo,” the “Company,” “we,” “our,” and “us”), and our wholly owned subsidiary, Noranda Aluminum Acquisition Corporation (“Noranda AcquisitionCo”), were formed by affiliates of Apollo Management, L.P. (“Apollo”) on March 27, 2007 for the purpose of acquiring Noranda Intermediate Holding Corporation (“Noranda Intermediate”), which owns all of the outstanding shares of Noranda Aluminum, Inc.
On May 18, 2007, Noranda AcquisitionCo purchased all of the outstanding shares of Noranda Intermediate from Xstrata PLC (together with its subsidiaries, “Xstrata”), and Xstrata (Schweiz) A.G., a direct wholly owned subsidiary of Xstrata. This transaction is referred to as the “Apollo Acquisition.” The purchase price for Noranda Intermediate was $1,150.0 million, excluding acquisition costs. Subsequent to the Apollo Acquisition, certain members of our management contributed $1.9 million in cash through the purchase of common shares.
In August 2009, we completed an acquisition of our alumina refinery in Gramercy, Louisiana (Noranda Alumina, LLC, or “Gramercy”) and our bauxite mining operation in St. Ann, Jamaica (Noranda Bauxite Limited, or “St. Ann”) whereby they became wholly owned subsidiaries. Previously, we held a 50% interest in Gramercy and in St. Ann.
On May 19, 2010, we completed an IPO of 11.5 million shares of common stock at an $8.00 per share public offering price on the New York Stock Exchange (NYSE: NOR). The net proceeds after the underwriting discounts, commissions, fees and expenses amounted to approximately $82.9 million.
In December 2010, we completed a follow-on offering of 11.5 million shares of common stock at an price offering of $11.35 per share. See Note 15, "Shareholders' Equity" for further discussion on the Company’s common stock offerings.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). In management’s opinion, the consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results, including the elimination of all intercompany accounts and transactions amongst our wholly owned subsidiaries.
Reclassifications
Certain reclassifications have been made to the consolidated balance sheet for the year ended December 31, 2013 to conform to the December 31, 2014 presentation. Taxes receivable and prepaid assets totaling $2.6 million and $4.6 million, respectively, were combined with other current assets. Derivative liabilities, net totaling $4.0 million were combined with accrued liabilities. Long-term derivative liabilities, net totaling $0.2 million were combined with other long-term liabilities.
Certain reclassifications have also been made to the consolidated statement of cash flows for the years ended December 31, 2013 and December 31, 2012 to conform to the 2014 presentation. Borrowings on the revolving credit facility of $11.0 million and $10.0 million, respectively, and repayments on the revolving credit facility of $11.0 million and $10.0 million, respectively, were disclosed as separate line items within cash provided by financing activities. These reclassifications had no impact on net income or net cash flows.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The ASU provides alternative methods of initial adoption and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is not permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern”. The ASU provides guidance on determining when and how to disclose going- concern uncertainties in financial statements. The Company will be required to perform interim and annual assessments of its ability to continue as a going concern within one year of the date that the financial statements are issued. The Company must provide certain disclosures if conditions or events raise substantial doubt about its ability to continue as a going concern. The ASU provides alternative methods of initial adoption and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Reporting
We are a vertically integrated producer of value-added primary aluminum and high quality rolled aluminum coils. Our principal operations include an aluminum smelter in New Madrid, Missouri (“New Madrid”) and four rolling mill facilities in the Southeastern United States. New Madrid is supported by Gramercy and St. Ann. As discussed further in Note 2, "Segments", we report our activities in five segments: our Bauxite segment comprises the operations of St. Ann; our Alumina segment comprises the operations of Gramercy; our Primary Aluminum segment comprises the operations of New Madrid; and our Flat-Rolled Products segment comprises the operations of our four rolling mills, which are located in Huntingdon, Tennessee; Salisbury, North Carolina and Newport, Arkansas. Our corporate expenses represent our fifth segment.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
Cash Equivalents
Cash equivalents comprise short-term, highly liquid investments with initial maturities of 3 months or less. We place our temporary cash equivalent investments with high credit quality financial institutions, which include money market funds invested in U.S. Treasury securities, short-term treasury bills and commercial paper. We consider our investments in money market funds to be available for use in our operations.
Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. We determine the allowance based on historical write-off experience, current market trends and our assessment of the customer’s ability to pay outstanding balances. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Inventories
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 the first-in, first-out (“FIFO”) method. Our Flat-Rolled Products inventories, our bauxite inventory at St. Ann, and our alumina and bauxite inventories at Gramercy 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 based on the normal capacity of the production facilities, and excluding abnormal amounts of idle facility expense, freight, handling and spoilage. Maintenance supplies expected to be used in the next twelve months are included in inventories.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Betterments, renewals and repairs that extend the life of the asset are capitalized; other maintenance and repairs are charged to expense as incurred. Major replacement spare parts are capitalized and depreciated over the lesser of the spare part’s useful life or remaining useful life of the associated piece of equipment. Assets, asset retirement obligations and accumulated depreciation accounts are relieved for dispositions or retirements with resulting gains or losses recorded as selling, general and administrative expenses in the consolidated statements of operations. Depreciation is based on the estimated service lives of the assets computed principally by the straight-line method for financial reporting purposes.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets for possible impairment when events or circumstances indicate that the carrying amounts may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest levels for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. If it is determined that the carrying amounts of such long-lived assets are not recoverable, the assets are written down to their estimated fair value.
Long-lived assets taken out of service to be disposed of other than by sale are written down to their estimated fair value through the acceleration of any remaining depreciation expense.
We reclassify long-lived assets to assets held for sale when a plan to dispose of the assets has been committed to by management. Assets held for sale are recorded at the lesser of their estimated fair value net of estimated costs to sell or carrying amount. Depreciation expense is no longer recorded once an asset is classified as held for sale.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets with a definite life (primarily customer relationships) are amortized over their expected lives and are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable.
Self-Insurance
We are primarily self-insured for workers’ compensation. The self-insurance liability is determined based on claims filed but not paid and an estimate of claims incurred but not yet reported. Based on actuarially determined estimates and discount rates of 0.7% in 2014 and 0.5% in 2013, as of December 31, 2014 and 2013, we had $5.6 million and $5.1 million, respectively, of accrued liabilities and $15.3 million and $15.7 million, respectively, of other long-term liabilities related to these claims.
At each of December 31, 2014 and 2013, we held $1.9 million and $2.1 million, respectively, in a restricted cash account to secure the payment of workers’ compensation obligations. This restricted cash is included in other assets in the accompanying consolidated balance sheets. In addition, we have $19.8 million of undrawn letters of credit as collateral for these obligations.
Goodwill and Other Indefinite-Lived 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 earlier upon the occurrence of certain triggering events.
Goodwill is evaluated for impairment at the reporting unit level which, in our circumstances, are the same as our reportable segments. Effective January 1, 2012, we adopted new accounting standards that simplify goodwill and other indefinite-lived intangible asset impairment tests by allowing a qualitative assessment to determine whether further impairment testing is necessary. We elected to evaluate goodwill and other indefinite-lived intangibles for impairment using the two-step process, which is based on a quantitative assessment. The first step is to compare the fair value of the reporting unit to its respective book value, 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. See Note 7, "Goodwill" and Note 8, "Other Intangible Assets" for further information.
Deferred Financing Costs
We capitalize costs to obtain debt and amortize them over the term of the related debt using the straight-line method, which approximates the effective interest method. We record deferred financing costs in the consolidated balance sheets as a component of other assets. When all or a portion of a loan is repaid, we charge the unamortized financing costs to interest expense.
Environmental Liabilities and Remediation Costs
Environmental liabilities
We are subject to environmental regulations which may create legal obligations to remediate or monitor certain environmental conditions present at our facilities. Liabilities for these obligations are accrued when it is probable that a liability has been incurred and the amount of loss can reasonably be estimated.
The measurement of environmental liabilities is based on an evaluation of currently available information with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. An environmental liability related to cleanup of a contaminated site might include, for example, an accrual for one or more of the following types of costs: site investigation and testing, cleanup, soil and water contamination, post-remediation monitoring, and outside legal fees.
As assessments and remediation progress at individual sites, the amount of projected cost is reviewed periodically, and the liability is adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Note 9, "Commitments and Contingencies" contains additional information on our environmental liabilities.
Environmental liabilities are undiscounted. The long and short-term portions of the environmental liabilities are recorded on the consolidated balance sheets in other long-term liabilities and accrued liabilities, respectively.
Environmental remediation costs
Costs incurred to improve our property as compared to the condition of the property when originally acquired, or to prevent environmental contamination from future operations, are capitalized as incurred. We expense environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernable.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Retirement Obligations
We are subject to environmental regulations which may create legal obligations related to the disposal of certain assets at the end of their lives. We recognize liabilities, at fair value, for existing legal asset retirement obligations which are based on estimated cash flows discounted at a credit-adjusted, risk-free rate. We adjust these liabilities for accretion costs and revisions 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 expense on these capitalized costs are recognized.
Reclamation Obligations
St. Ann has obligations to rehabilitate land disturbed by St. Ann’s bauxite mining operations. The reclamation process is governed by the Government of Jamaica (“GOJ”) regulations and includes filling the open mining pits and planting vegetation. GOJ regulations require the reclamation process to be completed within a certain period from the date a mining pit is mined-out, generally three years. Liabilities for reclamation are accrued as lands are disturbed and are based on the approximate number of hectares to be rehabilitated and the average expected cost per hectare.
Land Obligations
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 Obligations”). We account for the costs associated with fulfilling the St. Ann Land Obligations 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, including reclamation (the “Mining Period”).
In addition to the St. Ann Land Obligations, we have an agreement with the GOJ which requires us to fulfill obligations that pre-date St. Ann’s partnership with the GOJ. The costs to fulfill those obligations will be reimbursed by the GOJ up to a $4.3 million limit. St. Ann bears any costs in excess of that limit, including foreign currency adjustments (the “Predecessor Land Obligations”). At December 31, 2014 and December 31, 2013, we had recorded a liability of $1.8 million and $2.1 million, respectively, for the amount by which we believe our costs to fulfill the Predecessor Land Obligations will exceed the $4.3 million limit.
For both the St. Ann Land Obligations and the Predecessor Land Obligations, 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 reduce the asset and the corresponding land obligations.
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; therefore, further adjustments to the St. Ann Land Obligations and the Predecessor Land Obligations may be necessary.
