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EX-10.5 - AMENDED ESTABLISHMENT AGREEMENT - Noranda Aluminum Holding CORPdex105.htm
EX-31.1 - CERTIFICATION OF THE CEO PURSUANT TO RULES 13A-14(A) AND 15D-14(A) - Noranda Aluminum Holding CORPdex311.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - Noranda Aluminum Holding CORPdex321.htm
EX-31.2 - CERTIFICATION OF THE CFO PURSUANT TO RULES 13A-14(A) AND 15D-14(A) - Noranda Aluminum Holding CORPdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from [                     to                     ].

Commission file number: 001-34741

 

 

NORANDA ALUMINUM HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-8908550
(State or Other Jurisdiction of Incorporation)   (I.R.S. Employer Identification Number)
801 Crescent Centre Drive, Suite 600
Franklin, Tennessee
  37067
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (615) 771-5700

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  þ    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

Non-accelerated filer

 

þ  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  þ

As of July 29, 2010, there were 55,280,232 shares of Noranda common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

   1

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   37

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   53

Item 4.

 

Controls and Procedures

   54

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

   55

Item 1A.

 

Risk Factors

   55

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds from Registered Sales

   55

Item 3.

 

Defaults upon Senior Securities

   55

Item 4.

 

Removed and Reserved

   55

Item 5.

 

Other Information

   55

Item 6.

 

Exhibits

   55

SIGNATURES

   56

 

-i-


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

NORANDA ALUMINUM HOLDING CORPORATION

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

     Three months ended June 30,     Six months ended June 30,  
     2009     2010     2009     2010  
     $     $     $     $  

Sales

     157,679        334,905        321,994        636,414   
                                

Operating costs and expenses:

      

Cost of sales

     163,745        290,973        348,064        555,899   

Selling, general and administrative expenses

     10,717        43,130        32,943        72,131   

Goodwill and other intangible asset impairment

     —          —          43,000        —     

Excess insurance proceeds

     (29,185     —          (29,185     —     
                                
     145,277        334,103        394,822        628,030   
                                

Operating income (loss)

     12,402        802        (72,828     8,384   
                                

Other (income) expenses:

      

Interest expense, net

     14,100        8,539        29,974        17,786   

Gain on hedging activities, net

     (53,198     (20,519     (98,326     (22,282

Equity in net loss of investments in affiliates

     34,051        —          78,101        —     

(Gain) loss on debt repurchase

     (12,442     2,508        (164,650     2,612   
                                

Total other (income) expenses

     (17,489     (9,472     (154,901     (1,884
                                

Income before income taxes

     29,891        10,274        82,073        10,268   

Income tax expense

     42,017        3,401        49,920        3,450   
                                

Net income (loss) for the period

     (12,126     6,873        32,153        6,818   
                                

Net income (loss) per share

        

Basic

   $ (0.28   $ 0.14      $ 0.74      $ 0.15   

Diluted

   $ (0.28   $ 0.14      $ 0.74      $ 0.14   

Weighted-average shares outstanding

        

Basic

     43,487        49,088        43,485        46,443   

Diluted

     43,487        50,103        43,485        47,080   

See accompanying notes

 

1


Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

 

     December 31, 2009     June 30, 2010  
     $     $  

ASSETS

    

Current assets:

    

Cash and cash equivalents (includes $117 and $498 related to a consolidated Variable Interest Entity (“VIE”) at December 31, 2009 and June 30, 2010, respectively)

   167,236      31,678   

Accounts receivable, net

   85,530      118,615   

Inventories (includes $11,813 and $11,174 related to a consolidated VIE at December 31, 2009 and June 30, 2010, respectively)

   182,356      186,162   

Derivative assets, net

   68,755      —     

Taxes receivable

   730      9,279   

Prepaid assets

   36,418      15,855   

Other current assets

   13,808      14,596   
            

Total current assets

   554,833      376,185   
            

Property, plant and equipment, net (includes $36,911 and $35,815 related to a consolidated VIE at December 31, 2009 and June 30, 2010, respectively)

   745,498      724,336   

Goodwill

   137,570      137,570   

Other intangible assets, net

   79,047      76,019   

Long-term derivative assets, net

   95,509      —     

Other assets (includes $2,305 and $3,302 related to a consolidated VIE at December 31, 2009 and June 30, 2010, respectively)

   85,131      87,618   
            

Total assets

   1,697,588      1,401,728   
            

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable (includes $6,208 and $8,420 related to a consolidated VIE at December 31, 2009 and June 30, 2010, respectively)

   69,912      89,633   

Accrued liabilities (includes $3,583 and $6,186 related to a consolidated VIE at December 31, 2009 and June 30, 2010, respectively)

   61,961      54,523   

Accrued interest

   167      894   

Derivative liabilities, net

   —        26,136   

Deferred tax liabilities

   27,311      15,992   

Current portion of long-term debt

   7,500      —     
            

Total current liabilities

   166,851      187,178   
            

Long-term debt, net

   944,166      553,713   

Long-term derivative liabilities, net

   —        22,471   

Pension and OPEB liabilities

   106,393      112,287   

Other long-term liabilities (includes $5,435 and $5,706 related to a consolidated VIE at December 31, 2009 and June 30, 2010, respectively)

   55,632      54,120   

Deferred tax liabilities

   330,382      317,206   

Common stock subject to redemption (200,000 shares at December 31, 2009 and June 30, 2010)

   2,000      2,000   

Shareholders’ equity:

    

Preferred stock (25,000,000 shares authorized; no shares outstanding)

   —        —     

Common stock (200,000,000 shares authorized; $0.01 par value; 43,752,832 shares issued and outstanding at December 31, 2009; 55,280,232 shares issued and outstanding at June 30, 2010, including 200,000 shares subject to redemption at December 31, 2009 and June 30, 2010)

   436      551   

Capital in excess of par value

   16,123      102,890   

Accumulated deficit

   (75,123   (68,305

Accumulated other comprehensive income

   144,728      111,617   
            

Total Noranda shareholders’ equity

   86,164      146,753   

Noncontrolling interest

   6,000      6,000   
            

Total shareholders’ equity

   92,164      152,753   
            

Total liabilities and shareholders’ equity

   1,697,588      1,401,728   
            

See accompanying notes

 

2


Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Consolidated Statements of Shareholders’ Equity

(in thousands)

(unaudited)

 

     Common stock    Capital in
excess
of par value
    Accumulated
deficit
    Accumulated
other
comprehensive
income (loss)
    Non-controlling
interest
   Total  
     $    $     $     $          $  

Balance, December 31, 2008

   434    14,383      (176,497   198,315      —      36,635   
                                  

Net income

   —      —        101,375      —        —      101,375   

Components of other comprehensive income (loss):

              

Pension adjustment, net of tax of $6,866

   —      —        —        11,164      —      11,164   

Unrealized gains on derivatives, net of tax of $25,419

   —      —        —        45,143      —      45,143   

Reclassification of derivative amounts realized in net income, net of tax benefit of $62,354

   —      —        —        (109,894   —      (109,894
                  

Total comprehensive income

   —      —        —        —        —      47,788   

Noncontrolling interest

   —      —        —        —        6,000    6,000   

Repurchase of shares

   —      (90   —        —        —      (90

Issuance of shares

   2    290      (1   —        —      291   

Stock compensation expense

   —      1,540      —        —        —      1,540   
                                  

Balance, December 31, 2009

   436    16,123      (75,123   144,728      6,000    92,164   
                                  

Net income

   —      —        6,818      —        —      6,818   

Components of other comprehensive income (loss):

              

Unrealized gain (loss) on derivatives, net of tax benefit of $6,444

   —      —        —        (8,394   —      (8,394

Reclassification of derivative amounts realized in net income, net of tax benefit of $12,507

   —      —        —        (24,717   —      (24,717
                  

Total comprehensive income (loss)

   —      —        —        —        —      (26,293

Repurchase of shares

   —      (16   —        —        —      (16

Issuance of shares

   115    82,814      —        —        —      82,929   

Stock compensation expense

   —      3,969      —        —        —      3,969   
                                  

Balance, June 30, 2010

   551    102,890      (68,305   111,617      6,000    152,753   
                                  

See accompanying notes

 

3


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NORANDA ALUMINUM HOLDING CORPORATION

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Six months ended June 30,  
     2009     2010  
     $     $  

OPERATING ACTIVITIES

    

Net income

   32,153      6,818   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

   45,720      51,185   

Non-cash interest

   23,649      13,193   

Loss on disposal of property, plant and equipment

   3,475      1,903   

Insurance proceeds applied to capital expenditures

   (7,161   —     

Goodwill and other intangible asset impairment

   43,000      —     

Gain on hedging activities, net of cash settlements

   (70,211   (4,513

Settlements from hedge terminations, net

   70,139      164,603   

(Gain) loss on debt repurchase

   (164,650   2,612   

Equity in net (income) loss of investments in affiliates

   78,101      —     

Deferred income taxes

   62,130      3,449   

Stock compensation expense

   740      3,969   

Changes in other assets

   3,046      (7,718

Changes in pension and other long-term liabilities

   4,071      4,224   

Changes in operating assets and liabilities:

    

Accounts receivable, net

   13,848      (32,366

Insurance receivable

   (34,125   —     

Inventories

   3,810      (3,806

Taxes receivable

   (4,513   (14,422

Other current assets

   12,438      16,813   

Accounts payable

   (903   19,721   

Accrued liabilities and accrued interest

   (6,627   (6,711
            

Cash provided by operating activities

   108,130      218,954   
            

INVESTING ACTIVITIES

    

Capital expenditures

   (22,360   (27,810

Proceeds from insurance related to capital expenditures

   7,161      —     

Proceeds from sale of property, plant and equipment

   —        163   
            

Cash used in investing activities

   (15,199   (27,647
            

FINANCING ACTIVITIES

    

Proceeds from issuance of shares, net of issuance costs

   41      82,929   

Repurchase of shares

   (90   (16

Repayments on revolving credit facility

   —        (215,930

Repayment of long-term debt at face value

   (24,500   (193,848

Repurchase of debt

   (70,840   —     
            

Cash used in financing activities

   (95,389   (326,865
            

Change in cash and cash equivalents

   (2,458   (135,558

Cash and cash equivalents, beginning of period

   184,716      167,236   
            

Cash and cash equivalents, end of period

   182,258      31,678   
            

See accompanying notes

 

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Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

1. ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements represent the consolidation of Noranda Aluminum Holding Corporation and all companies that we directly or indirectly control (“Noranda,” “the Company,” “we,” “us,” and “our”). Noranda HoldCo” refers only to Noranda Aluminum Holding Corporation, excluding its subsidiaries. “Noranda AcquisitionCo” refers only to Noranda Aluminum Acquisition Corporation, the wholly owned direct subsidiary of Noranda HoldCo, excluding its subsidiaries.

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. The consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Consolidated balance sheet data as of December 31, 2009 was derived from audited financial statements. In management’s opinion, the consolidated financial statements include all adjustments (including normal recurring accruals) that are considered necessary for the fair presentation of our financial position and operating results. All intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications have been made to previously issued financial statements to conform to the current period presentation. These reclassifications had no impact on net income or net cash flows.

We are a vertically integrated producer of value-added primary aluminum products and high quality rolled aluminum coils. We have two businesses: our upstream business and downstream business. Our upstream business consists of three reportable segments: primary aluminum products, alumina refining, and bauxite. These three segments are closely integrated and consist of an aluminum smelter near New Madrid, Missouri, which we refer to as “New Madrid,” and supporting operations at our bauxite mining operations in St. Ann, Jamaica (Noranda Bauxite Limited, or “St. Ann”) and our alumina refinery in Gramercy, Louisiana (Noranda Alumina, LLC, or “Gramercy”). New Madrid has annual production capacity of approximately 580 million pounds (263,000 metric tons). Our downstream business comprises our flat rolled products segment, which consists of four rolling mill facilities with a combined maximum annual production capacity of 410 to 495 million pounds, depending on production mix.

The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with our 2009 annual financial statements included in our Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 2, 2010 and our Form 8-K, filed with the SEC on April 26, 2010 to reflect the effects of a change in segments and a two-for-one stock split.

Power outage

In January 2009, an ice storm disrupted the power grid throughout Southeastern Missouri. The resulting power outage disabled two of New Madrid’s three production lines, initially reducing our daily production to 25% of pre-outage levels. This event had a substantial negative impact on our 2009 operating results, resulting in an average operating rate of 58% of capacity during 2009. This is significantly below our operating rate for the past 20 years of 99%. We reached a settlement with our insurance providers pursuant to which we collected approximately $67.5 million in the second and third quarters of 2009, and the smelter became fully operational during first quarter 2010.

Net income (loss) per share

Basic earnings per share (“EPS”) is calculated as income available to common stockholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated using the weighted-average outstanding common shares determined using the treasury stock method for options.

Joint Venture Transaction

Through August 31, 2009, we held a 50% interest in Gramercy and in St. Ann. Our investments in these noncontrolled entities, in which we had the ability to exercise equal or significant influence over operating and financial policies, were accounted for by the equity method. On August 3, 2009, we entered into an agreement with Century Aluminum Company (together with its subsidiaries, (“Century”) whereby we would become the sole owner of both Gramercy and St. Ann. The transaction closed on August 31, 2009 and is referred to as the “Joint Venture Transaction.”

 

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Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

Segment changes

During first quarter 2010, in connection with continued integration activities of our alumina refinery and our bauxite mining operations, we changed the composition of our reportable segments. Those integration activities included a re-evaluation of the financial information provided to our Chief Operating Decision Maker, as that term is defined in US GAAP. During the first and second quarter 2009, we reported two segments: upstream (which included corporate expenses) and downstream. We have now identified five reportable segments, with the components previously comprising upstream now representing four segments: primary aluminum products, alumina refining, bauxite, and corporate. The downstream segment will be referred to as the flat rolled products segment. All segment information presented herein has been revised to reflect the new structure. These segment changes had no impact on our historical consolidated financial position, results of operations or cash flows.

Stock split

On April 16, 2010, our Board of Directors approved a two-for-one split of our outstanding shares of common stock to be effected in the form of a stock dividend. Stockholders of record at the close of business on April 19, 2010, were issued one additional share of common stock for each share owned by such stockholder as of that date. The additional shares were issued on April 20, 2010. The stock split increased the number of shares of common stock outstanding from approximately 21.9 million to approximately 43.8 million. Share and per-share amounts shown in the condensed consolidated financial statements and related notes reflect the split as though it occurred on January 1, 2009. The total number of authorized common shares and the par value thereof was not changed by the split.

Initial Public Offering

In May 2010, we completed an initial public offering (“IPO”) of 11.5 million shares of common stock at a public offering price of $8.00 per share (NYSE: NOR). The net proceeds after the underwriting discounts, commissions, fees and expenses amounted to $82.9 million. We used those net proceeds from the offering together with $95.9 million of proceeds from settling all outstanding fixed-price aluminum hedges, to repurchase the $66.3 million remaining principal amount of outstanding Holdco Notes, and to repay $110.0 million principal amount outstanding under the term B loan. The remaining $2.5 million was used for other corporate purposes.

In connection with the IPO, pursuant to our amended and restated certificate of incorporation, our authorized capital stock increased from 100.0 million to 225.0 million, of which 200.0 million ($0.01 par value) is designated as common stock and 25.0 million (at $0.01 par value) is designated as preferred stock. As of June 30, 2010, no preferred stock was outstanding.

2. JOINT VENTURE TRANSACTION

On August 31, 2009, we became the sole owner of both Gramercy and St. Ann (“the Joint Venture Transaction”). The results of operations of Gramercy and St. Ann have been included in our consolidated financial statements since the Joint Venture Transaction date. Prior to the Joint Venture Transaction, our 50% investment interests in the joint ventures were accounted for by the equity method. The results of operations related to Gramercy and St. Ann are included in our consolidated financial statements from the closing date of the transaction. Unaudited pro forma condensed consolidated statement of operations data is summarized below (in thousands):

 

     Pro Forma(1)     Actual    Pro Forma(1)     Actual
     Three months ended June 30,    Six months ended June 30,
     2009     2010    2009     2010
     $     $    $     $

Sales

   196,951      334,905    399,674      636,414

Operating income (loss)

   7,862      802    (94,256   8,384

Net income (loss)

   (12,983   6,873    54,378      6,818

 

(1)

The unaudited pro forma condensed statement of operations data for the three and six months ended June 30, 2009 reflects our consolidated results of operations as if the Joint Venture Transaction had occurred January 1, 2009. These amounts have been calculated by adjusting the results of Gramercy and St. Ann to reflect the additional inventory cost, depreciation and amortization that would have been charged assuming the fair value adjustments to inventory, property, plant and equipment and intangible assets had been applied on January 1, 2009, together with the consequential tax effects. The unaudited pro forma condensed statement of operations data is not intended to represent the consolidated results of operations we would have reported if the acquisition had been completed at January 1, 2009, nor is it necessarily indicative of future results.

 

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Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

Investment in affiliates

Summarized financial information for the joint ventures, as recorded in their respective consolidated financial statements, at full value, prior to the Joint Venture Transaction is presented below.

 

     Three months ended
June 30, 2009
   Six months ended
June 30, 2009
     $    $

St. Ann to Gramercy

   6,957    20,205

St. Ann to third parties

   7,559    13,379

Gramercy to us and joint venture partner

   32,851    89,855

Gramercy to third parties

   18,624    33,355
         

Net sales

   65,991    156,794
         

Gross profit

   4,337    10,927
         

Net income(1)

   5,182    11,496
         

 

(1)

Includes other income of $1.5 million during the three and six months ended June 30, 2009.

Impairment

Beginning in fourth quarter 2008 and continuing through second quarter 2009, the cost of alumina purchased from the Gramercy refinery exceeded the spot prices of alumina available from other sources. Because of the reduced need for alumina caused by the smelter power outage and depressed market conditions, during first quarter 2009 Gramercy reduced its annual production rate of smelter grade alumina from approximately 1.0 million metric tonnes to approximately 0.5 million metric tonnes and implemented other cost saving activities.

These production changes led us to evaluate our investments in the joint ventures for impairment in first quarter 2009, which resulted in a $45.3 million write down ($39.3 million for St. Ann and $6.0 million for Gramercy). In second quarter 2009, revisions to our assumptions about St. Ann’s future profitability and cash flows resulted in a $35.0 million write down. Impairment expenses are recorded within equity in net loss of investments in affiliates in the consolidated statements of operations.

3. NEW MADRID POWER OUTAGE

During the week of January 26, 2009, power supply to our New Madrid smelter, which supplies all of the upstream business’ production, was interrupted several times because of a severe ice storm in Southeastern Missouri. As a result of the outage, we lost approximately 75% of the smelter capacity. The smelter returned to operating above 55% of capacity at June 30, 2009.

