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EX-10.3 - AMENDED & RESTATED MANAGEMENT EQUITY INVESTMENT & INCENTIVE TERM SHEET-MAHONEY - Noranda Aluminum Holding CORPdex103.htm
EX-10.4 - AMENDED & RESTATED MANAGEMENT EQUITY INVESTMENT & INCENTIVE TERM SHEET-LEHMAN - Noranda Aluminum Holding CORPdex104.htm
EX-10.1 - AMENDED & RESTATED MANAGEMENT EQUITY INVESTMENT & INCENTIVE TERM SHEET-SMITH - Noranda Aluminum Holding CORPdex101.htm
EX-10.5 - EQUITY INVESTMENT & INCENTIVE TERM SHEET--ALAN K. BROWN - Noranda Aluminum Holding CORPdex105.htm
EX-10.6 - EQUITY INVESTMENT & INCENTIVE TERM SHEET--SCOTT CROFT - Noranda Aluminum Holding CORPdex106.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - Noranda Aluminum Holding CORPdex321.htm
EX-10.2 - AMENDED & RESTATED MANAGEMENT EQUITY INVESTMENT & INCENTIVE TERM SHEET-LORENTZEN - Noranda Aluminum Holding CORPdex102.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULES 13A-14(A) & 15D-14(A) - Noranda Aluminum Holding CORPdex311.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULES 13A-14(A) & 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)

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

For the quarterly period ended September 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  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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   (Do not check if a smaller reporting company)  x    Smaller reporting company   ¨

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

As of October 22, 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

     40   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     55   

Item 4.

 

Controls and Procedures

     55   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     57   

Item 1A.

 

Risk Factors

     57   

Item 2.

 

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

     57   

Item 3.

 

Defaults upon Senior Securities

     57   

Item 4.

 

Removed and Reserved

     57   

Item 5.

 

Other Information

     57   

Item 6.

 

Exhibits

     58   

SIGNATURES

     59   

 

-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 September 30,     Nine months ended September 30,  
     2009
(as adjusted)
    2010     2009
(as adjusted)
    2010  
     $     $     $     $  

Sales

     218,559        314,228        540,553        950,642   
                                

Operating costs and expenses:

        

Cost of sales

     216,190        274,227        564,254        830,126   

Selling, general and administrative expenses

     18,739        19,927        51,682        92,058   

Goodwill and other intangible asset impairment

     —          —          43,000        —     

Excess insurance proceeds

     (14,282     —          (43,467     —     
                                
     220,647        294,154        615,469        922,184   
                                

Operating income (loss)

     (2,088     20,074        (74,916     28,458   
                                

Other (income) expenses:

        

Interest expense, net

     12,577        7,218        42,551        25,004   

Gain on hedging activities, net

     (5,747     (21,758     (104,073     (44,040

Equity in net loss of investments in affiliates

     1,553        —          79,654        —     

Gain on debt repurchase

     (28,574     (3,565     (193,224     (953

Gain on business combination

     (120,276     —          (120,276     —     
                                

Total other (income) expenses

     (140,467     (18,105     (295,368     (19,989
                                

Income before income taxes

     138,379        38,179        220,452        48,447   

Income tax expense

     12,430        12,989        62,350        16,439   
                                

Net income for the period

     125,949        25,190        158,102        32,008   
                                

Net income per share:

        

Basic

   $ 2.89      $ 0.46      $ 3.63      $ 0.65   

Diluted

   $ 2.89      $ 0.45      $ 3.63      $ 0.64   

Weighted-average shares outstanding:

        

Basic

     43,534        55,280        43,501        49,421   

Diluted

     43,534        56,299        43,501        50,311   

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     September 30, 2010  
     $     $  

ASSETS

    

Current assets:

    

Cash and cash equivalents (includes $117 and $635 related to a consolidated Variable Interest Entity (“VIE”) at December 31, 2009 and September 30, 2010, respectively)

     167,236        33,022   

Accounts receivable, net

     85,530        115,166   

Inventories (includes $11,813 and $10,113 related to a consolidated VIE at December 31, 2009 and September 30, 2010, respectively)