We amortize adjustments to the liabilities 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 additional expense in the period of revision.
Pensions and Other Post-Retirement Benefits
We sponsor defined benefit pension and OPEB plans for which we recognize expenses, assets and liabilities based on actuarial assumptions regarding the valuation of benefit obligations and the future performance of plan assets. We recognize the funded status of the plans as an asset or liability in the consolidated financial statements, measure defined benefit pension and OPEB plan assets and obligations as of the end of our fiscal year, and recognize the change in the funded status of defined benefit pension and OPEB plans in accumulated other comprehensive income (“AOCI”). The primary assumptions used in calculating pension and OPEB expense and liabilities are related to the discount rates at which the future obligations are discounted to value the liability, expected rate of return on plan assets and projected salary increases. These rates are estimated annually as of December 31.
Pension and OPEB benefit obligations are actuarially calculated using management’s best estimates and based on expected service periods, salary increases and retirement ages of employees. Pension and OPEB benefit expense includes the actuarially computed cost of benefits earned during the current service periods, the interest cost on accrued obligations, the expected return on plan assets based on fair market value and the straight-line amortization of net actuarial gains and losses and adjustments due to plan amendments. The primary assumptions used in calculating pension expense and liabilities are related to the discount rates at which the future obligations are discounted to value the liability, the expected long-term rate of return on plan assets and assumptions related to the employee workforce including projected salary increases, retirement age and mortality. All net actuarial gains and losses are amortized over the expected average remaining service life of the employees.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Post-Employment Benefits
We provide certain benefits to former or inactive employees after employment but before retirement and accrue for the related cost over the service lives of the employees. These benefits include, among others, disability, severance and workers’ compensation. We are self-insured for these liabilities. At both December 31, 2014 and 2013, we carried a liability totaling $0.7 million and $0.8 million respectively, for these benefits, based on actuarially determined estimates. These estimates were not discounted due to the short duration of the future payments.
Derivative Instruments and Hedging Activities
Derivatives are reported on the balance sheet at fair value. For derivatives that are designated and qualify as cash flow hedges, the effective portion of changes in fair value are initially recorded in AOCI as a separate component of equity and reclassified into earnings in the period during which the hedged transaction is recognized in earnings. The ineffective portion of changes in fair value is reported in (gain) loss on hedging activities immediately. For derivative instruments not designated as cash flow hedges, changes in the fair values are recognized in the consolidated statement of operations in the period of change.
U.S. GAAP permits entities that enter into master netting arrangements with the same counterparty as part of their derivative transactions to offset in their consolidated financial statements net derivative positions against the fair value of amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements. The net derivative positions are presented gross in Note 14, “Derivative Financial Instruments”.
Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, derivative assets and liabilities, accounts payable and long-term debt due to third parties. Financial instruments expose us to market and credit risks which, at times, may be concentrated with certain groups of counterparties. We periodically evaluate the financial condition of our counterparties and take appropriate action to minimize our risk of loss. We generally do not require collateral for trade receivables. At December 31, 2014, we did not have substantial doubt that any of our financial instrument counterparties had the ability to perform their obligations. Cash and cash equivalent investments are held with major financial institutions and trading companies including registered broker dealers. The carrying values and fair values of our third-party debt and derivative instruments outstanding are presented in Note 10, "Long-Term Debt" and Note 14, "Derivative Financial Instruments". The remaining financial instruments are carried at amounts that approximate fair value.
Revenue Recognition
Revenue is recognized when title and risk of loss pass to customers in accordance with contract terms. Shipping and handling costs are classified as a component of cost of sales in the consolidated statements of operations. Shipping and handling revenue is classified as a component of sales in the consolidated statements of operations.
Income Taxes
We account for income taxes using the liability method, whereby deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In evaluating our ability to realize deferred tax assets, we use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. Based on the weight of evidence, both negative and positive, if it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is established.
We must deal with uncertainties in the application of complex tax regulations in the calculation of tax liabilities. We are subject to routine income tax audits. We provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. We make this assessment based on only the technical merits of the tax position. The technical merits of a tax position are derived from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more likely than not recognition threshold, the benefit of that position is not recognized in the consolidated financial statements and a liability for unrecognized tax benefits is established. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the consolidated financial statements. The tax benefit recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution with a taxing authority. To the extent that we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability established, our effective tax rate in a given financial statement period may be affected.
Share-Based Payments
We account for employee equity awards under the fair value method. Accordingly, we measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The fair value of each stock option is estimated on the grant date using the Black-Scholes-Merton valuation model. The application of this valuation model involves
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assumptions that require judgment and are highly sensitive in the determination of compensation expense. The fair value of each restricted share and each restricted stock unit equals the closing stock price on the grant date. We recognize stock compensation expense on a straight-line basis over the vesting period for all equity instruments.
We account for share-based payment awards to be settled in cash as liability awards. We remeasure the fair value of the liability at each reporting date based on the closing stock price on the reporting date. We adjust stock compensation expense at each reporting date so that the amount ultimately recorded as stock compensation expense will equal the cash paid on the vesting date.
Upon the exercise of stock options or the vesting of restricted stock, we generally issue new shares of common stock.
Dividends
The declaration of dividends is at the discretion of our Board of Directors. The amount of cash dividends declared on our common stock is dependent upon our financial results, cash requirements, future prospects and other factors deemed relevant by the Board. We record a liability for dividends on the declaration date. We record cash dividend payments as a reduction to retained earnings.
Net Income (Loss) Per Share
Basic net income (loss) per share (“EPS”) is calculated as income available to common stockholders divided by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated using the weighted-average outstanding common shares determined using the treasury stock method for share based payment awards.
Foreign Currency Transactions and Translation
The primary economic currency of our Jamaican bauxite mining operation is the U.S. dollar. Certain transactions, such as payroll and local vendor payments, are made in currencies other than the U.S. dollar. These transactions are recorded at the rates of exchange prevailing on the dates of the transactions.
Exchange differences arising on the settlement of monetary items and on the re-measurement of monetary items are immaterial and are included in selling, general and administrative expenses in the consolidated statements of operations.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SEGMENTS
We manage and operate our business segments based on the markets we serve and the products we produce.
Segment profit (in which certain items, primarily non-recurring costs or non-cash expenses, are not allocated to the segments and in which certain items, primarily the income statement effects of current period cash settlements of hedges, are allocated to the segments) is a measure used by management as a basis for evaluating segment performance and resource allocation.
We have five reportable segments:
•
Bauxite - Mines and produces the bauxite used for alumina production at our Gramercy refinery. The remaining bauxite is sold to a third party.
•
Alumina - Chemically refines and converts bauxite into alumina, which is the principal raw material used in the production of primary aluminum. The Gramercy refinery is the source for the majority of our New Madrid smelter’s alumina requirements. The remaining alumina production at the Gramercy refinery in the form of smelter grade alumina and alumina hydrate, or chemical-grade alumina, is sold to third parties.
•
Primary Aluminum - Produces value-added aluminum products in several forms, including billet, rod, high purity sow and foundry. The Primary Aluminum segment also produces commodity grade sow.
•
Flat-Rolled Products - Produces rolled aluminum products such as finstock and container stock.
•
Corporate - Reflects costs of corporate operations.
The accounting policies of the segments are the same as those described in Note 1, "Accounting Policies".
Major Customer Information
During 2014, 2013 and 2012, we had no major customers which represented more than 10% of our consolidated revenue.
Geographic Region Information
Substantially all of our sales are within the United States. Revenues from external customers attributed to foreign countries were immaterial during 2014, 2013 and 2012. All long-lived assets are located in the United States, except those assets of our bauxite mining operation in Jamaica, which totaled $68.5 million at December 31, 2014 and $65.2 million at December 31, 2013.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Business by Segment
Operating and asset information for our reportable segments was (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2012, we incurred $4.1 million of contingency costs related to assembling a back-up labor force during the renegotiation of our collective bargaining agreement at our New Madrid smelter. This is reflected in the table above in “Other, net.”
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Consolidated statements of cash flows:
Depreciation and amortization in the accompanying consolidated statements of cash flows included (in millions):
During the year ended December 31, 2013, we recorded $5.9 million in impairment charges related to construction in progress, equipment and other long term assets in our Flat-Rolled Products segment, including $3.2 million related to certain fixed and other long-term assets at the Salisbury, N.C. rolling mill facility which were taken out of service in connection with the workforce reduction announced in October 2013. We also accelerated $2.3 million of depreciation expense related to fixed assets taken out of service in connection with the workforce reduction at the Salisbury facility. See Note 4, “Fair Value Measurements” for further discussion of the impairment charges and Note 13, “Restructuring” for further discussion of the workforce reduction.
Prior to fourth quarter 2012, we recorded a loss on disposal of abandoned fixed assets equal to the carrying value of the fixed assets upon abandonment, rather than accelerating depreciation. During fourth quarter 2012, we reclassified $3.3 million of losses related to fixed assets abandoned in the first nine months of 2012 from loss on disposal of fixed assets to depreciation expense. Losses on disposal of fixed assets and depreciation expense are included in selling, general and administrative expenses and cost of goods sold, respectively, in our consolidated statements of operations. The impact of this reclassification was not material to our 2012 consolidated financial statements. As a result, we have not adjusted any previously issued consolidated financial statements.
Cash paid for interest and income taxes was as follows (in millions):
Purchases of property, plant and equipment accrued in accounts payable and not yet paid were $3.0 million, $5.0 million and $3.7 million for the years ended December 31, 2014, 2013 and 2012, respectively, and were not reflected as capital expenditures in the consolidated statements of cash flows. For the years ended December 31, 2014, 2013 and 2012, we capitalized interest of $2.3 million, $1.6 million and $1.1 million, respectively, related to long-term capital projects. As of December 31, 2014 and December 31, 2013 cash and cash equivalents includes $1.8 million and $7.0 million, respectively, of cash intended to be used for ongoing capital and operational productivity improvements in Jamaica.
During 2012, we received net proceeds of $4.5 million upon the sale of idle mill equipment from our Flat-Rolled Products segment. This gain is included in (gain) loss on disposal of assets in the consolidated statement of cash flows for the year ended December 31, 2012.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of equity:
Changes in accumulated other comprehensive income (loss) (“AOCI”) were as follows (in millions):
Reclassifications out of AOCI were included in the consolidated statements of operations as follows (in millions):
(1)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost shown in Note 12, "Pensions and Other Post-Retirement Benefits."