During the three months ended June 30, 2009, we reached a $43.9 million settlement with our primary insurance carrier, Factory Mutual Insurance Company (“FM Global”). In addition, we reached a settlement of $23.6 million with the other insurance carriers during third quarter 2009, bringing the total insurance settlement to $67.5.

The following table shows the insurance activity as presented in the financial statement (in thousands):

 

     Three months ended
June 30, 2009
    Six months ended
June 30, 2009
 
     Items
incurred
   Related
proceeds
    Net
impact
    Items
incurred
   Related
proceeds
    Net
impact
 
   $    $     $     $    $     $  

Cost of sales

   6,503    (6,523   (20   13,767    (13,767   —     

Selling, general and administrative expenses

   2,048    (6,173   (4,125   6,173    (6,173   —     

Excess insurance proceeds

   —      (29,185   (29,185   —      (29,185   (29,185
                                  

Total

   8,551    (41,881   (33,330   19,940    (49,125   (29,185
                              

Insurance cash receipts through June 30, 2009

             (15,000  
                  

Insurance receivable recorded at June 30, 2009

             34,125     
                  

The line item titled “Excess insurance proceeds” reflects the residual insurance recovery after applying total expected proceeds recognized against the losses incurred through June 30, 2009. This amount is not intended to represent a gain on the insurance claim, but only a timing difference between expected proceeds recognized and claim-related costs incurred.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

4. RESTRUCTURING

On February 26, 2010, we announced a workforce and business process restructuring in our U.S. operations. The U.S. workforce restructuring plan reduced headcount by 89 employees through a combination of voluntary retirement packages and involuntary terminations. Substantially all activities associated with this workforce reduction were completed as of February 26, 2010.

In connection with a decision to contract the substantial portion of our bauxite mining to third party contractors, on April 21, 2010, we announced a workforce reduction in our Jamaican bauxite mining operations. The workforce restructuring plan reduced headcount by approximately 160 employees through a combination of voluntary retirement packages and involuntary terminations.

These actions resulted in $3.2 million of pre-tax charges recorded in second quarter 2010, and $7.8 million for the first half of 2010, primarily due to one-time termination benefits and pension benefits. These charges are reflected as a component of selling, general and administrative expenses.

The following table summarizes the impact of these restructurings (in thousands):

 

     Total  restructuring
costs(1)
 
   $  

Balance at December 31, 2009

   4   

2010 restructuring expense:

  

Corporate

   220   

Alumina refining

   1,619   

Bauxite

   3,029   

Primary aluminum products

   1,871   

Flat rolled products

   1,068   
      

Total

   7,811   

Benefits paid in 2010

   (4,953
      

Balance at June 30, 2010

   2,858   
      

 

(1)

Restructuring costs are recorded in accrued liabilities on the consolidated balance sheets at June 30, 2010. This table does not include window benefits of which $1.6 million was recorded in pension liabilities and $0.3 million were recorded in other accrued liabilities during first quarter 2010 and will be adjusted through net periodic pension costs.

5. SUPPLEMENTAL FINANCIAL STATEMENT DATA

Statements of operations (in thousands):

 

     Three months ended June 30,     Six months ended June 30,  
     2009     2010     2009     2010  
     $     $     $     $  

Interest expense

   14,163      8,557      30,060      17,834   

Interest income

   (63   (18   (86   (48
                        

Interest expense, net

   14,100      8,539      29,974      17,786   
                        

Statements of cash flow (in thousands):

 

     Six months ended June 30,
     2009     2010
     $     $

Interest paid

   10,320      4,254

Income taxes paid (received)

   (6,702   24,434

 

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Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

6. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consisted of the following (in thousands):

 

     December 31, 2009    June 30, 2010
     $    $

Cash

   12,334    15,309

Money market funds

   154,902    16,369
         

Total cash and cash equivalents

   167,236    31,678
         

Cash and cash equivalents include all cash balances and highly liquid investments with a maturity of three months or less at the date of purchase. We place our temporary cash 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. At December 31, 2009 all cash balances, excluding the money market funds, were fully insured by the Federal Deposit Insurance Corporation (“FDIC”). At June 30, 2010, $1.4 million of the cash balance is fully insured by the FDIC. We consider our investments in money market funds to be available for use in our operations.

7. INVENTORIES

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 are valued at weighted average cost. The components of our inventories were (in thousands):

 

     December 31, 2009     June 30, 2010  
     $     $  

Raw materials, at cost

   55,202      66,064   

Work-in-process, at cost

   50,720      60,309   

Finished goods, at cost

   24,638      21,430   
            

Total inventory, at cost

   130,560      147,803   

LIFO adjustment(1)

   23,348      22,205   

Lower of cost or market (“LCM”) reserve

   (7,892   (17,293
            

Inventory, at lower of cost or market

   146,016      152,715   

Supplies

   36,340      33,447   
            

Total inventories

   182,356      186,162   
            

 

(1)

Inventories at Gramercy and St. Ann are stated at weighted average cost and are not subject to the LIFO adjustment. Gramercy and St. Ann inventories comprise 30.0% and 27.2% of total inventories at cost at December 31, 2009 and June 30, 2010, respectively.

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. Quarterly inventory determinations under LIFO are based on assumptions about projected inventory levels at the end of the year. During the six months ended June 30, 2009, we recorded a LIFO loss of $11.9 million due to a decrement in inventory quantities. During the six months ended June 30, 2010 we recorded a $0.2 million loss due to a decrement in inventory quantities in our primary aluminum segment.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is based on the estimated useful lives of the assets computed principally by the straight-line method for financial reporting purposes.

Property, plant and equipment, net consisted of the following (in thousands):

 

     Estimated useful lives    December 31, 2009(1)     June 30, 2010  
     (in years)    $     $  

Land

      45,472      45,630   

Buildings and improvements

   10 — 47      114,898      114,921   

Machinery and equipment

   3 — 50    784,609      798,550   

Construction in progress

   —      28,723      34,627   
               
      973,702      993,728   

Accumulated depreciation

      (228,204   (269,392
               

Total property, plant and equipment, net

      745,498      724,336   
               

 

(1)

We have reclassified certain assets in the December 31, 2009 financial statements between land, buildings and improvements, and machinery and equipment to be consistent with June 30, 2010 presentation.

Cost of sales includes depreciation expense of the following amount in each period (in thousands):

 

Quarter-to-date

   $

Three months ended June 30, 2009

   19,440

Three months ended June 30, 2010

   22,423

Year-to-date

   $

Six months ended June 30, 2009

   43,873

Six months ended June 30, 2010

   45,918

Depreciation expense related to Gramercy and St. Ann was $6.5 million and $13.9 million during the three and six months ended June 30, 2010, respectively. This increase in depreciation was offset entirely by decreased depreciation in our primary aluminum and flat rolled products segments due to certain fixed assets which became fully-depreciated in second quarter 2009.

9. GOODWILL

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.

The following presents changes in the carrying amount of goodwill for the following periods (in thousands):

 

     Primary Aluminum    Flat Rolled Products     Total  
     Goodwill    Impairment
losses
   Goodwill    Impairment
losses
   
     $    $    $    $     $  

Balance, December 31, 2008

   137,570    —      130,706    (25,500   242,776   

Impairment loss

   —      —      —      (105,206   (105,206
                           

Balance, December 31, 2009

   137,570    —      130,706    (130,706   137,570   
                           

Balance, June 30, 2010

   137,570    —      130,706    (130,706   137,570   
                           

Impairment

Based on our interim impairment analysis of goodwill and other intangible assets during first quarter 2009, we recorded an impairment charge of $2.8 million on trade names and $40.2 million on goodwill in the flat rolled products segment. No further deterioration was noted in second quarter 2009 regarding the recoverability of goodwill; therefore, no goodwill impairment testing was necessary at June 30, 2009. Our analyses included assumptions about future profitability and cash flows of our segments, which we believe reflect 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, and is at least reasonably possible that the assumptions we employed will be materially different from the actual amounts or results. Future impairment charges could be required if we do not achieve our current cash flow, revenue and profitability projections.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

10. OTHER INTANGIBLE ASSETS

Intangible assets consisted of the following (in thousands):

 

     December 31, 2009     June 30, 2010  
   $     $  

Non-amortizable:

    

Trade names (indefinite life)

   17,694      17,694   

Amortizable:

    

Customer relationships (13.0 year weighted-average life)

   69,468      69,468   

Other (2.5 year weighted-average life)

   2,309      2,309   
            
   89,471      89,471   

Accumulated amortization

   (10,424   (13,452
            

Total intangible assets, net

   79,047      76,019   
            

Amortization expense related to intangible assets is included in selling, general and administrative expenses of the following amount in each period (in thousands):

 

Quarter-to-date

   $

Three months ended June 30, 2009

   912

Three months ended June 30, 2010

   1,482

Year-to-date

   $

Six months ended June 30, 2009

   1,847

Six months ended June 30, 2010

   3,028

As part of our interim impairment analysis of intangible assets during first quarter 2009 discussed in Note 9, we recorded an impairment charge of $2.8 million related to the indefinite-lived trade names in the flat rolled products segment.

11. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net consisted of the following (in thousands):

 

     December 31, 2009     June 30, 2010  
   $     $  

Trade

   85,732      118,765   

Allowance for doubtful accounts

   (202   (150
            

Total accounts receivable, net

   85,530      118,615   
            

Other current assets consisted of the following (in thousands):

 

     December 31, 2009    June 30, 2010
   $    $

Current foreign deferred tax asset

   5,911    2,948

Employee loans receivable, net

   2,083    1,994

Other current assets

   5,814    9,654
         

Total other current assets

   13,808    14,596
         

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

Other assets consisted of the following (in thousands):

 

     December 31, 2009    June 30, 2010
   $    $

Deferred financing costs, net of amortization

   17,859    13,878

Cash surrender value of life insurance

   22,775    22,905

Pension assets

   6,543    6,825

Restricted cash (see Note 18, “Reclamation, Land and Asset Retirement Obligations”)

   10,708    12,706

Supplies

   17,045    16,068

Prepaid income taxes (see Note 22, “Commitments and Contingencies”)

   —      5,000

Other

   10,201    10,236
         

Total other assets

   85,131    87,618
         

Accrued liabilities consisted of the following (in thousands):

 

     December 31, 2009    June 30, 2010
   $    $

Compensation and benefits

   31,752    21,314

Workers’ compensation

   4,822    5,276

Asset retirement obligations (see Note 18, “Reclamation, Land and Asset Retirement Obligations”)

   1,600    2,020

Land obligation (see Note 18, “Reclamation, Land and Asset Retirement Obligations”)

   2,552    2,262

Reclamation obligation (see Note 18, “Reclamation, Land and Asset Obligations”)

   1,698    1,832

Environmental remediation obligation (see Note 22, “Commitments and Contingencies”)

   1,317    1,317

Obligations to the Government of Jamaica (“GOJ”) (see Note 19, “Noncontrolling interest”)

   4,929    3,097

Pension and OPEB liabilities

   454    454

Restructuring costs

   4    2,858

Other

   12,833    14,093
         

Total accrued liabilities

   61,961    54,523
         

Other long-term liabilities consisted of the following (in thousands):

 

     December 31, 2009    June 30, 2010
   $    $

Reserve for uncertain tax positions

   10,090    10,248

Workers’ compensation

   9,485    9,544

Asset retirement obligations (see Note 18, “Reclamation, Land and Asset Obligations”)

   11,842    12,121

Land obligation (see Note 18, “Reclamation, Land and Asset Obligations”)

   5,104    4,695

Reclamation obligation (see Note 18, “Reclamation, Land and Asset Obligations”)

   7,244    7,515

Environmental remediation obligation (see Note 22, “Commitments and Contingencies”)

   3,046    3,029

Deferred interest payable

   2,894    2,372

Deferred compensation and other

   5,927    4,596
         

Total other long-term liabilities

   55,632    54,120
         

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

Accumulated other comprehensive income consisted of the following (in thousands):

 

     December 31, 2009     June 30, 2010  
     $     $  

Net unrealized gains (losses) on derivatives, net of taxes of $113,361 and $94,410, respectively

   199,031      165,920   

Pension and OPEB adjustments, net of tax benefit of $32,212 and $32,212, respectively

   (54,303   (54,303
            

Total accumulated other comprehensive income

   144,728      111,617   
            

12. RELATED PARTY TRANSACTIONS

The Apollo Acquisition was consummated on May 18, 2007, when Noranda AcquisitionCo acquired the Noranda Aluminum business of Xstrata (Schweiz) A.G., or “Xstrata,” by acquiring the stock of a subsidiary of Xstrata. In connection with the Apollo Acquisition, we entered into a management consulting and advisory services agreement with our principal stockholders (affiliated with Apollo Management VI) for the provision of certain structuring, management and advisory services for an initial term ending on May 18, 2017. Terms of the agreement provide for annual fees of $2.0 million, payable in one lump sum annually. Historically, we expensed approximately $0.5 million of such fees each quarter within selling, general and administrative expenses in our consolidated statements of operations. Upon completion of our initial public offering in second quarter 2010, as permitted by the terms of that management agreement, Apollo terminated the agreement and received a $13.5 million fee from the Company. This payment consisted of $1.0 million in management fees accrued for the six months ended June 30, 2010 and $12.5 million in accelerated management fees due upon termination of the management agreement. Such fee is included in selling, general and administrative expenses in the three and six month periods ended June 30, 2010.

We sell flat rolled aluminum products to Berry Plastics Corporation, a portfolio company of Apollo, under an annual sales contract. Sales to this entity were as follows (in thousands):

 

Quarter-to-date

   $

Three months ended June 30, 2009

   1,182

Three months ended June 30, 2010

   3,197

Year-to-date

   $

Six months ended June 30, 2009

   2,354

Six months ended June 30, 2010

   6,718

We purchase alumina from Gramercy. Until the Joint Venture Transaction on August 31, 2009, Gramercy was our 50% owned joint venture, and purchases of alumina from Gramercy were considered related party transactions. Related party purchases from Gramercy prior to the Joint Venture Transaction were as follows (in thousands):

 

     $

Three months ended June 30, 2009

   16,938

Six months ended June 30, 2009

   44,696

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

13. LONG-TERM DEBT

The carrying values and fair values of our outstanding debt were as follows (in thousands):

 

     December 31, 2009    June 30, 2010
     Carrying value     Fair value    Interest rate    Carrying value    Fair value    Interest rate
     $     $    %    $    $    %

Noranda HoldCo:

                

Senior Floating Rate Notes due 2014 (“HoldCo Notes”)(1)

   63,597      41,338    7.02    —      —      —  

Noranda AcquisitionCo:

                

Senior Floating Rate Notes due 2015 (“AcquisitionCo Notes”)

   344,068      264,932    5.27    353,142    271,919    5.37

Term B loan due 2014

   328,071      328,071    2.23    200,571    200,571    2.54

Revolving credit facility(2)

   215,930      215,930    2.23    —      —      —  
                      

Total debt, net(1)

   951,666            553,713      

Less: current portion

   (7,500         —        
                      

Long-term debt, net(1)

   944,166            553,713      
                      

 

(1)

Net of unamortized discount of $0.5 million and $0 at December 31, 2009 and June 30, 2010, respectively.

(2)

As of June 30, 2010, outstanding letters of credit on the revolving credit facility totaled $27.5 million and $215.2 million was available for borrowing.

On May 15, 2010, AcquisitionCo and HoldCo issued $9.1 million and $2.3 million in AcquisitionCo Notes and HoldCo Notes, respectively, as payment for PIK interest due May 15, 2010. Additionally, we have made a permitted election under the indentures governing our AcquisitionCo Notes, to pay all interest due hereunder on Nov 15, 2010, entirely in kind.

(Gain) loss on debt repurchase

During second quarter 2010, we used proceeds from our completed IPO and the termination of fixed-price aluminum swaps completed in connection with our IPO, as discussed in Note 1, to repay $110.0 million of our term B loan and the remaining $66.3 million principal balance of our HoldCo Notes. We used proceeds from April 2010 hedge terminations to repay $10.0 million principal amount of the term B loan. During the first quarter of 2010, we repaid $7.5 million of our term B loan. During the six months ended June 30, 2010, we repaid $127.5 million and $215.9 million of outstanding principal balances on the term B loan and revolving credit facility, respectively. Debt repayments resulted in the accelerated amortization of deferred financing costs of $2.5 million and $2.6 million of deferred financing costs and unamortized debt issuance discount for the three and six months ended June 30, 2010, respectively.

During second quarter 2009, we repurchased $1.6 million and $6.8 million aggregate principal balance of our HoldCo and AcquisitionCo Notes, respectively, and repaid $43.5 million and $6.6 million of outstanding principal balance on the term B loan and revolving credit facility borrowings, respectively. During the six months ended June 30, 2009, we repurchased $149.2 million and $64.9 million aggregate principal balance of our HoldCo and AcquisitionCo notes, respectively, and repaid $43.5 million and $6.6 million of outstanding principal balance on the term B loan and revolving credit facility borrowings, respectively. (Gain) loss on debt repurchases consisted of the following (in thousands):

 

     Three months ended June 2009  
     HoldCo Notes     AcquisitionCo
Notes
    Term B loan     Revolving credit
facility
    Total  
     $     $     $     $     $  

Net carrying amount of debt repurchased or repaid(1)

   (1,566   (6,297   (43,013   (6,404   (57,280

Amount paid to repurchase debt

   559      3,428      36,822      4,029      44,838   
                              

(Gain) loss on debt repurchase

   (1,007   (2,869   (6,191   (2,375   (12,442
                              
     Three months ended June 30, 2010  
     HoldCo Notes     AcquisitionCo
Notes
    Term B loan     Revolving credit
facility
    Total  
                              
     $     $     $     $     $  

Net carrying amount of debt repurchased or repaid(1)

   (65,388   —        (118,452   —        (183,840

Amount paid to repurchase debt

   66,348      —        120,000      —        186,348   
                              

(Gain) loss on debt repurchase

   960      —        1,548      —        2,508   
                              

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

     Six months ended June 30, 2009  
     HoldCo Notes     AcquisitionCo
Notes
    Term B loan     Revolving
credit facility
    Total  
     $     $     $     $     $  

Net carrying amount of debt repurchased or repaid(1)

   (147,093   (64,388   (43,013   (6,404   (260,898

Amount paid to repurchase debt(2)

   36,885      18,512      36,822      4,029      96,248   
                              

(Gain) loss on debt repurchase

   (110,208   (45,876   (6,191   (2,375   (164,650
                              
     Six months ended June 30, 2010  
     HoldCo Notes     AcquisitionCo
Notes
    Term B loan     Revolving
credit facility
    Total  
     $     $     $     $     $  

Net carrying amount of debt repurchased or repaid(1)

   (65,388   —        (125,848   (215,930   (407,166

Amount paid to repurchase debt

   66,348      —        127,500      215,930      409,778   
                              

(Gain) loss on debt repurchase

   960      —        1,652      —        2,612   
                              

 

(1)

Net carrying amount includes principal balance and accrued interest, net of any unamortized discount and deferred financing fees.