     182,356        195,907   

Derivative assets, net

     68,755        —     

Taxes receivable

     730        6,151   

Prepaid assets

     36,418        12,853   

Other current assets

     13,808        14,483   
                

Total current assets

     554,833        377,582   
                

Property, plant and equipment, net (includes $36,911 and $36,188 related to a consolidated VIE at December 31, 2009 and September 30, 2010, respectively)

     745,498        713,385   

Goodwill

     137,570        137,570   

Other intangible assets, net

     79,047        74,531   

Long-term derivative assets, net

     95,509        —     

Other assets (includes $2,305 and $3,649 related to a consolidated VIE at December 31, 2009 and September 30, 2010, respectively)

     85,131        86,099   
                

Total assets

     1,697,588        1,389,167   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable (includes $6,208 and $4,955 related to a consolidated VIE at December 31, 2009 and September 30, 2010, respectively)

     69,912        79,210   

Accrued liabilities (includes $3,583 and $6,239 related to a consolidated VIE at December 31, 2009 and September 30, 2010, respectively)

     61,961        58,726   

Accrued interest

     167        737   

Derivative liabilities, net

     —          28,405   

Deferred tax liabilities

     27,311        27,406   

Current portion of long-term debt

     7,500        —     
                

Total current liabilities

     166,851        194,484   
                

Long-term debt, net

     944,166        533,084   

Long-term derivative liabilities, net

     —          24,731   

Pension and OPEB liabilities

     106,393        113,097   

Other long-term liabilities (includes $5,435 and $5,794 related to a consolidated VIE at December 31, 2009 and September 30, 2010, respectively)

     55,632        61,836   

Deferred tax liabilities

     330,382        302,288   

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

     436        551   

Capital in excess of par value

     16,123        103,127   

Accumulated deficit

     (75,123     (43,115

Accumulated other comprehensive income

     144,728        91,084   
                

Total Noranda shareholders’ equity

     86,164        151,647   

Noncontrolling interest

     6,000        6,000   
                

Total shareholders’ equity

     92,164        157,647   
                

Total liabilities and shareholders’ equity

     1,697,588        1,389,167   
                

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 gain 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

     —           —          32,008        —          —           32,008   

Components of other comprehensive loss:

              

Unrealized loss on derivatives, net of tax benefit of $10,493

     —           —          —          (14,605     —           (14,605

Reclassification of derivative amounts realized in net income, net of tax benefit of $20,209

     —           —          —          (39,039     —           (39,039
                    

Total comprehensive loss

                 (21,636

Repurchase of shares

     —           (16     —          —          —           (16

Issuance of shares

     115         82,810        —          —          —           82,925   

Stock compensation expense

     —           4,210        —          —          —           4,210   
                                                  

Balance September 30, 2010

     551         103,127        (43,115     91,084        6,000         157,647   
                                                  

See accompanying notes

 

3


Table of Contents

 

NORANDA ALUMINUM HOLDING CORPORATION

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

      Nine months ended September 30,  
     2009
(as adjusted)
    2010  
     $     $  

OPERATING ACTIVITIES

    

Net income

     158,102        32,008   

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

    

Depreciation and amortization

     66,005        76,080   

Non-cash interest

     25,086        14,330   

Loss on disposal of property, plant and equipment

     7,260        3,412   

Insurance proceeds applied to capital expenditures

     (11,495     —     

Goodwill and other intangible asset impairment

     43,000        —     

Gain on hedging activities, net of cash settlements

     (63,100     (32,268

Settlements from hedge terminations, net

     119,722        164,603   

Gain on debt repurchase

     (193,224     (953

Gain on business combination

     (120,276     —     

Equity in net loss of investments in affiliates

     79,654        —     

Deferred income taxes

     78,931        16,438   

Stock compensation expense

     1,111        4,210   

Changes in other assets

     (8,380     (8,722

Changes in other long-term liabilities and pension

     31,966        12,636   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (7,066     (28,917

Inventories

     18,648        (13,551

Taxes receivable

     (1,050     (14,146

Other current assets

     18,679        18,152   

Accounts payable

     13,712        9,297   

Accrued liabilities and accrued interest

     (26,844     (2,665
                

Cash provided by operating activities

     230,441        249,944   
                

INVESTING ACTIVITIES

    

Capital expenditures

     (32,211     (40,319

Proceeds from insurance related to capital expenditures

     11,495        —     

Proceeds from sale of property, plant and equipment

     7        168   

Cash acquired in business combination

     11,136        —     
                

Cash used in investing activities

     (9,573     (40,151
                

FINANCING ACTIVITIES

    