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets:
Cash and cash equivalents consisted of the following (in millions):
Accounts receivable, net, consisted of the following (in millions):
Other current assets consisted of the following (in millions):
Other assets consisted of the following (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued liabilities consisted of the following (in millions):
Other long-term liabilities consisted of the following (in millions):
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We incorporate assumptions that market participants would use in pricing the asset or liability, and utilize market data to the maximum extent possible. Our fair value measurements incorporate nonperformance risk (i.e., the risk that an obligation will not be fulfilled). In measuring fair value, we reflect the impact of our own credit risk on our liabilities, as well as any collateral. We also consider the credit standing of our counterparties in measuring the fair value of our assets.
We use any of three valuation techniques to measure fair value: the market approach, the income approach, and the cost approach. We determine the appropriate valuation technique based on the nature of the asset or liability being measured and the reliability of the inputs used in arriving at fair value.
The inputs used in applying valuation techniques include assumptions that market participants would use in pricing the asset or liability (i.e., assumptions about risk). Inputs may be observable or unobservable. We classify the inputs used in our valuation techniques in accordance with the fair value hierarchy established by accounting guidance. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Level 1 inputs - Inputs valued based on unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information regularly. Fair value measurements classified as Level 1 may include financial instruments valued using inputs which are directly-held or broker-held exchange-traded derivatives or listed equities.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 2 inputs - Inputs other than those classified in Level 1, which are either directly or indirectly observable as of the reporting date. A Level 2 input must be observable for substantially the full term of the asset or liability. Fair value measurements that may fall into Level 2 could include financial instruments with observable inputs such as interest rates or yield curves.
Level 3 inputs - Unobservable inputs that reflect our consideration of the assumptions market participants would use in pricing the asset or liability. Fair value measurements that may be classified as Level 3 could, for example, be determined from our internally developed model that results in our best estimate of fair value. Fair value measurements that may fall into Level 3 could include certain structured derivatives or financial products that are specifically tailored to a customer’s needs.
Financial assets and liabilities are classified based on the lowest enumerated level of input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the fair value of assets and liabilities and their placement within the fair value hierarchy. We recognize transfers between Level 1, 2 or 3 at the end of the reporting period.
Valuations on a recurring basis
The tables below set forth by level the fair value hierarchy of our assets and liabilities that were measured at fair value on a recurring basis (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the fair value of the pension plan assets classified as Level 3 for the years ended December 31, 2014 and 2013 were as follows:
Changes in the fair value of the variable-price Midwest Premium contracts classified as Level 3 for the year ended December 31, 2014 and 2013 were as follows:
We classify temporary cash investments with high credit quality financial institutions as cash equivalents. Cash equivalents as of December 31, 2013 related to temporary cash investments with high credit quality financial institutions, which included money market funds invested in U.S. treasury securities, short-term treasury bills and commercial paper. These instruments were valued based upon unadjusted, quoted prices in active markets and were classified within Level 1.
We discuss our derivative instruments in Note 14, “Derivative Financial Instruments.” Fair values of all derivative instruments classified as Level 2 were primarily measured using industry standard models that incorporated inputs including quoted forward prices for commodities, interest rate curves and current market prices for those assets and liabilities. Substantially all of the inputs were observable throughout the full term of the instrument. Our variable-price Midwest premium contracts were classified as Level 3 and were primarily measured using management’s estimate of future U.S. Midwest premium prices, based on current market prices and quoted forward prices.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In Note 16, "Share-Based Payments" we discuss RSU liability awards. The fair value of this Level 1 liability was determined based on the closing market price of our common stock at each balance sheet date.
We value pension plan assets based upon the fair market value of the underlying investments. Plan assets directly invested in active exchange-traded debt and equity securities were classified within Level 1. We classified investments that do not have guaranteed liquidity and investments in limited partnerships, pooled investment funds, or unit trusts as Level 2 or Level 3, depending on management’s assessment of the liquidity or the transferability of the investment. We classified pension plan assets with underlying investments in limited partnerships for which significant unobservable inputs were used to determine fair value as Level 3. The Level 2 investments are valued based on the unit prices quoted by the funds, representing the fair value of underlying investments. The Level 3 investments are valued at estimated fair value, as determined by the general partner.
In Note 10, "Long-Term Debt" we disclose the fair values of our debt instruments. The fair value of our AcquisitionCo Notes was based on recent market transactions. We classified the AcquisitionCo Notes as Level 2. While the AcquisitionCo Notes have quoted market prices used to determine fair value, we do not believe transactions of those instruments occur in sufficient frequency or volume for a Level 1 classification. The fair values of the Term B Loan, revolving credit facility and our project specific financing borrowings are based on interest rates available at each balance sheet date. These fair value measurements are classified as Level 2.
Valuations on a non-recurring basis
Goodwill, trade name, and asset retirement obligations
Fair values of goodwill, trade name, and asset retirement obligations are measured using management’s assumptions about future profitability and cash flows, using a market participant approach. Such assumptions include a combination of discounted cash flow and market-based valuations. Discounted cash flow valuations require assumptions about future profitability and cash flows, which we believe reflect the best estimates at the date the valuations are determined to be performed.
Fair value of fixed assets and other assets
Fair values of fixed assets and other assets held for sale are measured using management’s assumptions about a pending sale or plan of sale. Such assumptions include an estimated future sale price based on offers received, scrap value or replacement value based on market price of scrap components or similar assets. These non-recurring fair value adjustments and the inputs used in the measurement are classified as Level 2 fair value measurements under the market approach.
During the year ended December 31, 2013, we recorded $5.9 million in impairment charges related to construction in progress, equipment and other long term assets in our Flat-Rolled Products segment. These impairment charges, described further below, were reflected in the consolidated statements of operations as a component of selling, general and administrative expenses for the year ended December 31, 2013.
During the year ended December 31, 2013 we reclassified certain non-strategic equipment to assets held for sale and recorded an impairment loss of $1.5 million to adjust the carrying value of the equipment to fair value, based on a purchase offer received for the equipment. The equipment was sold during fourth quarter 2013. We recorded impairment charges totaling $1.2 million to reduce the carrying value of certain non-depreciable other long term assets to their estimated fair value during the year ended December 31, 2013, based on a preliminary purchase offer received.
In connection with the workforce reduction at our Salisbury, N.C. rolling mill facility announced in October 2013, we began to reposition the Salisbury plant to produce predominately heavy gauge foil although some light gauge material will continue to be processed at Salisbury. We have begun to transfer a portion of the light gauge product production to the Newport plant. We recorded $3.2 million of impairment charges related to assets taken out of service in connection with the workforce reduction at the Salisbury facility, including a capital project with no residual value due to new advancements in technology and an impairment charge to reduce the carrying value of certain non-depreciable other long term assets which will be sold for scrap to their estimated fair value, based on market scrap value and the amount of scrap material.
5. INVENTORIES
We use the LIFO method of valuing raw materials, work-in-process and finished goods inventories at our New Madrid smelter and our rolling mills. Supplies inventories at our rolling mills are valued at FIFO. Inventories at Gramercy and St. Ann and supplies at New Madrid are valued at weighted-average cost and are not subject to the LIFO adjustment. Gramercy and St. Ann inventories comprise approximately 25% and 30% of total inventories, at cost, at December 31, 2014 and 2013, respectively.
Inventories, net, consisted of the following (in millions):
Work-in-process and finished goods inventories consist of the cost of materials, labor and production overhead costs. Supplies inventory consists primarily of maintenance supplies expected to be used within the next twelve months. Non-current maintenance supplies are included in other assets in the accompanying consolidated balance sheets.
An actual valuation of inventories valued under the LIFO method is made at the end of each year based on inventory levels and costs at that time. We recorded LIFO liquidation income of $0.4 million in the Flat-Rolled Products segment during the year ended December 31, 2014. During the year ended December 31, 2013, we recorded LIFO decrement losses of $1.1 million in the Flat-Rolled Products segment and $0.1 million in the Primary Aluminum segment.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following (in millions):
Depreciation expense on property, plant and equipment consisted of the following amounts (in millions):
7. GOODWILL
The carrying value of goodwill related to our Primary Aluminum Segment was $137.6 million at both December 31, 2014 and 2013. Our annual impairment tests performed as of October 1, 2014, 2013 and 2012 resulted in no impairment to goodwill. Our impairment analysis included assumptions about key factors affecting Primary Aluminum Segment's future profitability and cash flows including the long term price for primary aluminum. We believe these assumptions reflected our best estimates at the date the valuations were performed. The estimates were based on information that was known or knowable at the date of the valuations. It is at least reasonably possible that the assumptions we employed will be materially different from the actual amounts or results, and that impairment charges may be necessary in the future.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. OTHER INTANGIBLE ASSETS
Intangible assets, net, consisted of the following (in millions):
Amortization expense related to intangible assets is included as a component of selling, general and administrative expenses in our consolidated statements of operations. Amortization expense related to intangibles was (in millions):
Expected amortization of intangible assets for each of the next five years is as follows (in millions):
Impairments
Our annual impairment tests performed in the fourth quarters of 2014, 2013 and 2012 resulted in no impairment to our indefinite-lived intangible assets. Future impairment charges could be required if we do not achieve cash flow, revenue and profitability projections.
9.
COMMITMENTS AND CONTINGENCIES
Labor Commitments
As of December 31, 2014, approximately 1,600 (or approximately 70%) of our employees were union members.
We are a party to seven collective bargaining agreements with five different unions. Our collective bargaining agreements are with the following unions:
In the US: the United Steelworkers of America (“USWA”); the International Association of Machinists and Aerospace Workers (“IAMAW”).
•	The agreement at Gramercy with the USWA will expire in September 2015.
•	An agreement at New Madrid with the USWA will expire in August 2017.
•	An agreement at our Salisbury rolling mill with the USWA will expire in November 2016.
•	The agreement in place with the IAMAW at our Newport rolling mill originally extended through May 2014. During April 2014, a one-year extension was ratified, extending the expiration of the agreement to May 2015.
At St. Ann, Jamaica: the University and Allied Workers Union (“UAWU”); the Union of Technical, Administrative and Supervisory Personnel (“UTASP”); and the Bustamante Industrial Trade Union (“BITU”).
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
An agreement at St. Ann with the UTASP representing supervisory and technical salaried workers expired in December 2013. We received a claim for a new contract in July 2014 and negotiations have started. It is anticipated that we will close the negotiations during the first quarter of 2015.