(2)

Includes transaction fees of $0.9 million for the six months ended June 30, 2009.

14. PENSIONS AND OTHER POST-RETIREMENT BENEFITS

We sponsor defined benefit pension plans for hourly and salaried employees. Benefits under our sponsored defined benefit pension plans are based on years of service and/or eligible compensation prior to retirement. We also sponsor other post-retirement benefit (“OPEB”) plans for certain employees. In addition, we provide supplemental executive retirement benefits for certain executive officers.

During the six months ended June 30, 2010, we completed a workforce and business process restructuring in our U.S. operations and a workforce reduction at St. Ann (see Note 4, “Restructuring”). In conjunction with the U.S. restructuring, we recorded, as a component of net periodic cost for the Noranda plans, $1.6 million of special voluntary termination benefits which were provided to employees that met certain criteria for early retirement and who accepted the offer. The workforce reduction at St. Ann triggered a curtailment of the St. Ann benefit plans. Curtailment gains were recognized as of April 30, 2010 as a component of net periodic cost.

Net periodic benefit costs comprise the following (in thousands):

 

     Noranda Pension           Noranda OPEB  
     Three months ended June 30,           Three months ended June 30,  
     2009     2010           2009     2010  
     $     $           $     $  

Service cost

   1,716      2,248           34      85   

Interest cost

   4,350      4,397           105      139   

Expected return on plan assets

   (3,100   (5,132        —        (2

Actuarial (gain) loss

   1,897      626           (10   (42

Prior service cost

   87      81           —        66   

Settlement and termination benefits

   150      —             —        —     
                             

Net periodic cost

   5,100      2,220           129      246   
                             
           
     Noranda Pension           Noranda OPEB  
     Six months ended June 30,           Six months ended June 30,  
     2009     2010           2009     2010  
     $     $           $     $  

Service cost

   3,950      4,510           67      145   

Interest cost

   8,700      8,814           210      250   

Expected return on plan assets

   (6,200   (8,400        —        (2

Actuarial (gain) loss

   3,333      2,486           (20   (58

Prior service cost

   153      167           —        66   

Settlement and termination benefits

   264      1,630           —        —     
                             

Net periodic cost

   10,200      9,207           257      401   
                             

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

     St. Ann Pension           St. Ann OPEB  
     Three months ended
June 30, 2010
          Three months ended
June 30, 2010
 
     $           $  

Service cost

   136           71   

Interest cost

   397           181   

Expected return on plan assets

   (572        —     

Recognized net (gain) loss

   1,519           1,203   

Curtailment gain

   (1,511        (1,201

Net amortization and deferral

   9           12   
                 

Net periodic cost

   (22        266   
                 
       
     St. Ann Pension           St. Ann OPEB  
     Six months ended
June 30, 2010
          Six months ended
June 30, 2010
 
     $           $  

Service cost

   271           130   

Interest cost

   878           389   

Expected return on plan assets

   (1,257        —     

Recognized net (gain) loss

   1,544           1,203   

Curtailment gain

   (1,511        (1,201

Net amortization and deferral

   9           12   
                 

Net periodic cost

   (66        533   
                 

Employer contributions

We plan to contribute approximately $10.0 million, $0.4 million, and $0.3 million for the Noranda pension plans, the St. Ann pension and OPEB plans, and the Noranda OPEB plans, respectively in 2010. During the six months ended June 30, 2010, we contributed $3.8 million to the Noranda pension plans, and $0.2 million to the St. Ann pension plan. We may contribute additional funds to the plans in order to maintain an Adjusted Funding Target Attainment Percentage (“AFTAP”) under the Pension Protection Act of 2006 of 80%.

15. SHAREHOLDERS’ EQUITY AND SHARE-BASED PAYMENTS

Noranda long-term incentive plan

In connection with the stock split, the number of shares of our common stock under our 2007 Long-Term Incentive Plan (the “2007 Incentive Award Plan”) which are reserved for issuance to employees and non-employee directors increased from 1,900,000 shares to 3,800,000 shares. Of this amount at June 30, 2010, employees owned 940,232 shares and there were 2,162,432 option grants outstanding. The remaining 697,336 shares remained available for issuance.

In May 2010, our Board of Directors adopted the Noranda 2010 Incentive Award Plan (the “2010 Incentive Award Plan”). The 2010 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 2010 Incentive Plan, and our Board of Directors is authorized to amend, suspend and terminate the 2010 Incentive Award Plan once put in place. We expect that we will generally be required to obtain approval of our stockholders to increase the number of shares of our common stock that may be issued under the 2010 Incentive Award Plan. We reserved 5,200,000 shares of common stock for issuance under the 2010 Incentive Plan, all of which remained available for issuance at June 30, 2010.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

The summary of our stock option activity and related information were as follows:

 

     Employee Options and
Non-Employee Director Options
         Investor Director Provider Options
     Common shares     Weighted average
exercise price
         Common shares    Weighted average
exercise price
           $              $

Outstanding - December 31, 2009

   2,129,890      1.53         140,000    9.00

Granted

   35,400      2.18         —      —  

Modified

   —        —           —      —  

Exercised

   —        —           —      —  

Expired

   —        —           —      —  

Forfeited

   (2,858   1.14         —      —  
                     

Outstanding - June 30, 2010

   2,162,432      1.82         140,000    9.00
                     

Fully vested - end of period (weighted average remaining contractual term of 7.0 and 7.3 years, respectively)

   1,123,168      2.05         140,000    9.00
                     

Currently exercisable - end of period (weighted average remaining contractual term of 7.0 and 7.3 years, respectively)

   1,025,088      2.05         140,000    9.00
                     

The fair value of stock options was estimated at the grant date using the Black-Scholes-Merton option pricing model. The following summarized information concerning stock option grants:

 

     Three months ended June 30,    Six months ended June 30,  
     2009     2010    2009     2010  

Expected price volatility

     47.0   —        47.0   90.9

Risk-free interest rate

     4.0   —        4.0   3.1

Weighted average expected lives in years

     7.5      —        7.5      7.5   

Weighted average fair value

   $ 0.76      —      $ 0.76      1.76   

Forfeiture rate

     —        —        —        —     

Dividend yield

     —        —        —        —     

We recorded stock compensation expense of the following amounts (in thousands):

 

Quarter-to-date

   $

Three months ended June 30, 2009

   370

Three months ended June 30, 2010

   3,580

Year-to-date

   $

Six months ended June 30, 2009

   740

Six months ended June 30, 2010

   3,969

In May 2010, in connection with the Company’s IPO, stock options were modified to remove a call option which had created an implicit seven year vesting period. The effect of this modification was to accelerate expense recognition for certain fully-vested options and to change the amount of expense to be recognized based on an assumed forfeiture rate. We recorded $3.2 million of compensation expense during the three months ended June 30, 2010 in connection with this modification. The modification also shortened the period over which compensation expense is recognized for service awards which continue to vest, resulting in an immaterial amount of additional compensation expense during the three months ended June 30, 2010.

As of June 30, 2010, total unrecognized stock compensation expense related to non-vested stock options was $4.1 million with a weighted average expense recognition period of 4.3 years.

16. INCOME TAXES

Our effective income tax rate was approximately 33.6% for the six months ended June 30, 2010 and 60.8% for the six months ended June 30, 2009.

 

   

The effective tax rate for the six months ended June 30, 2010 was primarily impacted by state income taxes, the Internal Revenue Code Section 199 manufacturing deduction, and accrued interest related to unrecognized tax benefits.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

   

The effective tax rate for the six months ended June 30, 2009 was primarily impacted by state income taxes, equity method investee income, and goodwill impairment.

Each interim period is considered an integral part of the annual period and tax expense is measured using the estimated annual effective tax rate. Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluations of possible future events and transactions and may be subject to subsequent refinement or revision.

 

   

For the six months ended June 30, 2010, we used the annual effective tax rate based on estimated ordinary income for the year ended December 31, 2010.

 

   

For the six months ended June 30, 2009, we determined that our annual ordinary income for the year ended December 31, 2009 could not be reliably estimated because we expected near break-even operations and had a significant permanent difference (i.e. goodwill impairment) such that a minor change in our estimated ordinary income could have resulted in a material change in our estimated annual effective income tax rate. As a result, we determined that the actual effective income tax rate for the six months ending June 30, 2009 was the best estimate of the annual effective tax rate.

As of June 30, 2010 and December 31, 2009, we had unrecognized income tax benefits (including interest) of approximately $11.6 million and $11.5 million, respectively (of which approximately $7.6 million and $7.5 million respectively, if recognized, would favorably impact the effective income tax rate). As of June 30, 2010, the gross amount of unrecognized tax benefits has not changed. It is expected that the unrecognized tax benefits may change in the next twelve months; however, because Xstrata indemnified us for tax obligations related to periods ending on or before the acquisition date, we do not expect the change to have a significant impact on our results of operations or our financial position.

In April 2009, the Internal Revenue Service (“IRS”) commenced an examination of our U.S. income tax return for 2006. As part of the Apollo Acquisition, Xstrata indemnified us for tax obligations related to periods ending on or before the acquisition date. Therefore, we do not anticipate that the IRS examination will have a material impact on our financial statements

17. 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.

 

   

Fixed-price aluminum swaps. In 2007 and 2008, we implemented a hedging strategy designed to reduce commodity price risk and protect operating cash flows in the primary aluminum products segment through the use of fixed-price aluminum sale swaps. In addition, during first quarter 2009, we entered into fixed-price aluminum purchase swaps to lock in a portion of the favorable market position of our fixed-price aluminum sale swaps. In March 2009, we entered into a hedge settlement agreement with Merrill Lynch to provide a mechanism for us to monetize our favorable net fixed-price swap positions to fund debt repurchases, subject to certain limitations.

At the closing of our IPO in May 2010, we settled all of our remaining fixed-price aluminum swaps and used the proceeds to repay indebtedness. As of June 30, 2010, we have no outstanding fixed-price aluminum swaps.

 

   

Variable-price aluminum swaps. We also enter into forward contracts with our customers to sell aluminum in the future at fixed-prices in the normal course of business. Because these contracts expose us to aluminum market price fluctuations, we economically hedge this risk by entering into variable-price aluminum swap contracts with various brokers, typically for terms not greater than one year.

 

   

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 enter 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.

 

   

Interest rate swaps. We have floating-rate debt, which is subject to variations in interest rates. We have entered into an interest rate swap agreement to limit our exposure to floating interest rates for the periods through November 15, 2011

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

As of June 30, 2010, our outstanding hedges were as follows:

Aluminum swaps-variable-price

 

Year

   Average hedged price
per pound
   Pounds hedged
annually
   $    (in thousands)

2010

   0.93    38,574

2011

   0.99    12,097
       
      50,671
       

Natural gas swaps

 

Year

   Average price
per million BTU’s
    Million BTU’s hedged annually
   $     (in thousands)

2010

   7.30      4,006

2011

   7.28      8,048

2012

   7.46      8,092
      
     20,146
      
     Hedged LIBOR Rate     Variable Rate Debt Hedged
           $ (in thousands)

Interest rate swap

    

November 15, 2010

   4.98   250,000

May 15, 2011

   4.98   100,000

November 15, 2011

   4.98   100,000

We recognize all derivative instruments as either assets or liabilities at their estimated fair value in our balance sheet. The following table presents the carrying values, which were recorded at fair value, of our derivative instruments outstanding (in thousands):

 

     December 31, 2009     June 30, 2010  
     $     $  

Aluminum swaps-fixed-price

   196,602      —     

Aluminum swaps-variable-price

   6,813      (1,087

Interest rate swaps

   (13,312   (9,116

Natural gas swaps

   (25,839   (38,404
            

Total

   164,264      (48,607
            

Merrill Lynch is the counterparty for a substantial portion of our derivatives. All swap arrangements with Merrill Lynch are part of a master arrangement which is subject to the same guarantee and security provisions as the senior secured credit facilities. The master arrangement does not require us to post additional collateral, or cash margin. We present the fair values of derivatives where Merrill Lynch is the counterparty in a net position on the consolidated balance sheet as a result of our master netting agreement. The following is a presentation of the gross components of our net derivative balances (in thousands):

 

     December 31, 2009     June 30, 2010  
     $     $  

Current derivative assets

   97,382      1,271   

Current derivative liabilities

   (28,627   (27,407
            

Current derivative assets (liabilities), net

   68,755      (26,136
            

Long-term derivative assets

   113,026      17   

Long-term derivative liabilities

   (17,517   (22,488
            

Long-term derivative assets (liabilities), net

   95,509      (22,471
            

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

The following is a gross presentation of the derivative balances segregated by type of contract and between derivatives that are designated and qualify for hedge accounting and those that are not:

 

     As of December 31, 2009           As of June 30, 2010  
     Hedges that qualify  for
hedge accounting
    Hedges that do not qualify
for hedge accounting
          Hedges that qualify  for
hedge accounting
    Hedges that do not qualify  for
hedge accounting
 
   Asset    Liability     Asset    Liability           Asset    Liability     Asset    Liability  

Aluminum swaps-fixed-price

   —      —        202,726    (6,124        —      —        —      —     

Aluminum swaps-variable-price

   —      —        6,898    (85        —      —        1,288    (2,375

Interest rate swaps

   —      —        —      (13,312        —      —        —      (9,116

Natural gas swaps

   784    (3,608   —      (23,015        —      (15,903   —      (22,501
                                                 

Total

   784    (3,608   209,624    (42,536        —      (15,903   1,288    (33,992
                                                 

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of any gain or loss on the derivative is reported as a component of accumulated other comprehensive loss (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

 

   

Aluminum swaps—fixed-price. From January 1, 2008 to January 29, 2009, fixed-price aluminum-swaps were designated and qualified as cash flow hedges. As a result of the New Madrid power outage in January 2009, management concluded that certain hedged sale transactions were no longer probable of occurring, and we discontinued hedge accounting for all our aluminum fixed-price sale swaps on January 29, 2009. At that date, amounts were frozen in AOCI until such time as they are reclassified into earnings in the period the hedged sales occur, or until it is determined that the original forecasted sales are probable of not occurring.

 

   

Natural gas swaps. We entered into certain natural gas contracts during the fourth quarter of 2009 that qualified for and were designated as cash flow hedges based on a portion of estimated consumption of natural gas.

The following table presents the net amount of unrealized gains (losses) on cash flow hedges that were reported as a component of AOCI at June 30, 2010, and the expected timing of those amounts being reclassified into earnings:

 

     Amounts expected to be reclassified into earnings     Net unrealized gains (losses)
on cash flow hedges, pre-tax,
in AOCI at June 30, 2010
 
   July 1, 2010 to
June 30, 2011
    Thereafter    
     $     $     $  

Aluminum swaps-fixed-price

   101,596      174,635      276,231   

Natural gas swaps

   (5,538   (10,363   (15,901
                  

Total

   96,058      164,272      260,330   
                  

Gains and losses on the derivatives representing hedge ineffectiveness are recognized in current earnings, along with amounts that are reclassified from AOCI. Derivatives that do not qualify for hedge accounting or have not been designated for hedge accounting treatment are adjusted to fair value through earnings in gains (losses) on hedging activities in the consolidated statements of operations. The following table presents how our hedging activities affected our consolidated statements of operations for each period.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

     Derivatives qualified as hedges     Derivatives not
qualified as
hedges
    Total  
   Amount
reclassified
from AOCI
    Hedge
ineffectiveness
    Change in
fair value
   
   $     $     $     $  

Three months ended June 30, 2009:

        

Aluminum swaps-fixed-price

   (69,855   —        24,739      (45,116

Aluminum swaps-variable price

   —        —        (8,221   (8,221

Interest rate swaps

   —        —        307      307   

Natural gas swaps

   —        —        (168   (168
                        

Total (gain) loss on hedging activities

   (69,855   —        16,657      (53,198
                        

Three months ended June 30, 2010:

        

Aluminum swaps-fixed-price

   (22,191   —        (5,956   (28,147

Aluminum swaps-variable price

   —        —        6,613      6,613   

Interest rate swaps

   —        —        238      238   

Natural gas swaps

   1,502      1      (726   777   
                        

Total (gain) loss on hedging activities

   (20,689   1      169      (20,519
                        

Six months ended June 30, 2009:

        

Aluminum swaps-fixed-price

   (125,668   (69   14,952      (110,785

Aluminum swaps-variable price

   —        —        (4,410   (4,410

Interest rate swaps

   —        —        850      850   

Natural gas swaps

   —        —        16,019      16,019   
                        

Total (gain) loss on hedging activities

   (125,668   (69   27,411      (98,326
                        

Six months ended June 30, 2010:

        

Aluminum swaps-fixed-price

   (39,024   —        (1,499   (40,523

Aluminum swaps-variable price

   —        —        6,889      6,889   

Interest rate swaps

   —        —        1,405      1,405   

Natural gas swaps

   1,800      (34   8,181      9,947   
                        

Total (gain) loss on hedging activities

   (37,224   (34   14,976      (22,282
                        

18. RECLAMATION, LAND, AND ASSET RETIREMENT OBLIGATIONS

Reclamation obligation

St. Ann has a reclamation obligation to rehabilitate land disturbed by St. Ann’s bauxite mining operations. At June 30, 2010, the current and long-term portions of the reclamation obligation of $1.8 million and $7.5 million are included in accrued liabilities and other long-term liabilities, respectively, in the accompanying consolidated balance sheet.

The following is a reconciliation of the aggregate carrying amount of the reclamation obligation at St. Ann (in thousands):

 

     Six months ended
June 30, 2010
 
   $  

Balance, December 31, 2009

   8,942   

Additional liabilities incurred

   1,297   

Liabilities settled

   (892
      

Balance, June 30, 2010

   9,347   
      

Land obligation

In cases where land to be mined is privately owned, St. Ann offers to purchase the residents’ homes for cash, relocate the residents to another area, or a combination of these two options. These costs are recorded as liabilities as incurred. At June 30, 2010,

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

the current and long-term portions of the land obligation of $2.3 million and $4.7 million are included in accrued liabilities and other long-term liabilities, respectively, in the accompanying consolidated balance sheet.

Asset retirement obligations

Our asset retirement obligations (“ARO”) 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 red mud wastes from its refining process.

The current portion of the liability of $1.6 million and $2.0 million at December 31, 2009 and June 30, 2010, respectively, relates to the disposal of spent pot-liners at New Madrid and is recorded in accrued liabilities in the accompanying consolidated balance sheets. The remaining non-current portion of $11.8 million and $12.1 million at December 31, 2009 and June 30, 2010, respectively, is included in other long-term liabilities in the accompanying consolidated balance sheets.