Proceeds from issuance of shares, net of issuance costs

     41        82,925   

Repurchase of shares

     (90     (16

Borrowings on revolving credit facility

     13,000        —     

Repayments on revolving credit facility

     (14,500     (215,930

Repayment of long-term debt

     (147,519     (210,986
                

Cash used in financing activities

     (149,068     (344,007
                

Change in cash and cash equivalents

     71,800        (134,214

Cash and cash equivalents, beginning of period

     184,716        167,236   
                

Cash and cash equivalents, end of period

     256,516        33,022   
                

See accompanying notes

 

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Table of Contents

 

NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements

1. ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited 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 condensed notes, are unaudited and exclude some of the disclosures required in annual consolidated financial statements. Consolidated balance sheet data as of December 31, 2009 was derived from audited consolidated financial statements. In management’s opinion, the unaudited 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 consolidated 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. For example, our interim operating results are affected by peak power usage rates which apply to New Madrid from June through September each year. We are also subject to seasonality associated with the demand cycles of our end-use customers, which results in lower shipment levels from November to February each year. These unaudited consolidated 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 59% of capacity during 2009. This is significantly below our operating rate for the 20 years prior to the outage. 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 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

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

During third quarter 2009, we believed the Joint Venture Transaction would result in a bargain purchase gain; however, we were in the process of reassessing the recognition and measurement of identifiable assets acquired and liabilities assumed. During third quarter 2009, based on the preliminary fair values assigned to the assets acquired and liabilities assumed, we recorded the $127.3 million unallocated purchase price on the balance sheet as a long-term liability. During fourth quarter 2009, upon the
conclusion of that reassessment process and the finalization of the valuations and pre-acquisition balance sheets for Gramercy and St. Ann, we recorded a $120.3 million gain on the Joint Venture Transaction. As required by Accounting Standards Codification (“ASC”) 805-10-25, we have revised comparative information for prior periods presented in our unaudited consolidated financial statements as necessary, including recording the gain on business combination ($120.3 million), decreased depreciation expense ($0.3 million), decreased cost of goods sold related to inventory step-downs ($2.0 million), decreased equity in net loss of investments in affiliates ($0.7 million loss) and the related tax effects of $0.2 million. These adjustments have no impact on our results of operations for the year ended December 31, 2009, but only represent a reclassification of earnings from fourth quarter 2009 to third quarter 2009. Earnings per share increased $2.79 per share and $2.80 per share over such split-adjusted amounts previously reported for the three and nine months ended September 30, 2009, respectively.

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 U.S. GAAP. During the first, second and third quarters of 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.

During third quarter 2010, we revised our segment performance measure to be “segment profit” rather than segment operating income. Refer to the discussion in Note 23 for further information.

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 unaudited 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 an $8.00 per share public offering price on the New York Stock Exchange (NYSE: NOR). The net proceeds after the underwriting discounts, commissions, fees and expenses amounted to $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 September 30, 2010, no preferred stock was outstanding.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

2. JOINT VENTURE TRANSACTION

On August 31, 2009, we became the sole owner of both Gramercy and St. Ann. 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 consolidated into in our unaudited consolidated financial statements from the transaction closing date.

Gain calculation

We utilized a third-party valuation firm to assist us in determining the fair values of the assets acquired and liabilities assumed in the Joint Venture Transaction. See Note 21, “Fair Value Measurements,” for further discussion of significant assumptions used in measuring these fair values. Expenses related to the Joint Venture Transaction such as valuation, legal and consulting costs are included in selling, general and administrative expenses.

The Joint Venture Transaction was a business combination achieved in stages, since we owned 50% of both Gramercy and St. Ann prior to August 31, 2009. We recorded $18.5 million as a gain on business combination related to re-measuring our investment in affiliates to fair value as of the acquisition date. The $1.2 million tax effect of this gain was recorded as tax expense. The Joint Venture Transaction was also a bargain purchase. Based on the fair values assigned to the assets acquired and liabilities assumed, we recorded a $101.8 million (net of tax) gain on business combination related to the bargain purchase. The total gain on business combination recognized was $120.3 million.