•
The agreement at St. Ann with the BITU expired in December 2012. This contract covered a small portion of our St. Ann workforce. We received a claim for a new contract in January 2014 and negotiations commenced in the second quarter of 2014. We closed negotiations in November 2014. We signed a three year contract, which ends December 31, 2015.
•
An agreement at St. Ann with the UAWU, covering operators, expired in April 2013. We received a claim for a new contract in June 2013 and commenced negotiations in August 2013. We closed negotiations in November 2014. We signed a three year contract, which ends April 30, 2016.
Legal Contingencies
We are a party to legal proceedings incidental to our business. We assess the likelihood of an unfavorable outcome of each legal proceeding based upon the available facts and our historical experience with similar matters. We do not accrue a liability when we assess the likelihood of an unfavorable outcome to be remote. Where the risk of loss is probable and the costs can be reasonably estimated, we accrue a liability based on the factors mentioned above. Where the risk of loss is considered reasonably possible, we estimate the range of reasonably possible losses and disclose any reasonably possible losses, if material. We update our loss assessment as matters progress over time. Based on current knowledge, we do not believe any reasonably possible losses in excess of our accruals would be material to our consolidated financial statements.
Environmental Matters
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. Such future requirements may result in liabilities which may have a material adverse effect on our financial condition, results of operations or 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. To determine our smelter’s compliance with NAAQS, we measure emissions using currently acceptable methods.
In 2010, the EPA issued regulations that increased the stringency of the SO2 NAAQS. Federal and state regulators are in the process of developing measurement methods and time-lines that will govern the implementation of those regulations. Once finalized, these implementation requirements may present material implications for our smelter’s compliance with NAAQS. Failure to meet NAAQS may require us to incur material capital and operational costs to bring our smelter into compliance and could have negative implications for permits necessary to support increases in production volumes at our smelter.
Power Contract
Electricity is our largest cash cost component in the production of primary aluminum and is a key factor to our long-term competitive position in the primary aluminum business. We have a long-term contract with Ameren for our electricity supply at New Madrid, pursuant to which we have agreed to purchase substantially all of New Madrid’s electricity. Included in the contract is a minimum purchase requirement equal to five mega watts, calculated at peak and non-peak demand charges, or approximately $3.0 million over the remaining life of the contract. This minimum purchase requirement represents significantly less power usage than we require, given the power-intensive nature of our smelter facility. The power supply contract provides that the rate for power will be established by the MoPSC based on two components: a base rate and a fuel adjustment charge. The MoPSC determines whether to make changes to the base rate and fuel adjustment charge.
Operating Leases
We operate certain office, manufacturing and warehouse facilities under operating leases. In most cases, we expect leases to be renewed or replaced with other leases when they expire.
Rental expense for all operating leases except those with terms of one month or less that were not renewed totaled $3.8 million, $3.2 million and $2.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rental payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year as of December 31, 2014 follows (in millions):
10. LONG-TERM DEBT
The carrying values and fair values of our outstanding debt were as follows (in millions):
(1)
We refer to the Senior Unsecured Notes due 2019 issued by Noranda AcquisitionCo (“AcquisitionCo Notes due 2019”) outstanding at December 31, 2014 and Senior Floating Rate Notes due 2015 issued by Noranda AcquisitionCo (“AcquisitionCo Notes due 2015”) outstanding at December 31, 2012 collectively as the “AcquisitionCo Notes.”
As of December 31, 2014 and December 31, 2013 the amount outstanding under our Term B Loan was recorded in our consolidated balance sheets net of $2.4 million and $2.8 million, respectively, of unamortized discount. The carrying value of the AcquisitionCo Notes due 2019 was recorded net of unamortized underwriting discount of $1.7 million and $1.9 million at December 31, 2014 and December 31, 2013, respectively.
Including required repayments of the incremental Term B Loan borrowings, we are required to repay $1.2 million of the total Term B Loan quarterly.
In December 2012, we entered into a project specific financing arrangement which allowed us to borrow a maximum of $20.0 million to fund capital improvements related to port expansion and railing improvements designed to increase shipping capacity and improve the cost structure at our St. Ann bauxite mining operation. The outstanding balance as of December 31, 2013 was $11.0 million. During the first quarter of 2014, we borrowed $6.5 million from this project specific financing arrangement. On December 16, 2014, we amended our credit agreement to increase the borrowing capacity from $20.0 million to $22.5 million. During December 2014 we borrowed the remaining $5.0 million resulting in an outstanding balance as of December 31, 2014 of $22.5 million. We will repay $5.6 million annually beginning January 2015 through December 2018.
In the third quarter of 2014, we entered into a third party financing arrangement (the “Mid-Stream Loan”) to construct infrastructure and acquire equipment to increase the bauxite shipment unloading capacity of our Gramercy refinery. The financing arrangement provides for advance funding during the construction period totaling approximately $12.2 million. The construction is anticipated to be complete by the end of third quarter 2015, at which time the advanced funding received will convert to a 3.5 year term capital lease with monthly lease installments of approximately $0.3 million. As of December 31, 2014 advance funding of $1.0 million was recorded in the current portion of long term debt on our consolidated balance sheets.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt maturities over each of the next five years are as follows (in millions):
The debt maturity schedule above does not reflect the effect of any optional repayments we may elect to make on our outstanding debt.
2013 and 2012 Refinancings
On March 8, 2013, we completed a private offering of $175.0 million aggregate principal amount of 11.00% senior unsecured notes due 2019. Additionally, we entered into an incremental term loan facility in the amount of $110.0 million under our existing term loan credit agreement (the “$110.0 million incremental Term B Loan”). We used the net proceeds from the offering of the AcquisitionCo Notes due 2019 and the $110.0 million incremental Term B Loan to redeem the remaining $275.3 million outstanding AcquisitionCo Notes due 2015. We refer to these transactions, collectively, as the “2013 Refinancing.”
The $110.0 million incremental Term B Loan agreement permitted us to incur further incremental borrowings under the existing Term B Loan in an aggregate principal amount not to exceed the greater of (1) $50.0 million and (2) an amount such that, after giving effect to such incremental borrowing, we would be in pro forma compliance with a maximum total net senior secured leverage ratio of 2.25 to 1.00. On May 29, 2013, we borrowed an additional $50.0 million, which we refer to as the “$50.0 million incremental Term B Loan.” Borrowings under the $50.0 million incremental Term B Loan were used for general corporate purposes. The $110.0 million incremental Term B Loan and the $50.0 million incremental Term B Loan are due and payable on February 28, 2019 and have the same terms as borrowings under the existing Term B Loan.
On May 15, 2013, we entered into an incremental asset-based revolving credit facility, consisting of $15.0 million in additional commitments on a “first-in, last-out” basis, under our existing asset-based revolving credit facility. We refer to this incremental asset-based loan as the “incremental ABL.” Loans under the incremental ABL will be used for general corporate purposes, will bear interest at a rate equal to the rate applicable to loans under our existing asset-based revolving credit facility plus 1.5% per annum, will mature in February 2017 and, except as set forth herein, will be subject to the same terms and conditions as loans under the existing asset-based loan credit agreement.
We recorded debt refinancing expense of $2.5 million related to the 2013 Refinancing, representing the write-off of deferred financing fees and third party fees related to the AcquisitionCo Notes due 2015.
In first quarter 2012, we refinanced our Senior Secured Credit Facilities (the “2012 Refinancing”).
We recorded debt refinancing expense of $8.1 million related to the 2012 Refinancing, comprising $5.7 million of creditor fees related to the new senior secured credit facilities and $2.4 million of deferred financing fees related to the existing senior secured credit facilities.
Senior Secured Credit Facilities
Term B Loan
The Term B Loan consists of an initial borrowing of $325.0 million. The credit agreement governing the Term B Loan also permits Noranda AcquisitionCo to incur incremental borrowings thereunder in an aggregate principal amount equal to the greater of (1) $100.0 million and (2) an amount such that, after giving effect to such incremental borrowing, Noranda AcquisitionCo will have a total net senior secured leverage ratio of not greater than 2.25 to 1.00. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time Noranda AcquisitionCo seeks to incur such borrowings.
On March 8, 2013, we entered into an incremental term loan facility in the amount of $110.0 million under our existing term loan credit agreement (the “$110.0 million incremental Term B Loan”). The $110.0 million incremental Term B Loan agreement permitted us to incur further incremental borrowings under the existing Term B Loan in an aggregate principal amount not to exceed the greater of (1) $50.0 million and (2) an amount such that, after giving effect to such incremental borrowing, we would be in pro forma compliance with a maximum total net senior secured leverage ratio of 2.25 to 1.00. On May 29, 2013, we borrowed an additional $50.0 million, which we refer to as the “$50.0 million incremental Term B Loan.” Borrowings under the $50.0 million incremental Term B Loan were used for general corporate purposes. The $110.0 million incremental Term B Loan and the $50.0 million incremental Term B Loan are due and payable on February 28, 2019 and have the same terms as borrowings under the existing Term B Loan.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Obligations of Noranda AcquisitionCo under the Term B Loan are senior obligations guaranteed by the Company and substantially all of Noranda AcquisitionCo’s wholly owned existing and future direct and indirect U.S. subsidiaries, with certain exceptions. Currently NHB Capital LLC (“NHB”), in which we have a 100% ownership interest, is our only domestic subsidiary that has not guaranteed these obligations. Noranda AcquisitionCo and the subsidiary guarantors have pledged substantially all of their assets as security for such obligations, while the Company has pledged its shares of capital stock of Noranda AcquisitionCo. These security interests are second priority (subordinate to the liens in favor of the ABL) with respect to accounts receivable, inventory and certain related assets and first priority with respect to all other pledged assets.
All outstanding principal and interest under the Term B Loan will be due and payable on February 28, 2019. The Term B Loan requires Noranda AcquisitionCo to repay borrowings outstanding thereunder in the amount of 1.00% per annum, payable in quarterly installments, with the balance due on the maturity date.
Noranda AcquisitionCo may prepay amounts outstanding under the Term B Loan at any time. If such prepayment were made on or prior to the first anniversary of the date of the Term B Loan initial borrowing as a result of certain refinancing or repricing transactions, Noranda AcquisitionCo would have been required to pay a fee equal to 1.00% of the principal amount of the obligations so refinanced or repriced. No such fees were incurred in 2014 or 2013. Subject to certain exceptions, the Term B Loan requires Noranda AcquisitionCo to prepay certain amounts outstanding thereunder with (a) the net cash proceeds of certain asset sales and certain issuances of debt and (b) a percentage of annual excess cash flow, which percentage is based upon Noranda AcquisitionCo’s total net senior secured leverage ratio. During both 2014 and 2013, no mandatory prepayments were due pursuant to the cash flow sweep provisions of the credit agreement, nor, given our 2014 financial results, will any mandatory prepayments be due pursuant to the cash flow sweep provisions of the credit agreement during 2015.