The following is a reconciliation of the aggregate carrying amount of liabilities for the asset retirement obligations (in thousands):

 

     Six months ended
June 30, 2010
 
   $  

Balance, December 31, 2009

   13,442   

Additional liabilities incurred

   731   

Liabilities settled

   (536

Accretion expense

   504   
      

Balance, June 30, 2010

   14,141   
      

At December 31, 2009 and June 30, 2010, we had $6.2 million and $8.3 million, respectively, 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. This amount is included in other assets in the accompanying consolidated balance sheet. The remaining restricted cash relates primarily to funds for workers’ compensation claims.

19. NONCONTROLLING INTEREST

Through St. Ann, we hold a 49% partnership interest in Noranda Jamaica Bauxite Partners (“NJBP”), in which the Government of Jamaica (“GOJ”) holds 51% interest. NJBP mines bauxite, approximately 50% of which is sold to Gramercy, with the balance sold to third parties.

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 financial statements beginning with the date of the Joint Venture Transaction. On January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2009-17, “Improvements in Financial Reporting by Enterprises Involved with Variable Interest Entities,” (“ASU 2009-17”). ASU 2009-17 amends consolidation guidance for determining which enterprise, if any, is the primary beneficiary of a variable interest entity (“VIE”) and is therefore required to consolidate a VIE by replacing a quantitative approach with a qualitative approach. The qualitative approach is focused on identifying which enterprise has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. The adoption of ASU 2009-17 did not change our previous conclusion that St. Ann is NJBP’s primary beneficiary, and therefore did not have an effect on our financial statements at the date of adoption.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

Due to the consolidation of NJBP, we reflected the following amounts in our balance sheet (in thousands):

 

     December 31, 2009           June 30, 2010  
     NJBP
Balances
    Impact of
Eliminations
    Impact on
Consolidated
Statements
          NJBP
Balances
    Impact of
Eliminations
    Impact on
Consolidated
Statements
 
   $     $     $           $     $     $  

Cash and cash equivalents

   117      —        117           498      —        498   

Accounts receivable

   12,393      (12,393   —             16,655      (16,655   —     

Inventories, consisting of maintenance supplies inventory and fuel

   11,813      —        11,813           11,174      —        11,174   

Property, plant and equipment

   36,911      —        36,911           35,815      —        35,815   

Other assets

   2,305      —        2,305           3,302      —        3,302   

Accounts payable and accrued liabilities

   (43,621   36,547      (7,074        (47,123   35,368      (11,755

Environmental, land and reclamation liabilities

   (8,152   —        (8,152        (8,557   —        (8,557

Noncontrolling interest (at 51%)

   (6,000   —        (6,000        (6,000   —        (6,000
                                         

St. Ann’s net investment and advances to NJBP

   5,766      24,154      29,920           5,764      18,713      24,477   
                                         

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 we consolidate do not represent additional assets available to satisfy claims against our general assets.

St. Ann receives bauxite from NJBP at cost, excluding certain mining lease fees; 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. In these circumstances, no portion of NJBP’s net income (loss) or consolidated comprehensive income (loss) is allocated to the noncontrolling 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 a LCM or asset impairment scenario.

20. NET INCOME (LOSS) PER SHARE

We present both basic and diluted EPS on the face of the consolidated statements of operations. Basic EPS is calculated as net 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 options (in thousands, except per share).

 

     Three months ended June 30,    Six months ended June 30,
     2009     2010    2009    2010

Net income (loss)

   $ (12,126   $ 6,873    $ 32,153    $ 6,818
                            

Weighted-average common shares outstanding:

          

Basic

     43,487        49,088      43,485      46,443

Effect of diluted securities

     —          1,015      —        637
                            

Diluted

     43,487        50,103      43,485      47,080
                            

Basic EPS

   $ (0.28   $ 0.14    $ 0.74    $ 0.15

Diluted EPS

   $ (0.28   $ 0.14    $ 0.74    $ 0.14

Certain stock options whose terms and conditions are described in Note 15, “Shareholders’ Equity and 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 for the periods presented. Stock options excluded from the computation of diluted EPS were:

 

     Three months ended June 30,    Six months ended June 30,
     2009    2010    2009    2010

Antidilutive options

   1,768,788    —      1,768,788    55,246
                   

21. FAIR VALUE MEASUREMENTS

Fair value is 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

 

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Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

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 use observable inputs in our valuation techniques, and classify those inputs in accordance with the fair value hierarchy established by applicable accounting guidance, which prioritizes those inputs. 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 — Unadjusted quoted prices in active markets for identical assets or liabilities that we have access 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 on an ongoing basis. Fair value measurements that may be subject to Level 1 inputs include exchange-traded derivatives or listed equities.

Level 2 inputs — Inputs other than quoted prices included 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 own assumptions about 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.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

Valuations on a recurring basis

The table below sets forth by level within the fair value hierarchy of our assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2010 (in thousands):

 

     Level 1    Level 2     Level 3    Total Fair
Value
 
     $    $     $    $  

Cash equivalents

   16,369    —        —      16,369   

Derivative assets

   —      1,288      —      1,288   

Derivative liabilities

   —      (49,895   —      (49,895

Pension plan assets:

          

Equity securities:

          

Large capitalization

   53,753    —        —      53,753   

Small and mid capitalization growth

   11,868    16,632      1,319    29,819   

Global mid-capitalization blend

   45,034    —        —      45,034   

Global equity and other

   5,541    970      —      6,511   

Fixed income securities:

          

Global government bonds

   49,681    —        —      49,681   

Government of Jamaica bonds

   7,758    3,019      —      10,777   

Global corporate bonds

   13,322    —        —      13,322   

Mortgage-backed securities

   12,364    —        —      12,364   

Other

   1,486    —        —      1,486   

Cash and cash equivalents

   5,462    1,471      —      6,933   
                      

Total

   222,638    (26,515   1,319    197,442   
                      

Cash equivalents are invested in U.S. treasury securities, short-term treasury bills and commercial paper. These instruments are valued based upon unadjusted, quoted prices in active markets and are classified within Level 1.

Fair values of all derivative instruments are classified as Level 2. Those fair values are primarily measured using industry standard models that incorporate inputs including: quoted forward prices for commodities, interest rates, and current market prices for those assets and liabilities. Substantially all of the inputs are observable throughout the full term of the instrument. The counterparty of our derivative trades is Merrill Lynch, with the exception of a small portion of our variable price aluminum swaps.

Pension plan assets were valued based upon the fair market value of the underlying investments. The majority of plan assets are invested in debt and equity securities traded in active markets, and are classified within Level 1. Certain investments do not have guaranteed liquidity, and are therefore classified as Level 2. Our investment in a small capitalization equity fund that has underlying investments for which significant unobservable inputs were used to determine fair value is classified as Level 3 within the hierarchy. The fair value of the underlying investments are measured based on the original transaction price or recent transactions involving the same or similar instruments. The fair value measurement of investments classified as Level 3 may also reflect adjustments for illiquidity or non-transferability of the underlying investments.

In Note 13, “Long-Term Debt,” we disclose the fair values of our debt instruments. Those fair values are classified as Level 2 within the hierarchy. While the senior floating rate notes have quoted market prices, we do not believe transactions on those instruments occur in sufficient enough frequency or volume to warrant a Level 1 classification. Further, the fair values of the term B loan and revolving credit facility are based on interest rates available at each balance sheet date, resulting in a Level 2 classification as well.

Valuations on a non-recurring basis

Fair value of goodwill, trade names and investment in affiliates (prior to the Joint Venture Transaction) are classified as Level 3 within the hierarchy, as their fair values are measured using management’s assumptions about future profitability and cash flows. 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 reflects the best estimates at the date the valuations were performed. Key assumptions used to determine discounted cash flow valuations at March 31, 2009 and June 30, 2009 and December 31, 2009 include: (a) cash flow periods ranging from five to seven years; (b) terminal values based upon long-term growth rates ranging from 1.0% to 2.0%; and (c) discount rates based on a risk-adjusted weighted average cost of capital ranging from 12.5% to 13.8% for intangibles and to 19.0% for investment in affiliates.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

22. COMMITMENTS AND CONTINGENCIES

Labor commitments

We are a party to six collective bargaining agreements that expire at various times. One agreement at St. Ann expires in December 2010. We expect, during the last half of 2010, to begin renegotiating the bargaining agreement at St. Ann with the University and Allied Workers Union (“UAWU”), which expired on April 30, 2010. Additionally, we have completed the process of formalizing recognition of a third union at St. Ann, with the Bustamante Industrial Trade Union (“BITU”). We are currently in negotiations to finalize terms of the agreement.

Our agreement with the union at Gramercy expires in September 2010. All other collective bargaining agreements expire within the next five years.

Legal contingencies

We are a party to legal proceedings incidental to our business. In the opinion of management, the ultimate liability with respect to these actions will not materially affect our financial position, results of operations, and cash flows.

Environmental matters

In addition to our asset retirement obligations discussed in Note 18, “Reclamation, Land and Asset Retirement Obligations,” we have identified certain environmental conditions requiring remedial action or ongoing monitoring at the Gramercy refinery. As of June 30, 2010, we recorded undiscounted liabilities of $1.3 million and $3.0 million in accrued liabilities and other long-term liabilities, respectively, for remediation of Gramercy’s known environmental conditions. Approximately two-thirds of the recorded liability represents clean-up costs expected to be incurred during the next five years. The remainder represents monitoring costs which will be incurred ratably over a thirty year period. Because the remediation and subsequent monitoring related to these environmental conditions occurs over an extended period of time, these estimates are subject to change based on cost. No other responsible parties are involved in any ongoing environmental remediation activities. 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.

Production Levy

At the end of 2009, the Company and the GOJ reached an amendment to the establishment agreement setting the fiscal regime structure for St. Ann’s bauxite mining operations through December 31, 2014. The amendment covers the fiscal regime, as well as commitments for certain expenditures for haulroad development, maintenance, dredging, land purchases, contract mining, training and other general capital expenditures from 2009 through 2014. We signed the formal amendment with the GOJ on the fiscal structure in June 2010, which did not change the cost structure from the agreement reached in 2009. The terms of the agreement required us to make a $14.0 million prepayment of Jamaican income taxes, of which $10.0 million was paid in June 2010 and the remainder will be paid in April 2011. As of June 30, 2010, $5.0 million of the June 2010 prepayment is recorded in prepaid assets and $5.0 million is in other assets.

Guarantees

In connection with the 2005 disposal of a former subsidiary, American Racing Equipment, Inc (“ARE”), we guaranteed certain outstanding leases for the automotive wheel facilities located in Rancho Dominguez, California. The leases have various expiration dates that extend through December 2011. Since March 2008, we were released from the guarantee obligation on one of the properties, resulting in a reduction of the remaining maximum future lease obligations. As of June 30, 2010 the remaining maximum future payments under these lease obligations totaled approximately $0.8 million. We have concluded that it is not probable that we will be required to make payments pursuant to these guarantees and we have not recorded a liability for these guarantees. Further, ARE’s purchaser has indemnified us for all losses associated with the guarantees.

Power Contract

Electricity is the largest cost component at our New Madrid smelter and is a key factor to our long-term competitive position in the primary aluminum business. We have a power purchase agreement with AmerenUE (“Ameren”) pursuant to which we have agreed to purchase substantially all of New Madrid’s electricity through May 2020. Our current rate structure with Ameren consists of two components: a base rate and a fuel adjustment clause. On June 21, 2010, the Missouri Public Service Commission (“MoPSC”) ruled on the power rate case filed by Ameren on July 24, 2009. The MoPSC’s ruling resulted in no substantive change to the base power rate for the Company’s aluminum smelter in New Madrid.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

23. SEGMENTS

We manage and operate our business segments based on the markets we serve and the products and services provided to those markets. We evaluate performance and allocate resources based on profit from operations before income taxes.

Prior to August 2009, we reported results in two segments: upstream (which included corporate expenses) and downstream. In August 2009, with the completion of the Joint Venture Transaction, we changed our segment reporting so that corporate was a separate segment, and Gramercy and St. Ann were included in the upstream segment.

During first quarter 2010, in connection with continued integration activities of our alumina refinery and our bauxite mining operations, we changed the composition of our reportable segments. Those integration activities included a re-evaluation of the financial information provided to our Chief Operating Decision Maker, as that term is defined in US GAAP. We have now identified five reportable segments, disaggregating the post-Joint Venture Transaction upstream segment into three segments: primary aluminum products, alumina refining and bauxite. The downstream segment will be referred to as the flat rolled products segment. Our corporate expenses are reflected in the corporate segment. All segment information presented herein has been revised to reflect the new structure. These segment changes had no impact on our historical consolidated financial position, results of operations or cash flows.

Our bauxite segment mines and produces the bauxite used for alumina production at our Gramercy refinery, and the remaining bauxite not taken by the refinery is sold to a third party. Our alumina refining segment chemically refines and converts bauxite into alumina, which is the principal raw material used in the production of primary aluminum products. The Gramercy refinery is the source for the vast majority of our New Madrid smelter’s alumina requirements. The remaining alumina production at the Gramercy refinery that is not taken by New Madrid is in the form of smelter grade alumina and alumina hydrate, or chemical grade alumina, and is sold to third parties. The primary aluminum products segment produces value-added aluminum products in several forms: billet, used mainly for building construction, architectural and transportation applications; rod, used mainly for electrical applications and steel deoxidation; value-added sow, used mainly for aerospace; and foundry, used mainly for transportation. In addition to these value-added products, we produce commodity grade sow, the majority of which is used in our rolling mills. Our flat rolled products segment has rolling mill facilities whose major foil products are: finstock, used mainly for the air conditioning, ventilation and heating industry, and container stock, used mainly for food packaging, pie pans and convenience food containers.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

Geographic Region Information

Substantially all of our sales are within the United States. Sales whose country of origin was outside of the United States represented less than 5% of our consolidated sales in 2009 and 2010. All long-lived assets are located in the United States except those assets of our St. Ann bauxite mine comprising $52.9 million at December 31, 2009 and $50.9 million at June 30, 2010, which are located in Jamaica. The following tables summarize the operating results and assets of our reportable segments (in thousands):

 

     Three months ended June 30, 2009 (1)  
     Primary
aluminum
products
    Flat rolled
products
   Corporate     Eliminations     Consolidated  
     $     $    $     $     $  

Sales:

           

External customers

   59,832      97,847    —        —        157,679   

Intersegment

   10,638      —      —        (10,638   —     
                             
   70,470      97,847    —        (10,638   157,679   
                             

Costs and Expenses:

           

Cost of sales

   89,225      85,158    —        (10,638   163,745   

Selling, general and administrative expenses

   (32   2,814    7,935      —        10,717   

Excess insurance proceeds

   (29,185   —      —        —        (29,185
                             
   60,008      87,972    7,935      (10,638   145,277   
                             

Operating income (loss)

   10,462      9,875    (7,935   —        12,402   
                             

Interest expense, net

            14,100   

(Gain) loss on hedging activities, net

            (53,198

Equity in net (income) loss of investments in affiliates

            34,051   

(Gain) loss on debt repurchase

            (12,442
               

Income (loss) before income taxes

            29,891   
               

Depreciation and amortization

   14,718      5,556    78      —        20,352   

Capital expenditures

   10,548      1,367    757      —        12,672   

 

     Three months ended June 30, 2010 (1)  
     Bauxite     Alumina
refining
   Primary
aluminum
products
   Flat rolled
products
   Corporate     Eliminations     Consolidated  
     $     $    $    $    $     $     $  

Sales:

                 

External customers

   10,226      55,847    128,030    140,802    —        —        334,905   

Intersegment

   17,427      40,075    33,559    —      —        (91,061   —     
                                       
   27,653      95,922    161,589    140,802    —        (91,061   334,905   
                                       

Costs and Expenses:

                 

Cost of sales

   22,475      80,447    146,128    132,984    —        (91,061   290,973   

Selling, general and administrative expenses

   6,490      1,487    4,549    1,798    28,806      —        43,130   
                                       
   28,965      81,934    150,677    134,782    28,806      (91,061   334,103   
                                       

Operating income (loss)

   (1,312   13,988    10,912    6,020    (28,806   —        802   
                                       

Interest expense, net

                  8,539   

(Gain) loss on hedging activities, net

                  (20,519

(Gain) loss on debt repurchase

                  2,508   
                     

Income (loss) before income taxes

                  10,274   
                     

Depreciation and amortization

   2,593      4,984    12,185    5,159    205      —        25,126   

Capital expenditures

   1,412      2,584    7,734    2,665    423      —        14,818   

 

(1)

Our bauxite and alumina refining segments are presented subsequent to the Joint Venture Transaction, prior to which the results of Gramercy and St. Ann were reported using the equity method.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

     Six months ended June 30, 2009 (1)  
     Primary
aluminum
products
    Flat rolled
products
    Corporate     Eliminations     Consolidated  
     $     $     $     $     $  

Sales:

          

External customers

   126,914      195,080      —        —        321,994   

Intersegment

   18,856      —        —        (18,856   —     
                              
   145,770      195,080      —        (18,856   321,994   
                              

Costs and Expenses:

          

Cost of sales

   190,275      176,645      —        (18,856   348,064   

Selling, general and administrative expenses

   10,210      6,308      16,425      —        32,943   

Goodwill and other intangible asset impairment

   —        43,000      —        —        43,000   

Excess insurance proceeds

   (29,185   —        —        —        (29,185
                              
   171,300      225,953      16,425      (18,856   394,822   
                              

Operating income (loss)

   (25,530   (30,873   (16,425   —        (72,828
                              

Interest expense, net

           29,974   

(Gain) loss on hedging activities, net

           (98,326

Equity in net (income) loss of investments in affiliates

           78,101   

(Gain) loss on debt repurchase

           (164,650
              

Income (loss) before income taxes

           82,073   
              

Depreciation and amortization

   33,826      11,750      144      —        45,720   

Capital expenditures

   18,762      2,543      1,055      —        22,360   

 

     Six months ended June 30, 2010 (1)  
     Bauxite    Alumina
refining
   Primary
aluminum
products
   Flat rolled
products
   Corporate     Eliminations     Consolidated  
     $    $    $    $    $     $     $  

Sales:

                  

External customers

   25,104    109,706    235,048    266,556    —        —        636,414   

Intersegment

   30,104    77,825    60,089    —      —        (168,018   —     
                                      
   55,208    187,531    295,137    266,556    —        (168,018   636,414   
                                      

Costs and Expenses:

                  

Cost of sales

   42,186    168,048    261,628    252,055    —        (168,018   555,899   

Selling, general and administrative expenses

   9,818    5,273    12,014    6,560    38,466      —        72,131   
                                      
   52,004    173,321    273,642    258,615    38,466      (168,018   628,030   
                                      

Operating income (loss)

   3,204    14,210    21,495    7,941    (38,466   —        8,384   
                                      

Interest expense, net

                   17,786   

(Gain) loss on hedging activities, net

                   (22,282

(Gain) loss on debt repurchase

                   2,612   
                      

Income (loss) before income taxes

                   10,268   
                      

Depreciation and amortization

   5,632    10,365    24,376    10,396    416      —        51,185   

Capital expenditures

   2,946    4,193    15,246    4,487    938      —        27,810   

 

(1)

Our bauxite and alumina refining segments are presented subsequent to the Joint Venture Transaction, prior to which the results of Gramercy and St. Ann were reported using the equity method.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

     December 31, 2009     June 30, 2010  
   $     $  

Segment assets:

    

Bauxite

   125,168      130,050   

Alumina refining

   237,886      221,383   

Primary aluminum products

   612,099      590,722   

Flat rolled products

   382,601      398,306   

Corporate

   373,645      103,480   

Eliminations

   (33,811   (42,213
            

Total assets

   1,697,588      1,401,728   
            

24. SUBSIDIARY ISSUER OF GUARANTEED NOTES

On May 18, 2007, Noranda AcquisitionCo issued $510.0 million senior floating rate notes due 2015 (“the AcquisitionCo Notes”). The AcquisitionCo Notes are senior unsecured obligations of Noranda AcquisitionCo, and are fully and unconditionally guaranteed on a joint and several basis by the parent company, Noranda HoldCo, and by the existing and future wholly owned domestic subsidiaries of Noranda AcquisitionCo that guarantee the senior secured credit facilities. NHB Capital LLC (“NHB”), a 100%-owned subsidiary of Noranda AcquisitionCo, is not a guarantor of the senior secured credit facilities, and is therefore not a guarantor of the AcquisitionCo Notes. St. Ann is also not a guarantor of the AcquisitionCo Notes, as St. Ann is a foreign subsidiary.