Pro forma information

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
September 30,
     Nine months ended
September 30,
 
     2009
(as adjusted)
    2010      2009
(as adjusted)
    2010  
     $     $      $     $  

Sales

     250,082        314,228         649,756        950,642   

Operating income (loss)

     (1,273     20,074         (95,529     28,458   

Net income

     5,316        25,190         59,694        32,008   

Net income per share

         

Basic

   $ 0.12      $ 0.46       $ 1.37      $ 0.65   

Diluted

   $ 0.12      $ 0.45       $ 1.37      $ 0.64   

Weighted-average shares outstanding

         

Basic

     43,534        55,280         43,501        49,421   

Diluted

     43,534        56,299         43,501        50,311   

 

(1)

The unaudited pro forma condensed consolidated statement of operations data for the three and nine months ended September 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 consolidated 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.

Investment in affiliates

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

 

     Period from July 1 through August
31, 2009
(as adjusted)
    Period from January 1 through
August 31, 2009

(as adjusted)
 
     $     $  

St. Ann to Gramercy

     8,852        29,057   

St. Ann to third parties

     6,608        19,987   

Gramercy to us and joint venture partner

     22,294        112,149   

Gramercy to third parties

     13,588        46,942   
                

Net sales

     51,342        208,135   
                

Gross profit (loss)

     (5,444     5,482   
                

Net income

     (1,574     9,922   
                

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

Business conditions led us to evaluate our investments in the joint ventures for impairment in first quarter 2009. That evaluation resulted in a $45.3 million write down of such investments ($39.3 million for St. Ann and $6.0 million for Gramercy) which were recorded within equity in net loss of investments in affiliates in the consolidated statement of operations. In second quarter 2009, we revised our assumptions about St. Ann’s future profitability and cash flows to reflect continued deterioration in conditions. As a result we recorded an additional $35.0 million write down of our investment in St. Ann. No further impairment adjustments were necessary in third quarter 2009.

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 was operating at approximately 65% of capacity at September 30, 2009. The smelter became fully operational during first quarter 2010.

We reached a $67.5 million settlement with our insurance carriers, all of which had been received by September 30, 2009. Insurance proceeds funded $11.5 million of capital expenditures during the nine months ended September 30, 2009.

The following table shows the insurance activity as presented in the unaudited consolidated financial statements (in thousands):

 

     Three months ended
September 30, 2009
    Nine months ended
September 30, 2009
 
     Expenses
incurred
     Related
proceeds
    Net
impact
    Expenses
incurred
     Related
proceeds
    Net
impact
 
   $      $     $     $      $     $  

Cost of sales

     3,697         (3,697     —          17,464         (17,464     —     

Selling, general and administrative expenses

     396         (396     —          6,569         (6,569     —     

Excess insurance proceeds

     —           (14,282     (14,282     —           (43,467     (43,467
                                                  

Total

     4,093         (18,375     (14,282     24,033         (67,500     (43,467
                                                  

Insurance cash receipts through September 30, 2009

               (67,500  
                    

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

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 involuntary terminations.

These actions resulted in $0.3 million and $8.1 million of pre-tax charges recorded in the three and nine months ended September 30, 2010, respectively, primarily due to one-time termination benefits and early retirement benefits. These charges were recorded when service requirements, if any, were met and are reflected in the unaudited consolidated statement of operations as a component of selling, general and administrative expenses.

 

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Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

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

     501   

Alumina refining

     1,619   

Bauxite

     3,070   

Primary aluminum products

     1,871   

Flat rolled products

     1,068   
        

Total

     8,129   

Benefits paid in 2010

     (6,093
        

Balance at September 30, 2010

     2,040   
        

 

(1)

Restructuring costs are recorded in accrued liabilities on the unaudited consolidated balance sheets at September 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 cost.