Borrowings under the Term B Loan bear interest at a rate equal to an applicable margin plus, at Noranda AcquisitionCo’s option, either (a) a base rate calculated in a customary manner (provided such base rate shall not be less than 2.25%) or (b) an adjusted eurodollar rate calculated in a customary manner (provided that such adjusted eurodollar rate shall not be less than 1.25%). The applicable margin is 3.50% per annum with respect to base rate borrowings and 4.50% per annum with respect to eurodollar rate borrowings.
The Term B Loan contains certain customary affirmative and negative covenants, restrictions and events of default.
ABL
Subject to certain exceptions, maximum availability under the ABL is equal to the lesser of (1) $250.0 million and (2) a borrowing base equal to (i) 85% of the net amount of eligible accounts receivable plus (ii) the lesser of (a) 80% of the lesser of the original cost or market value of eligible inventory and (b) 90% of the orderly liquidation value of eligible inventory minus (iii) any applicable reserves. The borrowers may request the issuance of letters of credit up to an aggregate face amount of $75.0 million, and the borrowing of swingline loans, up to an aggregate amount equal to 10% of the outstanding commitments under the ABL. The ABL also permits Noranda AcquisitionCo to incur incremental commitments thereunder in an aggregate principal amount of up to $100.0 million. Incremental commitments are uncommitted and the availability thereof will depend on market conditions at the time Noranda AcquisitionCo seeks to incur such commitments.
Obligations of the borrowers under the ABL are senior obligations guaranteed by the Company, each borrower and substantially all of Noranda AcquisitionCo’s wholly owned existing and future direct and indirect U.S. subsidiaries, with certain exceptions. Currently, NHB is the only domestic subsidiary that has not guaranteed these obligations. Noranda AcquisitionCo and the subsidiary guarantors have pledged substantially all of their assets as security for such obligations, while the Company has pledged its shares of capital stock of Noranda AcquisitionCo. These security interests are first priority with respect to accounts receivable, inventory and certain related assets and second priority (subordinate to the liens in favor of the Term B Loan) with respect to all other pledged assets.
All outstanding principal and interest under the ABL will be due and payable on February 28, 2017. Noranda AcquisitionCo may prepay amounts, and/or terminate commitments, outstanding under the ABL at any time without penalty or premium.
Borrowings under the ABL bear interest at a rate equal to an applicable margin plus, at Noranda AcquisitionCo’s option, either (a) a base rate calculated in a customary manner or (b) an adjusted eurodollar rate calculated in a customary manner. The applicable margin is determined based on Noranda AcquisitionCo’s average quarterly excess availability under the ABL. The applicable margin ranges from 0.50% to 1.00% per annum with respect to base rate borrowings and from 1.5% to 2.00% per annum with respect to eurodollar rate borrowings. Noranda AcquisitionCo is also required to pay a quarterly commitment fee equal to 0.375% per annum of the average amount of unused commitments during the applicable quarter, as well as quarterly letter of credit fees equal to the product of (a) the applicable margin with respect to eurodollar borrowings and (b) the average amount available to be drawn under outstanding letters of credit during such quarter.
The ABL contains certain customary affirmative and negative covenants, restrictions and events of default. If our ABL Fixed-Charge Coverage Ratio is less than 1.0 to 1.0, we must maintain at least $20.0 million of available borrowing capacity under our ABL. As of December 31, 2014, our ABL Fixed-Charge Coverage Ratio was greater than 1.0 to 1.0.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The ABL had no outstanding balance at December 31, 2014 or December 31, 2013. Outstanding letters of credit on the ABL were $39.8 million and $34.6 million, respectively, at December 31, 2014 and December 31, 2013. As of December 31, 2014 and December 31, 2013, available borrowing capacity was $137.8 million and $117.0 million, respectively.
AcquisitionCo Notes due 2019
On March 8, 2013, we completed a private offering of $175.0 million of 11.00% AcquisitionCo Notes due June 1, 2019. The AcquisitionCo Notes due 2019 are fully and unconditionally guaranteed on a senior unsecured, joint and several basis by Noranda HoldCo and the domestic subsidiaries of Noranda AcquisitionCo that guarantee the senior secured credit facilities. The indenture governing the AcquisitionCo Notes due 2019 contains certain customary affirmative and negative covenants, restrictions and events of default. In January 2014 the Company registered the AcquisitionCo Notes by exchanging these notes for identical notes, except that the exchange notes have been registered under the U.S. federal securities laws and are not subject to transfer restrictions.
AcquisitionCo Notes due 2015
On May 18, 2007, Noranda AcquisitionCo issued $510.0 million senior floating rate notes due 2015. The AcquisitionCo Notes mature on May 15, 2015. Through May 15, 2011, Noranda AcquisitionCo was permitted to elect to pay interest: (i) entirely in cash, (ii) by increasing the principal amount of the AcquisitionCo Notes by paying interest entirely in kind (“PIK interest”) or (iii) 50% in cash and 50% in PIK interest. For all subsequent periods after May 15, 2011, Noranda AcquisitionCo was required to pay all interest in cash. The AcquisitionCo Notes cash interest accrued at six-month LIBOR plus 4.0% per annum, reset semi-annually. During the year ended December 31, 2011, AcquisitionCo issued $8.9 million of AcquisitionCo Notes due 2015 as payment-in-kind interest due May 15, 2011. The AcquisitionCo Notes due 2015 were all redeemed in March 2013 in connection with the 2013 Refinancing.
Certain covenants
Certain covenants contained in our debt agreements governing our Senior Secured Credit Facilities and the indenture governing our AcquisitionCo Notes restrict our ability to take certain actions if we are unable to meet certain ratios of Adjusted EBITDA to fixed charges and Net Debt, Senior Secured Net Debt and Senior First Lien Secured Net Debt to Adjusted EBITDA. These actions include incurring additional secured or unsecured debt, expanding borrowings under existing term loan facilities, paying dividends, engaging in mergers, acquisitions and certain other investments, and retaining proceeds from asset sales. In addition to the restrictive covenants described above, upon the occurrence of certain events, such as a change of control, our debt agreements could require that we repay or refinance our indebtedness.
11. ASSET RETIREMENT AND OTHER OBLIGATIONS
Reclamation Obligations
St. Ann has an obligation to rehabilitate land disturbed by St. Ann’s bauxite mining operations. See Note 1, "Accounting Policies" for further information. The reclamation obligations were $1.5 million and $1.4 million at December 31, 2014 and 2013, respectively. These amounts are included in accrued liabilities in the accompanying consolidated balance sheets.
A summary of our reclamation obligations activity at St. Ann follows (in millions):
Land Obligations
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 (“St. Ann Land Obligations”). See Note 1, "Accounting Policies" for further information. The current portion of the St. Ann Land Obligations was $3.7 million as of December 31, 2014 and December 31, 2013 and is included in accrued liabilities in the accompanying consolidated balance sheets. The long-term portion of the St. Ann Land Obligations was$6.8 million at December 31, 2014 and December 31, 2013 and is included in other long-term liabilities in the accompanying consolidated balance sheets.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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; therefore, further adjustments to the St. Ann Land Obligations and the Predecessor Land Obligations may be necessary. These adjustments, including the effects of fluctuations in foreign currency exchange rates, are aggregated in the following table as revisions to the obligation.
A summary of our St. Ann Land Obligations activity follows (in millions):
Asset Retirement Obligations
Our asset retirement obligations consist of costs related to the disposal of certain spent pot liners associated with the New Madrid smelter, as well as costs associated with the future closure and post-closure care of red mud lakes at the Gramercy facility, where Gramercy disposes of wastes from its refining process.
The current portion of the liability of $2.3 million and $2.2 million at December 31, 2014 and 2013, respectively, related to the disposal of spent pot-liners at New Madrid and was recorded in accrued liabilities in the accompanying consolidated balance sheets. The remaining non-current portion of $13.7 million and $14.3 million at December 31, 2014 and 2013, respectively, was included in other long-term liabilities in the accompanying consolidated balance sheets.
A summary of our asset retirement obligations activity follows (in millions):
At each of December 31, 2014 and 2013, we had $10.5 million and $9.2 million of restricted cash in an escrow account as security for the payment of red mud lake closure obligations that will arise under state environmental laws if we were to cease operations at the Gramercy facility. This amount is included in other assets in the accompanying consolidated balance sheets.
The ongoing operations at the Gramercy facility generate hazardous materials that are disposed of according to long-standing environmental permits. We have not recorded an ARO for removing such material that may remain throughout the production process up until closure of the Gramercy facility as we do not currently believe there is a reasonable basis for estimating the liability. Our ability to form a reasonable estimate is impeded as we cannot predict the amount of hazardous materials that will be remaining at the time of such a closure, due to the fact that we are continuously removing and disposing of these materials as they are generated.
Environmental Remediation Obligations
In addition to our asset retirement obligations, we have identified certain environmental conditions requiring remedial action or ongoing monitoring at the Gramercy refinery. As of December 31, 2014 and 2013, our consolidated balance sheets included undiscounted liabilities of $1.7 million, respectively, and $1.1 million and $1.2 million in other long-term liabilities, respectively, for remediation of Gramercy’s known environmental conditions. Monitoring costs are expensed as incurred. No other responsible parties are involved in any ongoing environmental remediation activities.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. PENSIONS AND OTHER POST-RETIREMENT BENEFITS
We sponsor defined benefit pension plans for hourly and salaried employees. Benefits under our sponsored defined benefit plans are based on years of service and/or eligible compensation prior to retirement. We also sponsor OPEB plans for certain employees. These benefits include life and health insurance. In addition, we provide supplemental executive retirement benefits for certain executive officers. Disclosures for the defined benefit pension plans and other post retirement benefit plans at St. Ann (the “St. Ann Plans,” collectively) are shown separately from the disclosures related to the plans at our other subsidiaries (the “Noranda Plans,” collectively) because the assumptions related to the St. Ann Plans are significantly different than those of the Noranda Plans.
We used an annual measurement date of December 31 to determine the pension and OPEB liabilities for the Noranda Plans and St. Ann Plans.