As of December 31, 2009, NHB held an investment in HoldCo Notes totaling $105.7 million. During second quarter 2010, NHB delivered to Noranda HoldCo all of its investment in HoldCo Notes, which Noranda HoldCo immediately retired.

The following unaudited 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 (NHB and St. Ann) and eliminations. These unaudited consolidating 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”.

The accounting policies used in the preparation of these unaudited consolidating financial statements are consistent with those found elsewhere in the unaudited condensed consolidated financial statements. Intercompany transactions have been presented gross in the following unaudited consolidating financial statements; however these transactions eliminate in consolidation.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Balance Sheet

December 31, 2009

(dollars expressed in thousands)

(unaudited)

 

     Parent guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantors
    Eliminations     Consolidated  
     $     $     $     $     $     $  

Current assets:

            

Cash and cash equivalents

   21,444      140,520      4,266      1,006      —        167,236   

Accounts receivable, net:

            

Trade

   —        —        82,068      3,462      —        85,530   

Affiliates

   —        5,909      —        10,346      (16,255   —     

Interest due from affiliates

   —        —        —        1,417      (1,417   —     

Inventories

   —        —        155,665      26,691      —        182,356   

Derivative assets, net

   —        —        68,755      —        —        68,755   

Taxes receivable

   —        —        1,053      (323   —        730   

Prepaid expenses

   169      —        24,414      11,834      1      36,418   

Other current assets

   —        2,000      1,991      9,811      6      13,808   
                                    

Total current assets

   21,613      148,429      338,212      64,244      (17,665   554,833   

Investments in affiliates

   278,770      1,291,423      —        105,740      (1,675,933   —     

Advances due from affiliates

   —        2,941      267,202      5,216      (275,359 )   —     

Property, plant and equipment, net

   —        —        692,621      52,877      —        745,498   

Goodwill

   —        —        137,570      —        —        137,570   

Other intangible assets, net

   —        —        79,047      —        —        79,047   

Long-term derivative assets, net

   —        —        95,509      —        —        95,509   

Other assets

   550      17,309      57,783      9,489      —        85,131   
                                    

Total assets

   300,933      1,460,102      1,667,944      237,566      (1,968,957   1,697,588   
                                    

Current liabilities:

            

Accounts payable

            

Trade

   33      2,000      64,378      3,501      —        69,912   

Affiliates

   —        —        10,347      5,908      (16,255   —     

Accrued liabilities

   —        —        45,713      16,248      —        61,961   

Accrued interest:

            

Third parties

   —        167      —        —        —        167   

Affiliates

   1,417     —        —        —        (1,417   —     

Deferred tax liabilities

   (6,481   (16,160   45,377      4,596      (21   27,311   

Current portion of long-term debt

   —        7,500      —        —        —        7,500   
                                    

Total current liabilities

   (5,031   (6,493   165,815      30,253      (17,693   166,851   

Long-term debt, net

   221,418      880,569      —        —        (157,821   944,166   

Pension and OPEB liabilities

   —        —        100,130      6,263      —        106,393   

Other long-term liabilities

   653      2,394      40,073      12,512      —        55,632   

Advances due to affiliates

   2,940      272,417      2      —        (275,359   —     

Deferred tax liabilities

   863      32,445     255,074      3,966      38,034      330,382   

Common stock subject to redemption

   2,000      —        —        —        —        2,000   

Shareholders’ equity:

            

Common stock

   436      —        —        —        —        436   

Capital in excess of par value

   16,123      216,606     1,199,712      83,683      (1,500,001   16,123   

Accumulated deficit

   (136,172   (135,539   (240,594   44,918      392,264      (75,123

Accumulated other comprehensive income

   197,703      197,703      147,732      49,971      (448,381   144,728   
                                    

Total Noranda shareholders’ equity

   78,090      278,770      1,106,850      178,572      (1,556,118   86,164   

Noncontrolling interest

   —        —        —        6,000      —        6,000   
                                    

Total shareholders’ equity

   78,090      278,770      1,106,850      184,572      (1,556,118   92,164   
                                    

Total liabilities and shareholders’ equity

   300,933      1,460,102      1,667,944      237,566      (1,968,957   1,697,588   
                                    

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Balance Sheet

June 30, 2010

(dollars expressed in thousands)

(unaudited)

 

     Parent guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantors
    Eliminations     Consolidated  
     $     $     $     $     $     $  

Current assets:

            

Cash and cash equivalents

   7,082      18,956      3,359      2,281      —        31,678   

Accounts receivable, net:

            

Trade

   —        —        115,190      3,425      —        118,615   

Affiliates

   21,105      7,250      785      8,387      (37,527   —     

Inventories

   —        —        156,286      30,725      (849   186,162   

Taxes receivable

   18,915      16,336      (24,906   (1,978   912      9,279   

Prepaid assets

   188      —        4,093      11,573      1      15,855   

Other current assets

   —        —        7,955      6,635      6      14,596   
                                    

Total current assets

   47,290      42,542      262,762      61,048      (37,457   376,185   
                                    

Investments in affiliates

   220,226      1,244,865      —        —        (1,465,091   —     

Advances due from affiliates

   —        19,351      494,720      63,524      (577,595   —     

Property, plant and equipment, net

   —        —        673,397      50,939      —        724,336   

Goodwill

   —        —        137,570      —        —        137,570   

Other intangible assets, net

   —        —        76,019      —        —        76,019   

Other assets

   —        13,878      58,892      14,848      —        87,618   
                                    

Total assets

   267,516      1,320,636      1,703,360      190,359      (2,080,143   1,401,728   
                                    

Current liabilities:

            

Accounts payable:

            

Trade

   251      —        80,766      8,616      —        89,633   

Affiliates

   —        21,105      8,386      8,036      (37,527   —     

Accrued liabilities

   —        —        41,364      13,159      —        54,523   

Accrued interest

   —        894      —        —        —        894   

Derivative liabilities, net

   —        —        26,136      —        —        26,136   

Deferred tax liabilities

   (16,704   (45,378   75,130      4,596      (1,652   15,992   
                                    

Total current liabilities

   (16,453   (23,379   231,782      34,407      (39,179   187,178   
                                    

Long-term debt, net

   —        553,713      —        —        —        553,713   

Long-term derivative liabilities, net

   —        —        22,471      —        —        22,471   

Pension and OPEB liabilities

   —        —        105,634      6,653      —        112,287   

Other long-term liabilities

   79      2,446      39,221      12,374      —        54,120   

Advances due to affiliates

   77,660      499,931      —        4      (577,595   —     

Deferred tax liabilities

   57,477      67,699      195,916      392      (4,278   317,206   

Common stock subject to redemption

   2,000      —        —        —        —        2,000   

Shareholders’ equity:

            

Preferred stock

   —        —        —        —        —        —     

Common stock

   551      —        —        —        —        551   

Capital in excess of par value

   102,890      229,605      1,199,713      83,683      (1,513,001   102,890   

Accumulated deficit

   (68,305   (120,996   (205,998   49,850      277,144      (68,305

Accumulated other comprehensive income

   111,617      111,617      114,621      (3,004   (223,234   111,617   
                                    

Total Noranda shareholders’ equity

   146,753      220,226      1,108,336      130,529      (1,459,091   146,753   

Noncontrolling interest

   —        —        —        6,000      —        6,000   
                                    

Total shareholders’ equity

   146,753      220,226      1,108,336      136,529      (1,459,091   152,753   
                                    

Total liabilities and shareholders’ equity

   267,516      1,320,636      1,703,360      190,359      (2,080,143   1,401,728   
                                    

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Statement of Operations

Three months ended June 30, 2009

(dollars expressed in thousands)

(unaudited)

 

     Parent guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantor
    Eliminations    Consolidated  
     $     $     $     $     $    $  

Sales

   —        —        157,679      —        —      157,679   

Operating costs and expenses:

             

Cost of sales

   —        —        163,745      —        —      163,745   

Selling, general and administrative expenses

   716      949      9,045      7      —      10,717   

Excess insurance proceeds

   —        —        (29,185   —        —      (29,185
                                   
   716      949      143,605      7      —      145,277   
                                   

Operating income (loss)

   (716   (949   14,074      (7   —      12,402   
                                   

Other expenses (income)

             

Interest expense (income), net

   5,073      14,012      (2,076   (2,909   —      14,100   

Gain on hedging activities, net

   —        —        (53,198   —        —      (53,198

Gain on early extinguishment of debt

   (530   (11,912   —        —        —      (12,442

Equity in net income of unconsolidated subsidiaries

   —        —        34,051      —        —      34,051   
                                   

Total other (income) expenses

   4,543      2,100      (21,223   (2,909   —      (17,489
                                   

Income (loss) before income taxes

   (5,259   (3,049   35,297      2,902      —      29,891   

Income tax expense (benefit)

   1,009      340      36,974      3,694      —      42,017   

Equity in net income of subsidiaries

   (5,858   (2,469   —        —        8,327    —     
                                   

Net income (loss) for the period

   (12,126   (5,858   (1,677   (792   8,327    (12,126
                                   

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Statement of Operations

Three months ended June 30, 2010

(dollars expressed in thousands)

(unaudited)

 

     Parent guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantors
    Eliminations     Consolidated  
     $     $     $     $     $     $  

Sales

   —        —        324,679      27,653      (17,427   334,905   

Operating costs and expenses:

            

Cost of sales

   —        —        285,925      22,475      (17,427   290,973   

Selling, general and administrative expenses

   4,106      17,966      14,561      6,497      —        43,130   
                                    
   4,106      17,966      300,486      28,972      (17,427   334,103   
                                    

Operating income (loss)

   (4,106   (17,966   24,193      (1,319   —        802   
                                    

Other (income) expenses

            

Interest expense (income), net

   2,271      7,591      62      (1,385   —        8,539   

Gain on hedging activities, net

   —        —        (20,519   —        —        (20,519

Loss on debt repurchase

   960      1,548      —        —        —        2,508   
                                    

Total other (income) expenses

   3,231      9,139      (20,457   (1,385   —        (9,472
                                    

Income (loss) before income taxes

   (7,337   (27,105   44,650      66      —        10,274   

Income tax expense (benefit)

   (2,201   (8,862   14,421      43      —        3,401   

Equity in net income of subsidiaries

   12,009      30,252      —        —        (42,261   —     
                                    

Net income (loss) for the period

   6,873      12,009      30,229      23      (42,261   6,873   
                                    

 

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NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Statement of Operations

Six months ended June 30, 2009

(dollars expressed in thousands)

(unaudited)

 

     Parent guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantor
    Eliminations    Consolidated  
     $     $     $     $     $    $  

Sales

   —        —        321,994      —        —      321,994   

Operating costs and expenses:

             

Cost of sales

   —        —        348,064      —        —      348,064   

Selling, general and administrative expenses

   1,632      1,455      29,849      7      —      32,943   

Goodwill and other intangible asset impairment

   —        —        43,000      —        —      43,000   

Excess insurance proceeds

   —        —        (29,185   —        —      (29,185
                                   
   1,632      1,455      391,728      7      —      394,822   
                                   

Operating loss

   (1,632   (1,455   (69,734   (7   —      (72,828
                                   

Other expenses (income)

             

Interest expense (income), net

   9,588      27,621      170      (7,405   —      29,974   

Gain on hedging activities, net

   —        —        (98,326   —        —      (98,326

Gain on debt repurchase

   (11,009   (153,641   —        —        —      (164,650

Equity in net income of unconsolidated subsidiaries

   —        —        78,101      —        —      78,101   
                                   

Total other (income) expenses

   (1,421   (126,020   (20,055   (7,405   —      (154,901
                                   

Income (loss) before income taxes

   (211   124,565      (49,679   7,398      —      82,073   

Income tax expense

   3,171      14,408      28,139      4,202      —      49,920   

Equity in net income of subsidiaries

   35,535      (74,622   —        —        39,087    —     
                                   

Net income (loss) for the period

   32,153      35,535      (77,818   3,196      39,087    32,153   
                                   

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Statement of Operations

Six months ended June 30, 2010

(dollars expressed in thousands)

(unaudited)

 

     Parent guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantors
    Eliminations     Consolidated  
     $     $     $     $     $     $  

Sales

   —        —        611,310      55,208      (30,104   636,414   

Operating costs and expenses:

            

Cost of sales

   —        —        543,817      42,186      (30,104   555,899   

Selling, general and administrative expenses

   4,837      18,486      38,977      9,831      —        72,131   
                                    
   4,837      18,486      582,794      52,017      (30,104   628,030   
                                    

Operating income (loss)

   (4,837   (18,486   28,516      3,191      —        8,384   
                                    

Other (income) expenses

            

Interest expense (income), net

   6,173      15,573      166      (4,126   —        17,786   

Gain on hedging activities, net

   —        —        (22,282   —        —        (22,282

Loss on debt repurchase

   960      1,652      —        —        —        2,612   
                                    

Total other (income) expenses

   7,133      17,225      (22,116   (4,126   —        (1,884
                                    

Income (loss) before income taxes

   (11,970   (35,711   50,632      7,317      —        10,268   

Income tax expense (benefit)

   (3,603   (11,642   16,310      2,385      —        3,450   

Equity in net income of subsidiaries

   15,185      39,254      —        —        (54,439   —     
                                    

Net income (loss) for the period

   6,818      15,185      34,322      4,932      (54,439   6,818   
                                    

 

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Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

NORANDA ALUMINUM HOLDING CORPORATION

Condensed Consolidating Statement of Cash Flows

Six months ended June 30, 2009

(dollars expressed in thousands)

(unaudited)

 

     Parent guarantor
(Noranda  HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantors
    Eliminations     Consolidated  
     $     $     $     $     $     $  

OPERATING ACTIVITIES

            

Cash provided by (used in) operating activities

   (3,861   86,630      25,569      487      (695   108,130   

INVESTING ACTIVITIES

            

Capital expenditures

   —        —        (22,360   —        —        (22,360

Purchase of debt

   —        —        —        (34,212   34,212      —     

Proceeds from insurance related to capital expenditures

   —        —        7,161      —        —        7,161   
                                    

Cash provided by (used in) investing activities

   —        —        (15,199   (34,212   34,212      (15,199
                                    

FINANCING ACTIVITIES

            

Proceeds from issuance of shares

   41      —        —        —        —        41   

Repurchase of shares

   (90   —        —        —        —        (90

Repayment of debt

   —        (24,500   —        —        —        (24,500

Repurchase of debt

   (2,673   (34,650   —        —        (33,517   (70,840

Intercompany advances

   3,049      (3,808   —        759      —        —     

Capital contribution (to subsidiary) from parent

   —        (33,000   —        33,000      —        —     

Distribution (to parent from subsidiary)

   980      (980   —        —        —        —     
                                    

Cash provided by (used in) financing activities

   1,307      (96,938   —        33,759      (33,517   (95,389
                                    

Change in cash and cash equivalents

   (2,554   (10,308   10,370      34      —        (2,458

Cash and cash equivalents, beginning of period

   24,101      159,994      621      —        —        184,716   
                                    

Cash and cash equivalents, end of period

   21,547      149,686      10,991      34      —        182,258   
                                    

 

35


Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

 

NORANDA ALUMINUM HOLDING CORPORATION

Condensed Consolidating Statement of Cash Flows

Six months ended June 30, 2010

(dollars expressed in thousands)

(unaudited)

 

     Parent guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantors
    Eliminations    Consolidated  
     $     $     $     $     $    $  

OPERATING ACTIVITIES

             

Cash provided by (used in) operating activities

   (31,842   222,781      23,829      4,186      —      218,954   

INVESTING ACTIVITIES

             

Capital expenditures

   —        —        (24,864   (2,946   —      (27,810

Proceeds from sale of property, plant and equipment

   —        —        128      35      —      163   
                                   

Cash used in investing activities

   —        —        (24,736   (2,911   —      (27,647
                                   

FINANCING ACTIVITIES

             

Proceeds from issuance of shares

   82,929      —        —        —        —      82,929   

Repayments on revolving credit facility

   —        (215,930   —        —        —      (215,930

Repurchase of shares

   (16   —        —        —        —      (16

Repayment of long-term debt

   (66,348   (127,500   —        —        —      (193,848

Distribution (to parent from subsidiary)

   915      (915   —        —        —      —     
                                   

Cash provided by (used in) financing activities

   17,480      (344,345   —        —        —      (326,865
                                   

Change in cash and cash equivalents

   (14,362   (121,564   (907   1,275      —      (135,558

Cash and cash equivalents, beginning of period

   21,444      140,520      4,266      1,006      —      167,236   
                                   

Cash and cash equivalents, end of period

   7,082      18,956      3,359      2,281      —      31,678   
                                   

 

36


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Unless otherwise specified or unless the context otherwise requires, references to (i) “Noranda HoldCo” refer only to Noranda Aluminum Holding Corporation, excluding its subsidiaries; (ii) “AcquisitionCo” refer only to Noranda Aluminum Acquisition Corporation, the wholly owned direct subsidiary of Noranda HoldCo, excluding its subsidiaries; (iii) “the Company,” “Noranda,” “we,” “us” and “our” refer collectively to Noranda HoldCo and its subsidiaries; and (iv) “Apollo” collectively refers to Apollo Management, L.P. and its affiliates.