5. SUPPLEMENTAL FINANCIAL STATEMENT DATA

Statements of operations (in thousands):

 

     Three months ended September 30,     Nine months ended September 30,  
     2009     2010     2009     2010  
     $     $     $     $  

Interest expense

     12,627        7,242        42,687        25,076   

Interest income

     (50     (24     (136     (72
                                

Interest expense, net

     12,577        7,218        42,551        25,004   
                                

Statements of cash flow (in thousands):

 

     Nine months ended September 30,  
     2009     2010  
     $     $  

Interest paid

     13,700        5,974   

Income taxes paid (received)

     (8,999     14,146   

Prepaid Jamaican income taxes

     —          10,000   

6. CASH AND CASH EQUIVALENTS

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

 

     December 31, 2009      September 30, 2010  
     $      $  

Cash

     12,334         8,260   

Money market funds

     154,902         24,762   
                 

Total cash and cash equivalents

     167,236         33,022   
                 

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

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 September 30, 2010, $1.2 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     September 30, 2010  
     $     $  

Raw materials, at cost

     55,202        55,292   

Work-in-process, at cost

     50,720        64,338   

Finished goods, at cost

     24,638        25,713   
                

Total inventory, at cost(1)

     130,560        145,343   

LIFO adjustment(2)

     23,348        21,505   

Lower of cost or market (“LCM”) reserve

     (7,892     (5,564
                

Inventory, at lower of cost or market

     146,016        161,284   

Supplies

     36,340        34,623   
                

Total inventories

     182,356        195,907   
                

 

(1)

Gramercy and St. Ann inventories comprise 30.0% and 27.4% of total inventories at cost at December 31, 2009 and September 30, 2010, respectively.

(2)

Inventories at Gramercy and St. Ann are stated at weighted average cost and are not subject to the LIFO adjustment.

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 unaudited 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 nine months ended September 30, 2009, we recorded a $12.6 million LIFO loss due to a decrement in inventory quantities. During the nine months ended September 30, 2010, there were no decrements in inventory quantities in our segments.

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
(in years)
     December 31,  2009(1)     September 30, 2010  
        $     $  

Land

        45,472        47,158   

Buildings and improvements

     10 — 47         114,898        114,313   

Machinery and equipment

     3 — 50         784,609        805,477   

Construction in progress

     —           28,723        34,610   
                   
        973,702        1,001,558   

Accumulated depreciation

  

     (228,204     (288,173
                   

Total property, plant and equipment, net

  

     745,498        713,385   
                   

 

(1)

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

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

Cost of sales includes depreciation expense on property, plant and equipment of the following amount in each period (in thousands):

 

Quarter-to-date

   $  

Three months ended September 30, 2009 (as adjusted)

     19,225   

Three months ended September 30, 2010

     22,104   

Year-to-date

   $  

Nine months ended September 30, 2009 (as adjusted)

     63,098   

Nine months ended September 30, 2010

     68,022   

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  
     Goodwill      Impairment
losses
     Goodwill      Impairment
losses
    Total  
     $      $      $      $     $  

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, September 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 or third quarter 2009 regarding the recoverability of goodwill; therefore, no goodwill impairment testing was necessary at June 30, 2009 or September 30, 2009.

Our impairment analysis performed in fourth quarter 2009 related to our annual impairment test (performed on October 1) resulted in a $64.9 million write-down of the remaining goodwill in the flat rolled products segment. This write-down reflects our view that the rolled products markets will be increasingly competitive for the foreseeable future. The combination of price-based competition and increased demand for lighter gauge products will limit opportunities for achieving higher fabrication margins.

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.

10. OTHER INTANGIBLE ASSETS

Intangible assets consisted of the following (in thousands):

 

     December 31, 2009     September 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     (14,940
                

Total intangible assets, net

     79,047        74,531   
                

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

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 September 30, 2009

     1,060   

Three months ended September 30, 2010

     1,488   

Year-to-date

   $  

Nine months ended September 30, 2009

     2,907   

Nine months ended September 30, 2010

     4,516   

As part of our interim impairment analysis of intangible assets during first quarter 2009, as discussed in Note 9—Goodwill, 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     September 30, 2010  
   $     $  

Trade

     85,732        115,316   

Allowance for doubtful accounts

     (202     (150
                

Total accounts receivable, net

     85,530        115,166   
                

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

 

     December 31, 2009      September 30, 2010  
   $      $  

Current foreign deferred tax asset

     5,911         1,172   

Employee loans receivable, net

     2,083         2,058   

Restricted Cash (See note 22 – Commitments and Contingencies)

     1,924         6,976   

Other current assets

     3,890         4,277   
                 

Total other current assets

     13,808         14,483   
                 

Other assets consisted of the following (in thousands):

 