Noranda Plans
Our pension funding policy is to contribute annually an amount based on actuarial and economic assumptions designed to achieve adequate funding of the projected benefit obligations and to meet the minimum funding requirements of the Employee Retirement Income Security Act (“ERISA”). OPEB benefits are funded as retirees submit claims.
On September 7, 2012, we ratified a new labor contract with the USWA at our New Madrid smelter, which included changes to pension benefits for members of the USWA within our New Madrid workforce. The increase in benefits increased our pension liability and our unrecognized pension loss in accumulated other comprehensive income by $16.7 million (pre-tax), which we recorded during third quarter 2012. Net periodic cost for the year ended December 31, 2012 increased $0.5 million as a result of the increase in pension benefits.
In fourth quarter 2013, we completed a workforce reduction (see “Note 13, "Restructuring"). As a result, we offered special voluntary termination benefits to employees that (1) met certain criteria for early retirement and (2) accepted the benefit by the required deadline. For the year ended December 31, 2013, we recognized a termination benefit loss of $0.7 million within net periodic benefit cost.
On October 1, 2014, select Noranda Pension Plans were amended to allow for lump-sum distributions for participant elections made through November 15, 2014. The amendment resulted in $9.5 million additional benefits paid in the fourth quarter of 2014. All payments associated with the amendment were completed in 2014.
Noranda Pension Plan assets
Weighted-average asset allocations as of December 31, 2014 and 2013 and the target asset allocations for 2015 were as follows:
We seek a balanced return on plan assets through a diversified investment strategy. Noranda pension plan assets consist principally of equities and fixed income accounts. In developing the long-term rate of return assumption for plan assets, we evaluated the plans’ historical cumulative actual returns over several periods, as well as long-term inflation assumptions. We anticipate that the plans will continue to generate long-term investment returns of approximately 7% per annum.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The change in benefit obligation and change in plan assets for the Noranda pension plans were as follows (in millions):
The change in benefit obligation and change in plan assets for the Noranda OPEB plans were as follows (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net liability for the Noranda plans was recorded in the consolidated balance sheets as follows (in millions):
In 2015, we expect to reclassify losses of approximately $13.0 million and $0.1 million from AOCI related to the Noranda pension and OPEB plans, respectively, into net income through net periodic cost. Amounts related to the Noranda plans in AOCI were as follows (in millions):
The Noranda OPEB benefit obligation included estimated health insurance benefits of $1.1 million, $1.0 million and $1.1 million at December 31, 2014, 2013 and 2012, respectively. The healthcare cost trend rates used in developing the periodic cost and the projected benefit obligation are 7% grading to 5% over four years.
Net periodic benefit costs related to the Noranda Pension Plans included the following (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit costs related to the Noranda OPEB plans included the following (in millions):
The effects of a one percentage point change in the assumed health care cost trend rate on our Noranda OPEB plans’ post-retirement benefit obligation were as follows (in millions):
The projected and accumulated benefit obligations in excess of plan assets for our Noranda pension plans were as follows (in millions):
St. Ann Plans
St. Ann operates a defined benefit pension plan and an OPEB plan. Our post-retirement benefits include life and health insurance and are funded as retirees submit claims.
St. Ann Pension Plan assets
The St. Ann Pension Plan is funded by employee and employer contributions. Employer contributions are made at a rate periodically determined by management, which is based, in part, on employee contributions. Our pension funding policy is to contribute annually an amount based on actuarial and economic assumptions designed to achieve adequate funding of the projected benefit obligations and to meet the funding requirements of the plan.
Our St. Ann Pension Plan’s weighted-average asset allocations at December 31, 2014 and 2013 and the target allocations for 2015 by asset category were as follows:
We seek a balanced return on plan assets through a diversified investment strategy. In developing the long-term rate of return assumption for plan assets, we evaluate the plan’s historical cumulative actual returns over several periods, as well as long-term inflation assumptions. We anticipate that the plan’s investments will continue to generate long-term returns of at least 7% per annum.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The change in benefit obligation and change in plan assets for the St. Ann Plans were as follows (in millions):
The net asset (liability) for the St. Ann Plans was recorded in the consolidated balance sheets as follows (in millions):
Net accumulated actuarial (gains) losses related to the St. Ann Pension and OPEB plans in AOCI were as follows (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit costs related to the St. Ann Pension Plans included the following (in millions):
Net periodic benefit costs related to the St. Ann OPEB Plan included the following (in millions):
The effect of a one-percentage-point change in the assumed health care cost trend rate on our St. Ann OPEB plan’s benefit obligation was as follows (in millions):
As of December 31, 2014 and 2013, St. Ann Pension Plan assets exceeded the projected benefit obligation and the accumulated benefit obligation.
Expected Employer Contributions
Expected contributions approximate $17.8 million and $0.4 million for the Noranda Pension Plans and the St. Ann Pension Plans, respectively, in 2015. We may elect to make additional contributions to the plans.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected Future Benefit Payments
The following table provides our estimated future benefit payments for the pension and OPEB plans at December 31, 2014 (in millions):
Defined Contribution Plans
We also have defined contribution retirement plans that cover our eligible employees. The purpose of these defined contribution plans is generally to provide additional financial security during retirement by providing employees with an incentive to make regular savings. Our contributions to these plans are based on employee contributions and were as follows (in millions):
13.
RESTRUCTURING
During the third quarter of 2014, we began a workforce reduction in our New Madrid location that resulted in 12 employees accepting early retirement incentive packages in the fourth quarter of 2014. Also in the fourth quarter 2014, we announced a workforce reduction in our Newport location that resulted in the termination of 29 hourly and 2 salaried employees. These 2014 actions resulted in $0.8 million of pre-tax charges for one-time termination benefits reflected in the consolidated statements of operations as a component of selling, general and administrative expenses for the year ended December 31, 2014. We completed substantially all activities associated with these workforce reductions as of December 31, 2014.
We announced workforce reductions on October 30, 2013 and December 17, 2013, which affected approximately 160 employees through a combination of voluntary retirement packages and involuntary terminations.
These 2013 actions resulted in $5.6 million of pre-tax charges for one-time termination benefits reflected in the consolidated statements of operations as a component of selling, general and administrative expenses for the year ended December 31, 2013. During fourth quarter 2013, $0.7 million of special termination benefits related to the restructuring were recorded to the pension liability and adjusted through net periodic pension cost. We completed substantially all activities associated with these workforce reductions as of December 31, 2013. The majority of these restructuring costs were paid in the first quarter of 2014. Additionally, the liability was reduced by$0.6 million, $0.2 million, $0.1 million and $0.1 million, respectively, in the first, second, third and fourth quarters of 2014 mainly due to the expiration of elective benefits.
Unpaid restructuring costs are recorded in accrued liabilities on our consolidated balance sheets.
The following table summarizes our restructuring activities by segment (in millions):
14. DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative instruments to mitigate the risks associated with fluctuations in aluminum prices, natural gas prices and interest rates. All derivatives are held for purposes other than trading.
We enter into forward contracts with our customers to sell aluminum in the future at fixed-prices in the normal course of business. We do not elect normal sale accounting on certain customer contracts and instead record those contracts as derivatives (“fixed-price aluminum customer contracts”). Because these fixed-price aluminum customer contracts expose us to aluminum and Midwest premium (“MWP”) market price fluctuations, we economically hedge these risks by entering into variable-price aluminum swap contracts (“variable-price aluminum offset swaps”) and variable-price MWP contracts with various brokers, typically for terms of one year or less.
As of December 31, 2014, our outstanding fixed price aluminum customer contracts were as follows:
As of December 31, 2014, our outstanding variable price aluminum offset swaps were as follows:
As of December 31, 2014, our outstanding variable price MWP contracts were as follows:
Natural gas swaps. We purchase natural gas to meet our production requirements. These purchases expose us to the risk of fluctuating natural gas prices. To offset changes in the Henry Hub Index price of natural gas, we have, from time to time, entered into financial swaps by purchasing the fixed forward price for the Henry Hub Index and simultaneously entering into an agreement to sell the actual Henry Hub Index Price. As of December 31, 2014, we have no outstanding natural gas swaps.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fixed-price natural gas contract. In 2012, we exercised a provision in the natural gas supply contract for our alumina refinery to set fixed prices for a portion of the refinery’s anticipated natural gas usage in the period from April through December 2012. We recorded these contracts as derivatives, based on the fair value using the Henry Hub Index price of natural gas. As of December 31, 2014, we had no fixed price purchases of natural gas remaining.
We recognize all derivative instruments as either assets or liabilities at their estimated fair value in our accompanying consolidated balance sheets. The following table presents the carrying values of our derivative instruments outstanding (in millions):
We have four counterparties for our variable-price aluminum offset swaps. Our variable-price MWP contracts are with various other counterparties. With each of the counterparties of our variable-price aluminum offset swaps, we have a master netting arrangement which is subject to the same guarantee and security provisions as the senior secured credit facilities. The master netting arrangements do not require us to post additional collateral, or cash margin. We present the fair values of derivatives which are subject to a master netting arrangement in a net position on the unaudited consolidated balance sheets. The following is a presentation of the gross components of our net derivative balances (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2014 and December 31, 2013, none of our derivative instruments were designated and qualified as fair value or cash flow hedges. We discontinued hedge accounting for all fixed-price aluminum swaps on January 29, 2009. At that date, amounts were frozen in AOCI to be reclassified into earnings in the period the hedged sales occur, or until we determined that the original forecasted sales were no longer probable of occurring. During first quarter 2013, we reclassified the final $6.4 million of gains into (gain) loss on hedging activities, net in the consolidated statements of operations, resulting in no derivative gains or losses on hedging activities remaining in AOCI.
Derivatives that do not qualify for hedge accounting or have not been designated for hedge accounting treatment are adjusted to fair value through (gain) loss on hedging activities, net in the consolidated statements of operations.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents how our hedging activities affected our consolidated statements of operations for each period (in millions):
15.
SHAREHOLDERS' EQUITY
Our authorized capital stock was 225.0 million shares, of which 200.0 million shares ($0.01 par value) was designated as common stock and 25.0 million shares (at $0.01 par value) was designated as preferred stock as of December 31, 2014 and 2013. As of December 31, 2014 and 2013, no preferred stock was outstanding.