We are a vertically integrated producer of value-added primary aluminum products and high quality rolled aluminum coils. We have two businesses: our upstream business and downstream business. Our upstream business consists of three reportable segments: primary aluminum products, alumina refining, and bauxite. These three segments are closely integrated and consist of an aluminum smelter near New Madrid, Missouri, which we refer to as “New Madrid,” and supporting operations at our bauxite mining operations in St. Ann, Jamaica (Noranda Bauxite Limited, or “St. Ann”) and our alumina refinery in Gramercy, Louisiana (Noranda Alumina, LLC, or “Gramercy”). New Madrid has annual production capacity of approximately 580 million pounds (263,000 metric tonnes), which represented more than 15% of total 2009 U.S. primary aluminum production, based on statistics from the Aluminum Association. Our flat rolled products segment, or downstream business, 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 segment consists of our corporate expenses.

Our second quarter 2010 results reflect these significant events:

 

   

Demand conditions remained strong during second quarter 2010, particularly across the majority of product groups in our flat rolled products segment, for billet in the primary aluminum products segment, and for chemical grade alumina product in the alumina segment. In the primary aluminum products segment, we saw improved demand for rod during second quarter 2010, following some weakness for that product in the previous quarter.

 

   

Although realized pricing was strong in second quarter 2010 compared to second quarter 2009, during second quarter 2010, the London Metal Exchange (“LME”) aluminum price fell from $1.06 per lb at the beginning of the quarter to $0.87 per lb at the end of the quarter. Industry analysts generally attribute the price decline to worries over the debt burden of certain European economies, a mixed picture on the strength of the U.S. recovery, and fears of more monetary tightening in China.

 

   

Rising aluminum prices and Midwest premiums, stronger demand in the flat rolled products segment, and the impact of our New Madrid smelter being fully operational throughout second quarter 2010 had a favorable impact on second quarter 2010 operating results compared to second quarter 2009.

 

   

For the six months ended June 30, 2010, operating cash flow was $219.0 million, including $164.6 million of proceeds from hedge terminations. For the six months ended June 30, 2009, our operating activities generated $108.1 million of cash flows, including $70.1 million of proceeds from hedge terminations.

 

   

For the second quarter 2010, our program which includes productivity improvement and cost reduction initiatives (which we refer to as “CORE”), contributed over $15.0 million in cost reduction, capital avoidance, and cash generation.

 

   

In May, 2010, we completed our IPO of 11,500,000 shares of common stock at a public offering price of $8.00 per share (NYSE: NOR). We used the $82.9 million net offering proceeds, together with $95.9 million of proceeds from terminating our remaining fixed-price aluminum sale swaps, to repurchase the remaining $66.3 million principal amount of our outstanding HoldCo Notes and to repay $110.0 million of our term B loan principal.

 

   

Electricity is the largest cost component at our New Madrid smelter and is a key factor to our long-term competitive position in the primary aluminum business. We have a power purchase agreement with AmerenUE (“Ameren”) pursuant to which we have agreed to purchase substantially all of New Madrid’s electricity through May 2020. Our current rate structure with Ameren consists of two components: a base rate and a fuel adjustment clause. On June 21, 2010, the MoPSC ruled on the power rate case filed by Ameren on July 24, 2009. The MoPSC’s ruling resulted in no substantive change to base power rate for the Company’s aluminum smelter in New Madrid. In June 2010, we received notice of a fuel adjustment totaling approximately $0.5 million per month from June 2010 through September 2010. It is reasonably possible that we will have additional fuel charges after September, although the amount of such charges, if any, cannot be estimated.

 

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On June 24, 2010 we finalized a definitive amendment to the establishment agreement with the GOJ, pursuant to the agreement reached at the end of 2009 setting the fiscal regime structure for St. Ann’s bauxite mining operations through December 31, 2014.

 

   

In connection with a decision to contract the substantial portion of our bauxite mining to third party contractors, on April 21, 2010, we announced a workforce reduction in our Jamaican bauxite mining operations. The workforce restructuring plan reduced headcount by approximately 160 employees through a combination of voluntary retirement packages and involuntary terminations. These actions resulted in $3.0 million of pre-tax charges recorded in second quarter 2010.

 

   

Upon completion of our initial public offering in second quarter 2010, as permitted by the terms of that management agreement, Apollo terminated the agreement and received $12.5 million in accelerated management fees due upon termination of the management agreement.

Forward-looking Statements

This report contains “forward-looking statements” which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements herein are based upon information available to us on the date of this report.

Important factors that could cause actual results to differ materially from our expectations, which we refer to as cautionary statements, are disclosed herein under “Item 1A. Risk Factors”, including, without limitation, in conjunction with the forward-looking statements included in this report. All forward-looking information in this report and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. In light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. Accordingly, investors should not place undue reliance on those statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). Preparation of these statements requires management to make significant judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. Our financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. The preparation of interim financial statements involves the use of certain estimates that are consistent with those used in the preparation of our annual financial statements. See Note 1, “Accounting Policies” of the notes to our consolidated financial statements for the fiscal year ended December 31, 2009 included in our Annual Report on Form 10-K, filed March 2, 2010 and our Form 8-K filed with the SEC on April 26, 2010 to reflect the effects of a change in segments and a two-for-one stock split, for a discussion of our critical accounting policies. Hereinafter, “Note” refers to the notes to the condensed consolidated financial statements elsewhere in this report unless the context otherwise requires.

 

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Results of Operations

 

     Three months ended June 30,     Six months ended June 30,  
     2009     2010     2009     2010  
     $     $     $     $  

Statements of Operations Data (in millions) (1):

        

Sales

   157.7      334.9      322.0      636.4   

Operating costs and expenses:

        

Cost of sales

   163.8      291.0      348.1      555.9   

Selling, general and administrative expenses

   10.7      43.1      32.9      72.1   

Goodwill and other intangible asset impairment

   —        —        43.0      —     

Excess insurance proceeds

   (29.2   —        (29.2   —     
                        
   145.3      334.1      394.8      628.0   
                        

Operating income (loss)

   12.4      0.8      (72.8   8.4   
                        

Other expenses (income)

        

Interest expense, net

   14.1      8.5      30.0      17.8   

Gain on hedging activities, net

   (53.2   (20.5   (98.3   (22.3

Equity in net loss of investments in affiliates

   34.0      —        78.1      —     

(Gain) loss on debt repurchase

   (12.4   2.5      (164.7   2.6   
                        

Income before income taxes

   29.9      10.3      82.1      10.3   

Income tax expense

   42.0      3.4      49.9      3.5   
                        

Net income (loss) for the period

   (12.1   6.9      32.2      6.8   
                        

Net income (loss) per share

        

Basic

   (0.28   0.14      0.74      0.15   

Diluted

   (0.28   0.14      0.74      0.14   

Weighted-average shares outstanding (in millions)

        

Basic

   43.49      49.09      43.49      46.44   

Diluted

   43.49      50.10      43.49      47.08   

Sales by segment (in millions):

        

Bauxite

   —        27.7      —        55.2   

Alumina refining

   —        95.9      —        187.5   

Primary aluminum products

   70.5      161.6      145.8      295.1   

Flat rolled products

   97.8      140.8      195.1      266.6   

Eliminations

   (10.6   (91.1   (18.9   (168.0
                        

Total

   157.7      334.9      322.0      636.4   

Operating income(1) (in millions):

        

Bauxite

   —        (1.3   —        3.2   

Alumina refining

   —        14.0      —        14.2   

Primary aluminum products

   10.5      10.9      (25.5   21.5   

Flat rolled products

   9.9      6.0      (30.9   7.9   

Corporate

   (7.9   (28.8   (16.4   (38.5
                        

Total

   12.4      0.8      (72.8   8.4   

Financial and other data:

        

Average realized Midwest transaction price per pound(2)

   0.71      1.04      0.70      1.04   

Integrated net cash cost for primary aluminum products (per pound shipped)(3)

   0.67      0.66      0.76      0.69   

Shipments:

        

Third party shipments:

        

Bauxite (kMts)

   —        333.2      —        822.2   

Alumina refining (kMts)

   —        170.4      —        342.6   

Primary aluminum products (pounds, in millions)

   68.7      113.1      145.3      208.2   

Flat rolled products (pounds, in millions)

   79.2      91.9      150.9      175.7   

Intersegment shipments:

        

Bauxite (kMts)

   —        726.3      —        1,254.3   

Alumina (kMts)

   —        127.9      —        229.2   

Primary aluminum products (pounds, in millions)

   15.4      33.4      27.6      59.1   

 

(1)

Figures may not add due to rounding.

 

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(2)

The price for primary aluminum products consists of two components: the price quoted for primary aluminum ingot by the London Metal Exchange (“LME”) and the Midwest transaction premium, a premium to LME price reflecting domestic market dynamics as well as the cost of shipping and warehousing. As a significant portion of our value-added products are sold at the prior month’s MWTP plus a fabrication premium, we calculate a “realized” MWTP which reflects the specific pricing of sale transactions in each period.

(3)

Unit integrated net cash cost for primary aluminum products per pound represents our integrated net cash cost of producing commodity grade aluminum as priced on the LME plus the Midwest premium. We have provided unit integrated net cash cost for primary aluminum products per pound shipped because we believe it provides investors with additional information to measure our operating performance. Using this metric, investors are able to assess the prevailing LME price plus Midwest premium per pound versus our unit integrated net cash cost per pound shipped. Unit integrated net cash cost per pound is positively or negatively impacted by changes in LME price, third party bauxite and alumina prices, 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. Unit integrated 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. Unit integrated net cash cost per pound shipped has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results under U.S. GAAP.

The following table summarizes the unit integrated net cash cost for primary aluminum for the periods presented:

 

     Three months ended June 30,    Six months ended June 30,
     2009    2010    2009    2010
     $    $    $    $

Total upstream integrated net cash cost (in millions)

   55.9    96.4    131.8    183.9

Total primary aluminum shipments (pounds in millions)

   84.1    146.5    172.9    267.3
                   

Net upstream integrated net cash cost for primary aluminum

   0.67    0.66    0.76    0.69
                   

The following table reconciles cost of sales to the integrated net cash cost for primary aluminum for the periods presented:

 

     Three months ended June 30,     Six months ended June 30,  
     2009     2010     2009     2010  

(in millions)

   $     $     $     $  

Bauxite cost of sales

   —        22.5      —        42.2   

Alumina refining cost of sales

   —        80.4      —        168.0   

Primary aluminum products cost of sales

   89.2      146.1      190.3      261.6   

Flat rolled products cost of sales

   85.2      133.0      176.6      252.1   

Intersegment cost of sales

   (10.6   (91.0   (18.8   (168.0
                        

Total cost of sales

   163.8      291.0      348.1      555.9   
                        

Primary aluminum products cost of sales

   89.2      146.1      190.3      261.6   

LIFO and lower of cost or market adjustments(a )

   1.4      (6.8   1.4      (6.5

Fabrication premium(b )

   (7.8   (9.7   (15.6   (17.6

Depreciation and amortization expense

   (14.7   (11.2   (33.8   (23.4

Alumina and bauxite impact( c)

   (4.6   (26.9   (7.9   (38.1

Selling, general and administrative expenses( d)

   (0.2   3.9      7.1      7.4   

Other(e )

   (7.4   1.0      (9.7   0.5   
                        

Total upstream integrated net cash cost of primary aluminum products

   55.9      96.4      131.8      183.9   
                        

 

(a)

Reflects the conversion from last-in, first-out (“LIFO”) to first-in, first-out (“FIFO”) method of inventory costing, including removing the effects of adjustments to reflect the lower of cost or market value.

(b)

Our value-added products, such as billet, rod and foundry, earn a fabrication premium over the MWTP. To allow comparison of our upstream per unit costs to the MWTP, we net the fabrication premium in determining upstream integrated net cash cost for primary aluminum.

(c)

Our upstream business is fully integrated from bauxite mined by St. Ann to alumina produced by Gramercy to primary aluminum metal manufactured by our aluminum smelter in New Madrid, Missouri. To reflect the underlying economics of the vertically integrated upstream business, this adjustment reflects the favorable impact that third-party joint venture sales have on our integrated net cash cost for primary aluminum, as well as post-integration intercompany alumina cost of sales eliminations.

(d)

Represents certain selling, general and administrative expenses which management believes are a component of integrated net cash cost for primary aluminum, but which are not included in cost of goods.

(e)

Reflects various other cost adjustments, such as the elimination of the effects of any intercompany profit in inventory, derivative cash settlements and non-cash pension and accretion.

 

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Discussion of Operating Results

The following discussion of the historical results of operations is presented for the three and six months ended June 30, 2009 and June 30, 2010.

You should read the following discussion of our results of operations and financial condition in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere herein.

Three months ended June 30, 2009 compared to three months ended June 30, 2010.

Sales

Sales in the three months ended June 30, 2010 were $334.9 million compared to $157.7 million in the three months ended June 30, 2009.

Sales to external customers from our primary aluminum products segment were $128.0 million, up from $59.8 million reported in three months ended June 30, 2009, driven primarily by the increase in LME prices, higher volumes of value-added shipments related to increased end-market demand and higher sow volumes related to the New Madrid power outage in the prior year.

 

   

The increase in pricing, due to a 46.5% increase in realized MWTP, impacted external revenues by $29.6 million. In the three months ended June 30, 2009 and the three months ended June 30, 2010, average realized MWTP per pound was $0.71 and $1.04, respectively.

 

   

Total primary aluminum shipments for the three months ended June 30, 2010 increased to 146.5 million pounds or 74.2% compared to the three months ended June 30, 2009.

 

   

Intersegment shipments to our flat rolled products segment increased 18.0 million pounds to 33.4 million pounds as a result of the New Madrid smelter becoming fully operational during first quarter 2010.

 

   

External primary aluminum shipments increased to 113.1 million pounds in the three months ended June 30, 2010 from 68.7 million pounds in the three months ended June 30, 2009. This 64.6% increase in external shipments resulted in higher external revenues of $38.6 million and is largely the result of the New Madrid smelter becoming fully operational during first quarter 2010. Shipments of value-added products in the three months ended June 30, 2010 increased 67.3% compared to the three months ended June 30, 2009. This higher volume was driven by increased end-market demand and increased demand for higher purity products.

Sales in our flat rolled products segment were $140.8 million, up from $97.8 million during the three months ended June 30, 2009, primarily due to the increase in LME prices, as well as higher shipments to external customers.

 

   

Rising LME prices contributed $27.3 million to the sales increase. Additionally, fabrication premiums were slightly higher during the three months ended June 30, 2010 compared the same 2009 period.

 

   

Higher shipment volumes increased revenues by $15.7 million. Shipment volumes from our flat rolled products segment increased 16.0% to 91.9 million pounds primarily due to higher end-market demand.

Sales to external customers from our alumina refining and bauxite segments for the three months ended June 30, 2010 were $55.8 million and $10.2 million, respectively. There were no such sales in the prior year as we did not acquire the remaining 50% interests until the third quarter of 2009. Intercompany shipments from the alumina refining and bauxite segments for the quarter ended June 30, 2010 were 127.9 million kMts and 726.3 million kMts, respectively.

Cost of sales

 

   

Cost of sales for the three months ended June 30, 2010 was $291.0 million compared to $163.8 million in the three months ended June 30, 2009. The increase in cost of sales is mainly the result of higher shipment volumes for value-added products to external customers, as well as increased LME prices, which is reflected in the pass-through nature of the downstream business. Total cost of sales in the primary aluminum products segment increased to $146.1 million in second quarter 2010 from $89.2 million in second quarter 2009. The increase relates to several factors, including a 74.2% increase in total shipments of primary aluminum due to the factors referenced in the discussion of sales, offset by (i) decreased depreciation expense related to certain fixed assets which became fully-depreciated in second quarter 2009, and (ii) a reduction in our integrated net cash cost to produce primary aluminum from $0.76 per pound in the first six months of 2009, to $0.66 per pound in second quarter 2010.

 

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Flat rolled products segment cost of sales increased to $133.0 million in second quarter 2010 from $85.2 million in second quarter 2009. The increase related principally to the increase in the LME aluminum price, since much of that segment’s product cost represents the pass-through cost of metal.

 

   

Cost of sales in the bauxite and alumina refining segments, before the effects of intercompany eliminations, totaled $22.5 million and $80.4 million, respectively during second quarter 2010. These two segments principally reflect the cost of sales for St. Ann and Gramercy, respectively, of which we became sole owners on August 31, 2009, and have no corresponding costs for second quarter 2009.

The production outage at New Madrid negatively impacted our integrated net cash cost of primary aluminum in 2009. Although insurance proceeds covered the costs and losses associated with our outage and returning the smelter to operation, our coverage did compensate us for inefficiencies associated with operating our integrated upstream business significantly below capacity. We estimate that due to lost production volume in 2009 from the smelter outage, which caused a loss of efficiency and fixed cost absorption, our integrated net cash cost of primary aluminum for the year ended December 31, 2009 of $0.77 per pound was negatively impacted by $0.05 per pound.

During second quarter 2010, the integrated net cash cost of primary aluminum was approximately $0.66 per pound. The decrease in integrated net cash cost reflects efficiencies gained from the smelter becoming fully operational during first quarter 2010 (average operating capacity during second quarter 2009 was 51.2%), as well as the impact of third party alumina and bauxite sales, and productivity savings from our CORE productivity program. Intercompany transfer prices for alumina in 2010 are indexed to LME, whereas 2009 transfer prices were at cost. Gramercy’s costs to produce alumina in 2009 were higher than 2010 due to inefficiencies related to operating at less than 60% of capacity.

Selling, general and administrative expenses

Selling, general and administrative expenses in the three months ended June 30, 2010 were $43.1 million compared to $10.7 million in the three months ended June 30, 2009. The increase relates primarily to (i) $5.2 million of costs associated with the inclusion of Gramercy and St. Ann since the completion of the Joint Venture Transaction; whereby we became sole owner of Gramercy and St. Ann on August 31. 2009, (ii) a $12.5 million expense to terminate our management consulting agreement with Apollo, upon completion of our initial public offering, (iii) $6.0 million in increased consulting costs and professional fees which were primarily transaction-related legal fees (iv) increases in stock compensation expense of $3.2 million related to a change in vesting of certain stock options in connection with the IPO and (v) $3.0 million of restructuring costs associated with our decision to move to contract mining at our bauxite mine

Goodwill and other intangible asset impairment

We recorded a $43.0 million impairment charge in our flat rolled products segment in the three months ended June 30, 2009. We evaluate Goodwill for impairment annually in the fourth quarter, or more often upon the occurrence of certain triggering events. No goodwill impairment was necessary for the three months ended June 30, 2010.

Excess insurance proceeds

We reached an insurance settlement with our primary insurance carrier in the three months ended June 30, 2009. The expected settlement proceeds of $49.1 million were allocated to cost of sales and selling, general and administrative expenses to the extent losses were realized and eligible for recovery under our insurance policies. The line item titled “Excess insurance proceeds” reflects the residual after applying the total expected proceeds recognized against losses incurred through June 30, 2009. This amount is not intended to represent a gain on the insurance claim, but only a timing difference between proceeds recognized and claim-related costs incurred.

Operating income

Operating income in the three months ended June 30, 2010 was $0.8 million compared to $12.4 million in the three months ended June 30, 2009. Operating income in second quarter 2010 compared to second quarter 2009 was impacted significantly by the effects of certain special items listed below. Additionally, the increase in operating income relates to quarter-over-quarter sales margin (sales minus cost of sales) improvements of $50.0 million, offset in part by $32.4 million increase in selling, general and administrative expenses.

 

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Special items during the three months ended June 30, 2009 and 2010 are outlined below (in millions):

 

     Three months ended June 30,  
     2009    2010  
     Increase (decrease) to operating income    
     $    $  

Special items:

     

Insurance recoveries in excess of cost and losses

   29.2    —     

Management agreement termination

   —      (12.5

Modification of stock options

   —      (3.2

Other transaction related legal costs

   —      (5.2

Restructuring, primarily related to contract mining

   —      (3.2

LIFO and LCM

   2.2    (9.9
           

Total

   31.4    (34.0
           

Sales margin for the three months ended June 30, 2010 was $43.9 million compared to a $6.1 million loss in the three months ended June 30, 2009. This increase resulted from the increase in realized MWTP coupled with efficiencies gained in bringing the smelter back to full production.

Selling, general and administrative expenses were $43.1 million in the three months ended June 30, 2010 compared to $10.7 million in the three months ended June 30, 2009, due to increased costs associated with the Joint Venture Transaction, the payment to terminate the consulting agreement with Apollo, increased stock compensation costs and restructuring costs related to contract mining.

Interest expense, net

Interest expense in the three months ended June 30, 2010 was $8.5 million compared to $14.1 million in the three months ended June 30, 2009, a decrease of $5.6 million. Decreased interest expense is related to lower average debt outstanding on the term B loan and revolving credit facility and repurchases of the AcquisitionCo Notes and HoldCo Notes.

Gain on hedging activities, net

Gain on hedging activities was $20.5 million in the three months ended June 30, 2010 compared to $53.2 million in the three months ended June 30, 2009. For the three months ended June 30, 2010, the amount reclassified from accumulated other comprehensive income to earnings was $20.7 million from aluminum and natural gas hedges compared to $69.9 million in the three months ended June 30, 2009.

Equity in net loss of investments in affiliates

We had no equity in net income of investments in affiliates for the three months ended June 30, 2010, compared to a loss of $34.0 million for the three months ended June 30, 2009. Such prior year loss related to impairment write-downs of our equity investments. Following the Joint Venture Transaction, which occurred in August 2009, we no longer account for any subsidiaries using the equity method of accounting.

(Gain) loss on debt repurchase

During second quarter, 2010, we repaid $110.0 million of our term B loan principal and the remaining $66.3 million principal balance of our outstanding HoldCo Notes using proceeds from the IPO and from the termination of our remaining fixed-price aluminum sale swaps. These debt repayments resulted in a loss on debt repurchase of $2.5 million due to the accelerated amortization of the debt discount and deferred financing costs upon repayment of the obligations. During second quarter, 2009, we repurchased $58.5 million aggregate principal amount of outstanding HoldCo Notes, AcquisitionCo Notes, term B loan and revolving credit facility for a price of $44.8 million plus fees, resulting in a $12.4 million gain.

 

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Income before income taxes

Income before income taxes was $10.3 million in the three months ended June 30, 2010 compared to a $29.9 million in the three months ended June 30, 2009. The special items outlined below significantly impacted the comparability of our pre-tax income:

Special items during the three months ended June 30, 2009 and 2010 are outlined below (in millions):

 

     Three months ended June 30,  
     2009     2010  
     Increase (decrease) to pre-tax income  
     $     $  

Special items:

    

Insurance recoveries in excess of cost and losses

   29.2      —     

Management agreement termination

   —        (12.5

Modification of stock options

   —        (3.2

Other transaction related legal costs

   —        (5.2

Restructuring, primarily related to contract mining

   —        (3.2

Gain (loss) on debt repurchase

   12.4      (2.5

Impairment of equity method investment

   (35.0   —     

Gain on hedging activities

   53.2      20.5   

LIFO and LCM

   2.2      (9.9
            

Total

   62.0      (16.0
            

Income tax expense (benefit)

Income tax expense was $3.4 million in the three months ended June 30, 2010, compared to $42.0 million in the three months ended June 30, 2009. The provision for income taxes resulted in an effective tax rate of 33.1% for the three months ended June 30, 2010, compared with an effective tax rate of 140.6% for the three months ended June 30, 2009. The effective tax rate for the three months ended June 30, 2010 was primarily impacted by state income taxes, the Internal Revenue Code Section 199 manufacturing deduction and accrued interest related to unrecognized tax benefits.

The effective tax rate for the three months ended June 30, 2009 was primarily impacted by goodwill impairment, state income taxes, and equity method investee income. For the three months ending June 30, 2009, we determined that our annual ordinary income for the year ending December 31, 2009 could not be reliably estimated because we expected near break-even operations and had a significant permanent difference (i.e. goodwill impairment) such that a minor change in our estimated ordinary income could result in a material change in the estimated annual effective tax rate. As a result, we determined that the actual effective tax rate for the period ending June 30, 2009 was the best estimate of the annual effective tax rate.

Net income (loss)

Net income (loss) increased from a $12.1 million net loss in the three months ended June 30, 2009 to income of $6.9 million in the three months ended June 30, 2010. This increase was the result of the net effect of the items described above.

Six months ended June 30, 2009 compared to six months ended June 30, 2010.

Sales

Sales in the six months ended June 30, 2009 were $322.0 million compared to $636.4 million in the six months ended June 30, 2010, an increase of 97.6%.

Sales to external customers from our primary aluminum products segment were $235.0 million, an 85.2% increase from the $126.9 million reported in the six months ended June 30, 2009, driven primarily by the increase in LME prices, higher volumes of value-added shipments related to increased end-market demand and higher sow volumes related to the New Madrid power outage in the prior year.

 

   

The increase in pricing, due to a 48.6% increase in realized MWTP, impacted external revenues by $31.7 million. In the six months ended June 30, 2010 and June 30, 2009, average realized MWTP per pound was $1.04 and $0.70, respectively.

 

   

Total primary aluminum shipments for the six months ended June 30, 2010 increased 94.4 million pounds to 267.3 million pounds or 54.6% compared to the six months ended June 30, 2009.

 

   

Intersegment shipments to our flat rolled products segment increased 31.5 million pounds to 59.1 million pounds, as a result of the New Madrid smelter becoming fully operational during first quarter 2010.

 

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External primary aluminum shipments increased to 208.2 million pounds in the six months ended June 30, 2010 from 145.3 million pounds in the six months ended June 30, 2009. This 43.3% increase in external shipments resulted in higher external revenues of $136.2 million and is largely the result of the New Madrid smelter becoming fully operational during first quarter 2010. Shipments of value-added products totaled 205.8 million pounds in the six months ended June 30, 2010 and represented a 48.4% increase compared to the six months ended June 30, 2009. This higher volume was driven by increased end-market demand and increased demand for higher purity products.

Sales in our flat rolled products segment were $266.6 million, an increase of 36.7%, compared to $195.1 million for the six months ended June 30, 2009, primarily due to the increase in LME prices, as well as higher shipments to external customers.

 

   

Rising LME prices contributed $50.9 million to the sales increase. Fabrication premiums were relatively unchanged.

 

   

Higher shipment volumes increased revenues by $118.5 million. Shipment volumes from our flat rolled products segment increased 16.4% to 175.7 million pounds primarily due to higher end-market demand.

Sales to external customers from our alumina refining and bauxite segments for the six months ended June 30, 2010 were $109.7 million and $25.1 million, respectively. Intercompany shipments from the alumina refining and bauxite segments for the first six months ended June 30, 2010 were 229.2 million kMts and 1,254.3 million kMts, respectively. There were no such sales in 2009.

Cost of sales

 

   

Cost of sales for the six months ended June 30, 2010 was $555.9 million compared to $348.1 million in the six months ended June 30, 2009. The increase in cost of sales is mainly the result of higher shipment volumes for value-added products to external customers, as well as increased LME prices, which is reflected in the pass-through nature of the downstream business. Total cost of sales in the primary aluminum products segment increased to $261.6 million in the first half of 2010 from $190.3 million in the first half of 2009. The increase relates to several factors, including a 54.6% increase in total shipments of primary aluminum due to the factors referenced in the discussion of sales, offset by (i) decreased depreciation expense related to certain fixed assets which became fully-depreciated in the first half of 2009, and (ii) a significant reduction in our integrated net cash cost to produce primary aluminum of $0.69 per pound in the first half of 2010, compared to $0.76 per pound in the first half of 2009. This decrease in integrated net cash cost reflects efficiencies gained from bringing the smelter back to full capacity during the first half of 2010 (average operating capacity during the first half of 2009 was 50.9% versus 94.1% in the first half of 2010), as well as reduced raw materials inputs, mainly alumina. Intercompany transfer prices for alumina for 2010 is indexed to LME, whereas 2009 transfer prices were at cost.

 

   

Flat rolled products segment cost of sales increased to $252.1 million in the first half of 2010 from $176.6 million in the first half of 2009. The increase related principally to the increase in the LME aluminum price, since much of that segment’s product cost represents the pass-through cost of metal.

 

   

Cost of sales in the bauxite and alumina refining segments, before the effects of intercompany eliminations, totaled $42.2 million and $168.0 million, respectively during the first half of 2010. These two segments principally reflect the cost of sales for St. Ann and Gramercy, respectively, of which we became sole owners on August 31, 2009, and have no corresponding costs for the first half of 2009.

The production outage at New Madrid negatively impacted our integrated net cash cost of primary aluminum in 2009. Although insurance proceeds covered the costs and losses associated with our outage and returning the smelter to operation, our coverage did not make us whole for inefficiencies associated with operating our integrated upstream business significantly below capacity. We estimate that due to lost production volume in 2009 from the smelter outage, which caused a loss of efficiency and fixed cost absorption, our integrated net cash cost of primary aluminum for the year ended December 31, 2009 of $0.77 per pound was negatively impacted by $0.05 per pound. During the first half of 2010, the integrated net cash cost of primary aluminum was approximately $0.69 per pound.

Selling, general and administrative expenses

Selling, general and administrative expenses in the six months ended June 30, 2010 were $72.1 million compared to $32.9 million in the six months ended June 30, 2009. This reflects (i) $11.0 million of increased costs from the inclusions of St. Ann and Gramercy since the Joint Venture Transaction, (ii) $7.8 million of costs related to our workforce and contract mining restructuring plans, (iii) $12.5 million related to the termination of the Apollo management agreement, (iv) $3.2 million in increased stock compensation costs associated with accelerated vesting in connection with the IPO, and (v) $6.1 million of increased consulting costs and professional fees, which were primarily transaction-related legal fees.

 

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Goodwill and other intangible asset impairment

We recorded a $43.0 million goodwill impairment charge in our flat rolled products segment in six months ended June 30, 2009. We evaluate goodwill for impairment annually in the fourth quarter, or more often upon the occurrence of certain triggering events. No goodwill impairment was recorded during six months ended June 30, 2009.

Excess insurance proceeds

We reached an insurance settlement with our primary insurance carrier in the six months ended June 30, 2009. The expected settlement proceeds of $49.1 million were allocated to cost of sales and selling, general and administrative expenses to the extent losses were realized and eligible for recovery under our insurance policies. The line item titled “Excess insurance proceeds” reflects the residual after applying the total expected proceeds recognized against losses incurred through June 30, 2009. This amount is not intended to represent a gain on the insurance claim, but only a timing difference between proceeds recognized and claim-related costs incurred.

Operating income (loss)

Operating income (loss) in the six months ended June 30, 2010 was income of $8.4 million compared to an operating loss of $72.8 million in the six months ended June 30, 2009. Operating income in the first half of 2010 compared to the first half of 2009 was impacted significantly by the effects of certain special items listed below. Additionally, the increase in operating income relates to sales margin improvements of $106.6 million, offset in part by $39.2 million increase in selling, general and administrative expenses.

Special items during the six months ended June 30, 22009 and 2010 are outline below (in millions):

 

     Six months ended June 30,  
     2009     2010  
       Increase (decrease) to operating income    
     $     $  

Special items:

    

Insurance recoveries in excess of costs and losses

   29.2      —     

Management agreement termination

     (12.5

Modification of stock options

   —        (3.2

Other transaction related legal costs

   —        (5.4

Restructuring

   —        (7.8

Goodwill and other intangible asset impairment

   (43.0   —     

LIFO and LCM

   6.6      (9.0
            

Total

   (7.2   (37.9
            

Sales margin for the six months ended June 30, 2010 was $80.5 million compared to a $26.1 million loss in the six months ended June 30, 2009. This $106.6 million increase resulted from the impact of a 48.6% increase in realized MWTP coupled with efficiencies gained in bringing the smelter back to full production.

Selling, general and administrative expenses were $72.1 million in the six months ended June 30, 2010 compared to $32.9 million in the six months ended June 30, 2009 as a result of (i) increased costs associated with the Joint Venture Transaction (ii) costs related to our February 2010 restructuring (iii) costs associated with moving to contract mining at our St. Ann bauxite mine, (iv) the termination of the Apollo management agreement (v) increased stock compensation costs and (v) increased legal and professional fees.

Interest expense, net

Interest expense in the six months ended June 30, 2010 was $17.8 million compared to $30.0 million in the six months ended June 30, 2009, a decrease of $12.2 million. Decreased interest expense is related to lower average debt outstanding on the term B loan and revolving credit facility and repurchases of the AcquisitionCo Notes and HoldCo Notes.

Gain on hedging activities, net

Gain on hedging activities was $22.3 million in the six months ended June 30, 2010 compared to $98.3 million in the six months ended June 30, 2009. For the six months ended June 30, 2010, the amount reclassified from accumulated other comprehensive income to earnings was $37.2 million, from aluminum and natural gas hedges, compared to $125.7 million in the six months ended June 30, 2009.

 

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Equity in net loss of investments in affiliates

We had no equity in net income of investments in affiliates for the six months ended June 30, 2010, compared to a loss of $78.1 million for the six months ended June 30, 2009 related primarily to impairment write-downs of our equity investments. Following the Joint Venture Transaction, which occurred in August 2009, we no longer account for any subsidiaries using the equity method of accounting.

(Gain) loss on debt repurchase

During the six months ended June 30, 2010, we repaid $127.5 million, $66.3 million and $215.9 million of outstanding principal balances on the term B loan, HoldCo Notes, and revolving credit facility, respectively. We used net proceeds from our completed IPO and the termination of fixed-price aluminum swaps to repay $176.3 million of aggregate principal amount of the Company’s outstanding HoldCo Notes and term B loan at par, and proceeds from April 2010 hedge terminations to repay $10.0 million principal amount of the term B loan. The debt repayments resulted in a loss on debt repurchase of $2.6 million due to the accelerated amortization of the debt discount and deferred financing costs upon repayment of the obligations. During the six months ended June 30, 2009, we repurchased or repaid $264.2 million aggregate principal amount of outstanding HoldCo Notes, AcquisitionCo Notes, term B loan and revolving credit facility for a price of $96.2 million, resulting in a $164.7 million gain.

Income (loss) before income taxes

Income before income taxes was $10.3 million in the six months ended June 30, 2010 compared to $82.1 million in the six months ended June 30, 2009. The special items outlined below significantly impacted the comparability of our pre-tax income:

Special items during the six months ended June 30, 2009 and 2010 are outline below (in millions):

 

     Six months ended June 30,  
     2009     2010  
     Increase (decrease) to pre-tax income  
     $     $  

Special items:

    

Insurance recoveries in excess of costs and losses

   29.2      —     

Management agreement termination

   —        (12.5

Modification of stock options

   —        (3.2

Other transaction related legal costs

   —        (5.4

Restructuring

   —        (7.8

Gain (loss) on debt repurchase

   164.7      (2.6

Impairment of equity method investment

   (80.3   —     

Goodwill and other intangible asset impairment

   (43.0   —     

Gain on hedging activities

   98.3      22.3   

LIFO and LCM

   6.6      (9.0
            

Total

   175.5      (18.2
            

Income tax expense (benefit)

Income tax expense was $3.5 million in the six months ended June 30, 2010, compared to an income tax expense of $49.9 million in the six months ended June 30, 2009. The effective tax rate for the six months ended June 30, 2010 was primarily impacted by state income taxes, the Internal Revenue Code Section 199 manufacturing deduction, and accrued interest related to unrecognized tax benefits.

The effective tax rate for the six months ended June 30, 2009 was primarily impacted by goodwill impairment, state income taxes, and equity method investee income. For the six months ended June 30, 2009, we determined that our annual ordinary income for the year ending December 31, 2009 could not be reliably estimated because we expected near break-even operations and had a significant permanent difference (i.e. goodwill impairment) such that a minor change in our estimated ordinary income could result in a material change in the estimated annual effective tax rate. As a result, we determined that the actual effective tax rate for the period ending June 30, 2009 was the best estimate of the annual effective tax rate.

Net income

Net income was $6.8 million in the six months ended June 30, 2010 compared to $32.2 million in the six months ended June 30, 2009. This decrease was the net effect of the items described above.

 

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Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by operating activities, available borrowings under our revolving credit facility and available cash balances. For the six months ended June 30, 2010, cash provided by operating activities amounted to $219.0 million. At June 30, 2010 we had cash and cash equivalents of $31.7 million. Of our revolving credit facility’s (“the facility”) $242.7 million borrowing capacity, we had no amounts outstanding, although we had outstanding letters of credit of $27.5 million, resulting in $215.2 million available for borrowing under the facility at June 30, 2010.

We incurred substantial indebtedness in connection with our 2007 acquisition by Apollo. As of June 30, 2010, we have reduced our total indebtedness to $553.7 million.