Cash Dividends
The following table summarizes the cash dividends paid during 2012, 2013 and 2014. The dividends paid on March 19, 2012 of $1.25 per share represent supplemental cash dividends declared by the Board.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 18, 2015, the Board declared a regular quarterly dividend of $0.01 per share to be paid on March 25, 2015 to shareholders of record as of March 2, 2015. Cash payments related to the dividend will total approximately $0.7 million.
16.
SHARE-BASED PAYMENTS
Noranda Long-Term Incentive Plans
We recorded stock compensation expense as follows (in millions):
In May 2014, our Board of Directors adopted the Noranda 2014 Incentive Award Plan (the “2014 Incentive Award Plan”). The 2014 Incentive Award Plan replaces the Third Amended and Restated Noranda Aluminum Holding Corporation 2007 Long-Term Incentive Plan and the Noranda Aluminum Holding Corporation 2010 Incentive Award Plan (the “Prior Plans”), under which we granted equity awards from 2007 to 2014. No additional equity awards will be granted under the Prior Plans. The 2014 Incentive Award Plan provides for a variety of share-based awards, including non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, dividend equivalents, performance share awards, performance-based cash awards and stock payment awards. Option terms will be set by our Board of Directors subject to the condition that no option term shall be longer than ten years from the date of grant. Upon termination of an outstanding optionholder’s services with us, the holder may exercise his or her options within the period of time specified in the option grant, to the extent that the options were vested at the time of termination. Our Board of Directors is generally authorized to adopt, amend and rescind rules relating to the administration of the 2014 Incentive Plan, and our Board of Directors is authorized to amend, suspend and terminate the 2014 Incentive Award Plan once put in place.
Employees and non-employee directors held 1,039,895 options at December 31, 2014 from our Noranda 2007 Long-Term Incentive Plan. The investor director provider group held 140,000 options at December 31, 2014. The investor director provider group consists of the full-time employees of our principal shareholders affiliated with Apollo Management VI (“Apollo”) who serve on our Board. Common stock shares awarded or sold to employees and non-employee directors under the plan, including exercised stock options, totaled 1,946,463 shares through December 31, 2014.
Employees and non-employee directors held 536,294 unvested service-vesting restricted stock units (“RSUs”) awards, 637,784 shares of restricted stock, a target amount of 1,232,055 performance-vesting restricted shares and RSUs and a target amount of 173,188 market-based restricted stock at December 31, 2014 from our Noranda 2010 Incentive Award Plan. The outstanding award amounts include dividend equivalent units issued to restricted stock and RSU holders in connection with the cash dividend paid to shareholders discussed in Note 15, "Shareholders' Equity". The number and grant date fair value of the performance awards to be issued, a maximum of 1,365,671 awards, will be based on Company performance for the years 2014 through 2015. A total of 1,041,375 service-vesting RSUs, 221,042 service-vesting restricted stock and 202,673 performance-vesting restricted shares and RSUs have vested as of December 31, 2014. We reacquired 428,627 shares upon vesting based on employee elections to use shares to pay for minimum statutory withholding taxes on the shares vested.
We reserved 5,000,000 shares of common stock for issuance under our Noranda 2014 Incentive Award Plan. We had 4,951,462 shares available for issuance under the 2014 Incentive Award Plan as of December 31, 2014. Employees and non-employee directors held 208,698 unvested service-vesting restricted stock units (“RSUs”) awards at December 31, 2014 from our Noranda 2014 Incentive Award Plan.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our stock option activity and related information follows:
Forty thousand non-employee director options which were not in-the-money at December 31, 2014, and therefore have a negative intrinsic value, have been excluded from the aggregate intrinsic value shown above. None of the 140,000 investor director provider options were in-the-money at December 31, 2014.
We estimated the grant date fair value of stock options using the Black-Scholes-Merton option pricing model. We did not grant stock options in 2014, 2013 or 2012.
In 2014 and 2013, we granted 60,000 and 20,000, respectively, of cash-settled service-vesting RSUs (“the investor director provider RSUs,”) in lieu of RSUs that would otherwise be granted under the director compensation program and 334 and 728, respectively, of dividend equivalent units to the investor director provider group. We make a cash payment to Apollo equal to the fair market value of the outstanding investor director provider RSUs on the vesting dates. We account for the investor director provider RSUs as liability awards. We remeasure the fair value of the liability at each reporting date and adjust stock compensation expense so that the amount ultimately recorded as stock compensation expense will equal the cash paid on the vesting date (see Note 4, "Fair Value Measurements"). We paid Apollo $0.1 million and $0.1 million for vested RSUs during the year ended December 31, 2014 and 2013, respectively.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our employee and non-employee director RSU and restricted stock activity was as follows:
(1)
As a result of the restructuring which took place during the fourth quarter of 2013, employees with performance-vesting restricted stock vested their awards as of their termination date inclusive of a service factor. The aggregate intrinsic value associated with those vestings was $0.1 million as of December 31, 2013.Our investor director provider RSU activity was as follows:
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our investor director provider RSU activity was as follows:
During the second quarter of 2013, we granted performance shares with market-based vesting conditions to certain senior level employees under our Noranda 2010 Incentive Award Plan. These performance shares can be earned upon the achievement of a specified fair market value of the Company’s common stock during the defined performance period. These performance shares are also subject to a three-year continued service vesting provision with earlier vesting permitted under certain conditions, such as upon a change of control of the Company.
We determined grant date fair value of service-vesting and performance-vesting restricted stock and RSUs based on the closing price of our common stock on the grant date. For market-based restricted stock, the effect of the market conditions is reflected in the fair value of the awards on the date of grant using a Monte-Carlo simulation model. A Monte-Carlo simulation model estimates the fair value of the market-based award based on the expected term, risk-free interest rate, expected dividend yield and expected volatility measure for the Company.
We estimated a forfeiture rate for share-based payment awards based on historical forfeiture rates of similar awards, which was 7% for restricted stock and RSUs granted to employees during 2014. We expect all share-based payment awards granted to executives and directors to vest. Dividend equivalent units vest on the same schedule as the related share-based payment awards. Service-vesting restricted stock and RSUs will generally vest over three years, on the anniversary of the grant date, in the following increments: 25% on the first anniversary, 25% on the second anniversary and 50% on the third anniversary. We recognize stock compensation expense on a straight-line basis over the three years vesting period. A grant date had not been determined as of December 31, 2014 for performance-vesting awards granted in 2014 and 2013 because the performance conditions had not yet been determined.
As of December 31, 2014, unrecognized stock compensation expense related to non-vested options, service-vesting RSUs, restricted stock, investor director provider RSUs and market-based restricted stock was $3.4 million. We will recognize this amount over a weighted-average period of 1.5 years. During first quarter 2013, we began recognizing stock compensation expense for performance-vesting RSUs awarded in 2011 because the performance conditions have now been determined. We have not yet recognized stock compensation expense for performance-vesting restricted stock or RSUs awarded in 2013 or 2014 because the performance conditions had not been determined as of December 31, 2014.
Total fair value of options that vested for the years ended December 31, 2014, 2013 and 2012 was $0.1 million, $0.4 million and $1.1 million, respectively. Total fair value of vested service-vesting RSUs and restricted stock was $4.7 million and $0.9 million respectively, for the year ended December 31, 2014. Only performance-vesting RSUs and restricted stock associated with the 2013 restructuring vested during the year ended December 31, 2013; total fair value of those vested RSUs and restricted stock was $0.1 million.
Employee Stock Purchase Plan
On May 10, 2012, our shareholders approved the 2012 Employee Stock Purchase Plan (the “ESPP”), which became effective on July 1, 2012. A total of 500,000 shares of common stock is available for issuance under the ESPP. The ESPP is designed to provide eligible employees an opportunity to purchase shares of our common stock at 95% of the fair market value on the purchase date. As of December 31, 2014 and December 31, 2013, activity under the ESPP was not material.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. NET INCOME PER COMMON SHARE
Basic and diluted EPS were calculated as follows (in millions, except per share):
Certain share-based payment awards whose terms and conditions are described in Note 16, "Share-Based Payments" could potentially dilute basic EPS in the future, but were not included in the computation of diluted EPS because to do so would have been antidilutive. Those anti-dilutive share-based payment awards were as follows (in millions):
18. INCOME TAXES
The components of income (loss) before income taxes were as follows (in millions):
Income tax expense (benefit) was as follows (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2014, we had foreign net operating loss carry forwards of approximately $41.9 million with no expiration date and state net operating loss carryforwards of approximately $206.9 million expiring in years 2020 through 2029. In addition, as of December 31, 2014, we had state tax credit carryforwards of $0.4 million expiring in years 2015 through 2026.
We recognize a valuation allowance against deferred tax assets if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. On a quarterly basis, we evaluate our deferred tax asset balance for realizability. To the extent we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we will increase the valuation allowance against the deferred tax assets. For the year ended December 31, 2014, we increased our valuation allowance by $6.4 million, primarily related to foreign and state net operating loss carry forwards. Adjustments could be required in the future if we estimate that the amount of deferred tax assets to be realized is more or less than the net amount we have recorded.
As of December 31, 2014, we have not provided for withholding or United States federal income taxes on approximately $4.0 million of accumulated undistributed earnings of our foreign subsidiaries as they are considered by management to be permanently reinvested. If these undistributed earnings were not considered to be permanently reinvested, an approximately $0.1 million deferred income tax liability would have been provided.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets and liabilities were as follows (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of Income Taxes
The reconciliation of the income taxes, calculated at the rates in effect, with the effective tax rate shown in the consolidated statements of operations, was as follows:
In connection with the Apollo Acquisition, Xstrata generally agreed to indemnify us for taxes imposed on Noranda Intermediate and its subsidiaries with respect to periods ending on or prior to the date of the Apollo Acquisition. At each of December 31, 2014 and 2013, we had a receivable of $0.1 million from Xstrata equal to our provision for uncertain tax positions (net of federal benefits) for income taxes of Noranda Intermediate and its subsidiaries for periods ending on or prior to the date of the Apollo Acquisition.
As of December 31, 2014 and 2013 we had unrecognized tax benefits (including interest) of approximately $2.0 million and $1.9 million, respectively. We elected to accrue interest and penalties related to unrecognized tax benefits in our provision for income tax. We had accrued interest and penalties related to unrecognized tax benefits of approximately $0.2 million and $0.1 million at December 31, 2014 and December 31, 2013.