Our debt facilities are rated as follows (in thousands):

 

     Outstanding balance at
June 30, 2010
   Ratings at
July 15, 2010

(in millions)

   $    Moody’s(1)    S&P(2)

Noranda AcquisitionCo:

        

Senior Floating Rate Notes due 2015

   353.1    B3    CCC+

Term B loan due 2014

   200.6    Ba3    B+

Revolving credit facility

   —      Ba3    B+
          

Total debt

   553.7      
          

 

(1)

On May 14, 2010, Moody’s Investors Service upgraded Noranda’s Corporate Family Rating and Probability of Default Rating to B2 from B3. Moody’s classifies Noranda’s rating outlook as “Positive”. Moody’s issue level ratings for Noranda were revised as follows: Noranda AcquisitionCo senior secured revolver and senior secured term loan ratings were moved to Ba3 from B1 and its senior unsecured notes due 2014 rating was moved to B3 from Caa1.

(2)

On June 11, 2010, Standard & Poor’s upgraded Noranda’s Corporate rating to B and revised Noranda’s rating outlook to “Positive”. S&P’s issue level ratings for Noranda were revised as follows: Noranda AcquisitionCo senior secured revolver and senior secured term loan ratings were moved to B+ from B and its senior unsecured notes rating was upgraded to CCC+ from CCC.

The following table sets forth consolidated cash flow information for the periods indicated:

 

     Six months ended June 30,  
     2009     2010  

(in millions)

   $     $  

Cash provided by operating activities

   108.1      219.0   

Cash used in investing activities

   (15.2   (27.6

Cash used in financing activities

   (95.4   (326.9
            

Net change in cash and cash equivalents

   (2.5   (135.5
            

Operating Activities

Cash provided by operating activities in the six months ended June 30, 2010 reflected $164.6 million of proceeds from hedge terminations under our hedge settlement agreement with Merrill Lynch, offset by $20.8 million from increases in working capital due to the increased level of volume and the smelter becoming fully operational. Additionally, we made a $10.0 million tax prepayment in connection with the finalization of the GOJ agreement.

Investing Activities

Capital expenditures amounted to $27.8 million through June 30, 2010 and $22.4 million in the comparable 2009 period. During the global economic contraction, we reduced our capital expenditures to maintenance activities and costs associated with bringing the smelter back to full capacity. Of our capital spending in the six months ended June 30, 2009, $7.2 million was related to the New Madrid restart, all of which was funded with insurance proceeds. Though we have not finalized plans or entered into contractual commitments, we are evaluating projects at our New Madrid smelter that will increase our annual metal production by approximately 30 million pounds per annum to 610 million pounds by 2012 and contribute to a reduction in our future average integrated net cash cost per pound of aluminum produced.

 

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Financing Activities

During the six months ended June 30, 2010 our financing cash flows mainly reflected debt reduction. Through June 30, 2010 we used available cash balances, $82.9 million of IPO proceeds and $164.6 million of proceeds from our remaining hedge terminations to repay $215.9 million of our revolving credit facility, $127.5 million of term B loan borrowings and $66.3 million principal balance of our HoldCo Notes.

On May 15, 2010, AcquisitionCo and HoldCo issued $9.1 million and $2.3 million in AcquisitionCo Notes and HoldCo Notes, respectively as payment for PIK interest due May 15, 2010. Additionally, we have made a permitted election under the indentures governing our AcquisitionCo Notes, to pay all interest due hereunder on Nov 15, 2010, entirely in kind.

Covenant Compliance and Financial Ratios

Certain covenants contained in the credit agreement governing our senior secured credit facilities and the indentures governing our notes restrict our ability to take certain actions (including 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) if we are unable to meet defined ratios: the Adjusted EBITDA to fixed charges (“fixed-charge coverage ratio”) and the net senior secured debt to Adjusted EBITDA (“leverage ratio”). In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness.

Further, the interest rates we pay under our senior secured credit facilities are determined in part by the Net Senior Secured Leverage Ratio. Furthermore, our ability to take certain actions, including paying dividends and making acquisitions and certain other investments, depends on the amounts available for such actions under the covenants, which amounts accumulate with reference to our Adjusted EBITDA on a quarterly basis. Adjusted EBITDA is computed on a trailing four quarter basis and the minimum or maximum amounts generally required by those covenants and our performance against those minimum or maximum levels are summarized below:

The minimum or maximum ratio levels set forth in our covenants as conditions to or undertaking certain actions and our actual performance are summarized below:

 

    

Financial Ratio Relevant to
Covenants

  

Threshold

   Actual
           December  31,
2009(1)
   June  30,
2010(1)

Noranda HoldCo:

           

Senior Floating Rate Notes fixed charge coverage ratio(2)

  

Fixed Charge

Coverage Ratio

  

Minimum

1.75 to 1

   1.6 to 1      —  

Noranda AcquisitionCo:

           

Senior Floating Rate Notes fixed charge coverage ratio( 3)

  

Fixed Charge

Coverage Ratio

  

Minimum

2.0 to 1

   2.1 to 1    4.6 to 1

Term B loan and revolving credit facility leverage ratio(4 )

   Net Senior Secured Leverage Ratio   

Maximum

3.0 to  1(4)

   3.5 to 1    0.9 to 1

 

(1)

For purposes of measuring Adjusted EBITDA in order to compute the ratios, pro forma effect is given to the Joint Venture Transaction as if it had occurred at the beginning of the trailing four-quarter period. Fixed charges are the sum of consolidated interest expenses and all cash dividend payments in respect of preferred stock. In measuring interest expense for the ratio, pro forma effect is given to any repayment or issuance of debt as if such transaction occurred at the beginning of the trailing four-quarter period. For Noranda HoldCo and Noranda AcquisitionCo, the pro forma impact of the Joint Venture Transaction on Adjusted EBITDA for the four quarters ended December 31, 2009 and June 30, 2010 was $15.6 million and $4.4 million, respectively.

(2)

During second quarter 2010, we repurchased all outstanding HoldCo Notes; therefore ratio as of June 30, 2010 is not included. For Noranda HoldCo, fixed charges on a pro forma basis (giving effect to debt repayments) for the four quarters ended December 31, 2009 were $72.0 million.

(3)

For Noranda AcquisitionCo, fixed charges on a pro forma basis (giving effect to debt repayments) for the four quarters ended December 31, 2009 and June 30, 2010 were $53.9 million and $43.1 million, respectively.

(4)

As used in calculating this ratio, “senior secured net debt” means the amount outstanding under our term B loan and the revolving credit facility, plus other first-lien secured debt (of which we have none as of December 31, 2009 and June 30, 2010), less “unrestricted cash” and “permitted investments” (as defined under our senior secured credit facilities). At December 31, 2009, senior secured debt was $544.0 million and unrestricted cash and permitted investments aggregated $145.8 million, resulting in senior secured net debt of $398.2 million. At June 30, 2010, senior secured debt was $200.6 million and unrestricted cash and permitted investments aggregated $24.6 million, resulting in senior secured net debt of $176.0 million.

Our debt instruments contain no financial “maintenance” covenants. Under our debt instruments, “Adjusted EBITDA” means net income before income taxes, net interest expense and depreciation and amortization, adjusted to eliminate related party management fees, certain charges resulting from the use of purchase accounting and specified other non-cash items of income or expense. For covenant compliance calculations, Adjusted EBITDA is computed on a trailing four-quarter basis.

Adjusted EBITDA is not a measure of financial performance under 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

 

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to net income, income from continuing operations, operating income or any other performance measures derived in accordance with 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 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 GAAP, as an indicator of our operating performance, or as an alternative to cash flows from operating activities, determined in accordance with GAAP, as an indicator of our cash flows or as a measure of liquidity.

The following table reconciles net income to Adjusted EBITDA for the periods presented. All of the following adjustments are in accordance with the credit agreement governing our term B loan and the indentures governing our notes.

 

(in millions)

   Twelve months
ended
December 31, 2009
    Last twelve
months ended
June 30, 2010
    Six months
ended
June 30, 2009
    Six months
ended
June 30, 2010
    Three months
ended

June 30,  2009
    Three months
ended

June 30,  2010
 
   $     $     $     $     $     $  

Net income (loss) for the period

   101.4      76.0      32.2      6.8      (12.1   6.9   

Income tax expense

   58.6      12.2      49.9      3.5      42.0      3.4   

Interest expense, net

   53.6      41.4      30.0      17.8      14.1      8.5   

Depreciation and amortization

   86.6      97.3      40.5      51.2      15.1      25.1   

Joint Venture EBITDA(a)

   8.0      0.7      7.3      —        3.6      —     

LIFO adjustment(b)

   26.0      16.8      8.8      (0.4   4.9      0.3   

LCM adjustment(c)

   (43.4   (18.6   (15.4   9.4      (7.1   9.6   

(Gain) loss on debt repurchase

   (211.2   (43.9   (164.7   2.6      (12.5   2.5   

New Madrid power outage(d)

   (30.6   (13.3   (17.3   —        (16.5   —     

Charges related to termination of derivatives

   17.9      15.2      11.7      9.0      3.1      4.9   

Non-cash hedging gains, net(e)

   (86.1   (11.0   (81.3   (6.2   (44.4   (14.9

Goodwill and other intangible asset impairment

   108.0      65.0      43.0      —        —        —     

Joint Venture impairment

   80.3      —        80.3      —        35.0      —     

Gain on business combination

   (120.3   (120.3   —        —        —        —     

Purchase accounting(f)

   8.9      6.9      —        (2.0   —        —     

Other items, net(g)

   40.6      68.5      16.2      44.1      8.4      32.5   
                                    

Adjusted EBITDA

   98.3      192.9      41.2      135.8      33.6      78.8   
                                    

 

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The following table reconciles cash flow from operating activities to Adjusted EBITDA for the periods presented:

 

(in millions)

   Twelve months
ended
December 31, 2009
    Last twelve
months ended
June 30, 2010
    Six months
ended
June 30, 2009
    Six months
ended
June 30, 2010
 
   $     $     $     $  

Cash flow from operating activities

   220.4      331.3      108.1      219.0   

Loss on disposal of property, plant and equipment

   (9.3   (7.7   (3.5   (1.9

Gain on hedging activities

   68.9      3.2      70.2      4.5   

Settlements from hedge terminations, net

   (120.8   (215.3   (70.1   (164.6

Insurance proceeds applied to capital expenditures

   11.5      4.3      7.2      —     

Equity in net income of investments in affiliates

   0.7      (1.5   2.2      —     

Stock compensation expense

   (1.5   (4.8   (0.7   (4.0

Changes in deferred charges and other assets

   (0.8   9.9      (3.0   7.7   

Changes in pension and other long-term liabilities

   2.9      2.7      (4.1   (4.3

Changes in asset and liabilities, net

   (21.2   (11.2   10.8      20.8   

Income tax expense (benefit)

   0.9      13.2      (12.2   0.1   

Interest expense, net

   12.1      10.4      6.3      4.6   

Joint Venture EBITDA(a)

   8.0      0.7      7.3      —     

LIFO adjustment(b)

   26.0      16.8      8.8      (0.4

LCM adjustment(c)

   (43.4   (18.6   (15.4   9.4   

New Madrid power outage(d)

   (30.6   (13.3   (17.3   —     

Non-cash hedging gains(e)

   (86.1   (11.0   (81.3   (6.2

Charges related to termination of derivatives

   17.9      15.2      11.7      9.0   

Purchase accounting(f)

   8.9      6.9      —        (2.0

Insurance proceeds applied to depreciation expense

   (6.8   (6.8   —        —     

Other items, net(g)

   40.6      68.5      16.2      44.1   
                        

Adjusted EBITDA

   98.3      192.9      41.2      135.8   
                        

 

(a)

Prior to the Joint Venture Transaction at August 31, 2009 our reported Adjusted EBITDA includes 50% of the net income of Gramercy and St. Ann, based on transfer prices that are generally in excess of the actual costs incurred by the joint venture operations. To reflect the underlying economics of the vertically integrated upstream business, this adjustment eliminates depreciation and amortization, interest and tax components of equity.

(b)

Our New Madrid smelter and rolling mills use the LIFO method of inventory accounting for financial reporting and tax purposes. This adjustment restates pre-tax income to the FIFO method by eliminating LIFO expenses related to inventory held at the New Madrid smelter and rolling mills. Inventories at St. Ann and Gramercy are stated at lower of weighted average cost or market, and are not subject to the LIFO adjustment.

(c)

Reflects adjustments to reduce inventory to the lower of cost (adjusted for purchase accounting) or market value.

(d)

Represents the portion of the insurance settlement used for claim-related capital expenditures.

(e)

We use derivative financial instruments to mitigate effects of fluctuations in aluminum and natural gas prices. 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):

 

     Twelve months
ended
December 31, 2009
    Last twelve
months ended
June 30, 2010
    Six months
ended
June 30, 2009
    Six months
ended
June 30, 2010
    Three months
ended

June 30,  2009
    Three months
ended

June 30,  2010
 
     $     $     $     $     $     $  

Aluminum swaps—fixed-price

   (93.1   (50.1   (67.2   (24.2   (32.9   (10.2

Aluminum swaps—variable-price

   23.8      4.5      19.0      (0.3   7.7      0.2   

Natural gas swaps

   31.8      26.9      15.3      10.4      8.6      6.4   

Interest rate swaps

   11.9      12.8      4.7      5.6      4.7      5.6   
                                    

Total

   (25.6   (5.9   (28.2   (8.5   (11.9   2.0   
                                    

The previous table presents cash settlements net of early termination discounts totaling $17.9 million in 2009 and $9.0 million to date in 2010.

 

(f)

Represents the impact from inventory step-ups and other adjustments arising from adjusting assets acquired and liabilities assumed in the Joint Venture Transaction to their fair values.

 

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(g)

Other items, net, consist of the following (in millions):

 

     Twelve months
ended
December 31, 2009
    Last twelve
months ended
June 30, 2010
   Six months
ended
June 30, 2009
   Six months
ended
June 30, 2010
   Three months
ended

June 30,  2009
    Three months
ended

June 30,  2010
   $     $    $    $    $     $

Sponsor fees

   2.0      14.5    1.0    13.5    0.5      13.0

Pension expense-non cash portion

   8.1      9.0    3.7    4.6    2.1      1.8

Employee compensation items

   1.8      5.0    1.0    4.2    0.4      3.8

Loss on disposal of property, plant and equipment

   7.3      7.5    1.7    1.9    (0.7   0.4

Interest rate swap

   11.9      12.8    4.7    5.6    4.7      5.6

Consulting and non-recurring fees

   5.6      8.1    2.7    5.2    0.7      4.1

Restructuring

   (0.2   7.6    —      7.8    (0.2   3.2

Other

   4.1      4.0    1.4    1.3    0.9      0.6
                               

Total

   40.6      68.5    16.2    44.1    8.4      32.5
                               

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Aluminum

Our primary aluminum products typically earn the LME price plus a Midwest premium. Because aluminum is a global commodity, we have experienced and expect to continue to be subject to volatile primary aluminum prices. See Note 17, “Derivative Financial Instruments” for a summary of derivatives related to hedging our exposure to fluctuations in aluminum prices.

Natural Gas

We purchase natural gas to meet our production requirements. These purchases expose us to the risk of changing market prices. See Note 17, “Derivative Financial Instruments” for a summary of outstanding derivatives related to hedging our exposure to fluctuations in natural gas prices.

Interest Rates

We have floating-rate debt, which is subject to variations in interest rates. See Note 17, “Derivative Financial Instruments” for a summarys of derivatives related to hedging our exposure to fluctuations in interest rates.

Non-Performance Risk

Merrill Lynch is the counterparty for a substantial portion of our derivatives. All swap arrangements with Merrill Lynch are part of a master arrangement which is subject to the same guarantee and security provisions as the senior secured credit facilities. The master arrangement does not require us to post collateral, nor are we subject to margin requirements. While management may alter our hedging strategies in the future based on their view of actual forecasted prices, there are no plans in place that would require us to post additional collateral or become subject to margin requirements under the master agreement with Merrill Lynch.

We have also entered into variable-priced aluminum swaps with counterparties other than Merrill Lynch. To the extent those swap contracts are in an asset position for us, management believes there is minimal counterparty risk because these counterparties are backed by the LME. From time-to-time, these contracts may be in a liability position for us. The swap agreements may require that we establish margin accounts in favor of the broker. When applicable, these margin account balances are netted in the settlement of swap liability. There were no margin account balances at December 31, 2009 or June 30, 2010.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2010. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

There are no material changes from the description of our legal proceedings previously disclosed in our Form 10-K filed on March 2, 2010.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Form 10-K filed on March 2, 2010, as updated by our 10-Q filed May 5, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Sales

On May 13, 2010, our registration statement (File No. 333-150760) was declared effective for our initial public offering, pursuant to which we registered the offering and sale of 11,500,000 shares of common stock (including the underwriters’ right to purchase up to an additional 1,500,000 shares to cover over-allotments) at a public offering price of $8.00 per share. We completed our IPO on May 19, 2010. Aggregate gross offering proceeds were $92.0 million. The representatives for the underwriters were Merrill Lynch, Pierce, Fenner & Smith Incorporated; Morgan Stanley & Co. Incorporated; Credit Suisse Securities (US) LLC; Goldman, Sachs & Co; UBS Securities LLC.

There have been no material changes in the planned use of proceeds from our initial public offering from that described in the prospectus dated May 13, 2010 and filed with the SEC on May 14, 2010 The net proceeds from the offering, after underwriting discounts and commission of $5.6 million, and additional offering-related fees and expenses of $3.5 million, were $82.9 million. We used the net proceeds, together with $95.9 million of proceeds from settling all our outstanding fixed-price aluminum hedges, to repurchase all outstanding Holdco Notes, of which $66.3 million was remaining, and to repay $110.0 million principal amount outstanding under the term B loan. The remaining $2.5 million was used for general corporate purposes.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

  3.1    Amended and Restated Certificate of Incorporation of Noranda Aluminum Holding Corporation (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-8 (File No. 333-166947), filed on May 19, 2010).
  3.2    Amended and Restated By-Laws of Noranda Aluminum Holding Corporation (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-8 (File No. 333-166947), filed on May 19, 2010).
10.1    Third Amended and Restated 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 21, 2010).
10.2    2010 Incentive Award Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 10, 2010).
10.3    Senior Executive Bonus Plan (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on May 10, 2010).
10.4    Amended and Restated Securityholders Agreement, by and among Noranda Aluminum Holding Corporation and the other Holders that are parties thereto, dated as of May 19, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 19, 2010).
10.5†    Amended Establishment Agreement, dated as of June 24, 2010, between the Government of Jamaica and Noranda Bauxite Limited
31.1    Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) Promulgated Under the Securities Exchange Act of 1934, as amended.
31.2    Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) Promulgated Under the Securities Exchange Act of 1934, as amended.
32.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Certain portions of this document have been omitted pursuant to a confidential treatment request.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

 

    NORANDA ALUMINUM HOLDING CORPORATION

Date: July 30, 2010

    /s/    ROBERT B. MAHONEY        
   

Robert B. Mahoney

Chief Financial Officer

 

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