Changes in amounts of unrecognized tax benefits were as follows (in millions):
As of December 31, 2014 and 2013 the total amounts of net unrecognized tax benefits that, if recognized, would impact the effective tax rate were $1.3 million and $1.3 million, respectively. Within the next twelve months, we estimate that the unrecognized benefits could change by approximately $0.1 million as a result of tax audit closings, settlements and the expiration of the statute of limitations with respect to returns in various jurisdictions.
We file a consolidated federal and various state income tax returns. The earliest year open to examination in the Company’s major jurisdictions is 2011 for federal and state income tax returns.
19.
RELATED PARTY TRANSACTIONS
On August 8, 2014 Apollo sold its remaining shares in Berry Plastics Corporation, a former portfolio company of Apollo. Sales to this entity were as follows (in millions):
On April 12, 2013 Metals USA Holdings Corp. was acquired by Reliance Steel & Aluminum Co., a public company not affiliated with Apollo. Sales to Metals USA Holdings Corp. and its subsidiaries were as follows (in millions):
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Sales to Metals USA Holding Corp. include the period in which Metals USA Holdings Corp was affiliated with Apollo through April 12, 2013.
Accounts receivable from related parties were as follows:
On March 17, 2014, we completed a secondary offering of 10.0 million shares of common stock by investment funds affiliated with or managed by Apollo Global Management, LLC. We did not receive any of the proceeds from the offering.
In connection with the 2012 Refinancing, we paid $0.7 million in fees to Apollo Global Securities, LLC, an affiliate of Apollo that participated in the arrangement and structuring of the 2012 Refinancing. Fees paid to Apollo Global Securities, LLC in connection with the 2013 Refinancing were immaterial.
20. NON-CONTROLLING INTEREST
Through St. Ann, we hold a 49% partnership interest in Noranda Jamaica Bauxite Partners (“NJBP”), in which the GOJ holds a 51% interest. NJBP mines bauxite, approximately 58% of which was sold to Gramercy during 2014, with the remaining majority sold to Sherwin Alumina Company.
St. Ann is a party to several agreements (collectively, the “Mining Agreements”) with the GOJ. St. Ann and the GOJ have equal voting rights in NJBP’s executive committee. St. Ann manages the mining operations under a management agreement. St. Ann receives bauxite from NJBP at NJBP’s cost and pays the GOJ a return on its investment in NJBP through fees paid by NBL pursuant to an establishment agreement, as amended, that defines the negotiated fiscal structure. St. Ann has a special mining lease with the GOJ for the supply of bauxite. The lease ensures access to sufficient reserves to allow St. Ann to ship annually 4.5 million dry metric tonnes (“DMT”) of bauxite from mining operations in a specified concession area through September 30, 2030. In 2013, the GOJ gave us the option to mine up to 5.1 million DMT of bauxite during 2013 and up to 5.4 million DMT per annum for the period 2014 through 2017.
In return for these rights, St. Ann is required to pay fees called for in the establishment agreement, as amended, consisting of:
•
Dedication fee - Base dedication fee of $0.6 million per year is tied to a total land base of 13,820 acres. The sum actually paid will vary with the current total of bauxite lands owned by the GOJ which is being used by NJBP expressed as a proportion of the total land base.
•
Depletion fee - A base depletion fee of $0.2 million is paid on a base shipment of 4.0 million DMT per annum. Variations in amounts paid will be proportional to changes in shipments.
•
Asset usage fee - St. Ann also pays the GOJ 10% annually in respect of the GOJ’s 51% share of the mining assets.
•
Production levy - A production levy determined using the average realized price of primary aluminum as determined by regulation of the GOJ, is applied to all bauxite shipped from Jamaica other than sales to the GOJ and its agencies.
•
Royalty - Royalties are payable to any person for the mining of bauxite at a rate of U.S. $1.50 per DMT of monohydrate bauxite shipped and U.S. $2.00 per DMT of trihydrate bauxite shipped, provided that during any period when the production levy is payable the royalty shall be at a rate of U.S. $0.50 per DMT.
As of December 31, 2014 and 2013, we recorded accrued liabilities of $5.9 million and $5.7 million, respectively, for these fees. We had no prepaid GOJ royalties as of December 31, 2014 and 2013.
The previous structure provided for a commitment by NBL to make certain expenditures for haulroad development, maintenance, dredging, land purchases, contract mining, training and other general capital expenditures through 2017. The terms of the establishment agreement, as amended, 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. We utilized $1.3 million of these prepaid income taxes in 2011 leaving a balance of $12.7 million at December 31, 2014. These prepaid taxes can be used into perpetuity subject to an annual limitation.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are attempting to negotiate a new fiscal structure with the GOJ. The terms of any new fiscal structure, as well as our ability to utilize all or part of the prepaid taxes, are subject to the outcome of the negotiations of any new fiscal structure or to the determination of our rights and obligations in connection with the existing arrangements. An unfavorable outcome could materially and adversely affect our business, financial condition, results of operations and cash flows.
We have determined that NJBP is a variable interest entity under U.S. GAAP, and St. Ann is NJBP’s primary beneficiary. The determination that St. Ann is the primary beneficiary was based on the fact that St. Ann absorbs the profits and losses associated with the partnership, while the GOJ receives certain fees from St. Ann (royalties, production and asset usage fees, etc.). Therefore, we consolidate NJBP into our consolidated financial statements.
Due to the consolidation of NJBP, the following amounts were included in our consolidated balance sheets (in millions):
The liabilities recognized as a result of consolidating NJBP do not represent additional claims on our general assets. NJBP’s creditors have claims only on the specific assets of NJBP and St. Ann. Similarly, the assets of NJBP do not represent additional assets available to satisfy claims against our general assets.
St. Ann receives bauxite from NJBP at cost, excluding the mining lease fees described above; therefore, NJBP operates at breakeven. Further, all returns to the GOJ are provided through the payments from St. Ann under the various fees, levies and royalties described above. In these circumstances, no portion of NJBP’s net income (loss) or consolidated comprehensive income (loss) is allocated to the non-controlling interest. We do not expect the balance of the non-controlling interest to change from period to period unless there is an adjustment to the fair value of inventory or property, plant and equipment, as may occur in an LCM or asset impairment scenario.
21. SUBSIDIARY ISSUER OF GUARANTEED NOTES
The AcquisitionCo Notes are fully and unconditionally guaranteed on a senior unsecured, joint and several basis by the existing and future wholly owned domestic subsidiaries of Noranda AcquisitionCo that guarantee the senior secured credit facilities. NHB and St. Ann are not guarantors of the senior secured credit facilities and are not guarantors of the AcquisitionCo Notes. Noranda HoldCo fully and unconditionally guarantees the AcquisitionCo Notes on a joint and several basis with the subsidiary guarantors. Noranda HoldCo has no independent operations or any assets other than its interest in Noranda AcquisitionCo. Noranda AcquisitionCo is a wholly owned finance subsidiary of Noranda HoldCo with no operations independent of its subsidiaries.
The following consolidating financial statements present separately the financial condition and results of operations and cash flows (condensed) for Noranda HoldCo (as parent guarantor), Noranda AcquisitionCo (as the issuer), the subsidiary guarantors, the subsidiary non-guarantors and eliminations (“the guarantor financial statements”). The guarantor financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accounting policies used in the preparation of the guarantor financial statements are consistent with those elsewhere in the accompanying consolidated financial statements. Intercompany transactions have been presented gross in the guarantor financial statements; however these transactions eliminate in consolidation.
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORANDA ALUMINUM HOLDING CORPORATION
Consolidating Balance Sheet
December 31, 2014
(in millions)
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORANDA ALUMINUM HOLDING CORPORATION
Consolidating Balance Sheet
December 31, 2013
(in millions)
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORANDA ALUMINUM HOLDING CORPORATION
Consolidating Statement of Operations
Year ended December 31, 2014
(in millions)
NORANDA ALUMINUM HOLDING CORPORATION
Consolidating Statement of Operations
Year ended December 31, 2013
(in millions)
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORANDA ALUMINUM HOLDING CORPORATION
Consolidating Statement of Operations
Year ended December 31, 2012
(in millions)
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORANDA ALUMINUM HOLDING CORPORATION
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2014
(in millions)
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORANDA ALUMINUM HOLDING CORPORATION
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2013
(in millions)
NORANDA ALUMINUM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORANDA ALUMINUM HOLDING CORPORATION
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2012
(in millions)
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, is accumulated and communicated to management in a timely fashion. In designing and evaluating controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management is necessarily required to use judgment in evaluating controls and procedures. In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes.
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
Management’s Report On Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting and the attestation report of Ernst & Young LLP, the Company’s independent registered public accounting firm, on the Company’s internal control over financial reporting are included on pages [54] and [55], respectively, of this Form 10-K.
Changes In Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the captions “Corporate Governance - Code of Business Conduct,” “Election of Directors,” “Corporate Governance - Director Independence,” “Corporate Governance - Board Meetings and Board Committees,” “Compensation Committee Report,” “Certain Relationships And Related Party Transactions,” and “Section16 (a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 14, 2015 is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions “Certain Relationships and Related Party Transactions,” “Director Compensation,” “Executive Compensation,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “2014 Summary Compensation Table,” “2014 Grants of Plan-Based Awards,” “2014 Outstanding Equity Awards at Fiscal Year End,” “2014 Pension Benefits,” “2014 Outstanding Equity Awards at Fiscal Year End,” “2014 Option Exercises and Stock Vested,” and “Potential Payments Upon Termination or Change in Control” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 14, 2015 is incorporated herein by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation Plan Information” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 14, 2015 is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the captions “Election of Directors,” “Corporate Governance” and “Certain Relationships and Related Party Transactions” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 14, 2015 is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the caption “Proposal To Ratify The Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 14, 2015 is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
See the index to Financial Statements, which appears on page 55 of this report.
(a) (2) Financial Statement Schedules
Any applicable financial statement schedules required under the related instructions are included in the notes to the consolidated financial statements, which appear on pages 59 through 115 of this report.
(a) (3) Exhibits
See the Index to Exhibits, which appear on pages 120 through 122 of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 27, 2015.
NORANDA ALUMINUM HOLDING CORPORATION
By:
/S/ LAYLE K. SMITH
Name:
Layle K. Smith
Title:
President and Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned directors and officers of Noranda Aluminum Holding Corporation hereby constitutes and appoints Layle K. Smith, Dale W. Boyles and Gail E. Lehman, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to execute any and all amendments to this annual report, and to cause the same to be filed with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and desirable to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
† Certain portions of this document have been omitted pursuant to a confidential treatment request.
* Previously filed.