     December 31, 2009      September 30, 2010  
   $      $  

Deferred financing costs, net of amortization

     17,859         12,817   

Cash surrender value of life insurance

     22,775         22,766   

Pension assets

     6,543         6,953   

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

     10,708         12,638   

Supplies

     17,045         14,940   

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

     —           5,000   

Other

     10,201         10,985   
                 

Total other assets

     85,131         86,099   
                 

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

Accrued liabilities consisted of the following (in thousands):

 

     December 31, 2009      September 30, 2010  
   $      $  

Compensation and benefits

     31,752         24,049   

Workers’ compensation

     4,822         3,793   

Accrued operating expenses

     12,833         15,794   

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

     1,600         2,193   

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

     2,552         2,329   

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

     1,698         2,897   

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

     1,317         1,317   

Obligations to the Government of Jamaica (see Note 22, “Commitments and Contingencies”)

     4,929         3,860   

Pension and OPEB liabilities

     454         454   

Restructuring costs (See Note 4, “Restructuring”)

     4         2,040   
                 

Total accrued liabilities

     61,961         58,726   
                 

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

 

     December 31, 2009      September 30, 2010  
   $      $  

Reserve for uncertain tax positions (See Note 16, “Income Taxes”)

     10,090         10,363   

Workers’ compensation

     9,485         11,486   

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

     11,842         12,179   

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

     5,104         4,658   

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

     7,244         6,584   

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

     3,046         3,027   

Deferred interest payable

     2,894         6,799   

Deferred compensation and other

     5,927         6,740   
                 

Total other long-term liabilities

     55,632         61,836   
                 

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

 

     December 31, 2009     September 30, 2010  
   $     $  

Net unrealized gains on derivatives, net of taxes of $113,361 and $82,659, respectively

     199,031        145,387   

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        91,084   
                

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 an Xstrata subsidiary. 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

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

payment consisted of $1.0 million in management fees accrued in 2010 prior to the termination of the management agreement, 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 nine months ended September 30, 2010. Management fees were $0.5 million and $1.5 million for the three and nine months ended September 30, 2009, respectively. There were no management fees incurred during the three months ended September 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 September 30, 2009

     1,703   

Three months ended September 30, 2010

     2,010   

Year-to-date

   $  

Nine months ended September 30, 2009

     4,057   

Nine months ended September 30, 2010

     8,728   

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):

 

     $  

Period from July 1, 2009 to August 31, 2009

     11,323   

Period from January 1, 2009 to August 31, 2009

     56,019   

13. LONG-TERM DEBT

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

 

     December 31, 2009      September 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         332,513         279,311         5.37   

Term B loan due 2014

     328,071        328,071         2.23         200,571         200,571         2.05   

Revolving credit facility(2)

     215,930        215,930         2.23         —           —           —     
                            

Total debt, net(1)

     951,666              533,084         

Less: current portion

     (7,500           —           
                            

Long-term debt, net(1)

     944,166              533,084         
                            

 

(1)

Net of $0.5 million unamortized discount at December 31, 2009.

(2)

As of September 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 Payment-In-Kind (“PIK”) interest due May 15, 2010. We have made a permitted election under the indentures governing our AcquisitionCo Notes, to pay all interest due hereunder on November 15, 2010 and May 15, 2011, entirely in kind.

(Gain) loss on debt repurchase

        During third quarter 2010, we repurchased and retired $20.6 million aggregate principal balance of our AcquisitionCo Notes. During the nine months ended September 30, 2010, we repaid $127.5 million and $215.9 million of aggregate principal balances on the term B loan and revolving credit facility, respectively, and we repurchased $66.3 million and $20.6 million aggregate principal balance of our HoldCo Notes and AcquisitionCo Notes, respectively. Debt repayments resulted in the accelerated amortization of $0.3 million of deferred financing costs and $2.9 million of deferred financing costs and unamortized debt issuance discount for the three and nine months ended September 30, 2010, respectively.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

During third quarter 2009, we repurchased $5.5 million and $74.7 million aggregate principal balance of our HoldCo and AcquisitionCo Notes, respectively, and repaid $0.9 million of outstanding principal balance on the term B loan. During the nine months ended September 30, 2009, we repurchased $154.7 million and $139.6 million aggregate principal balance of our HoldCo and AcquisitionCo notes, respectively, and repaid $44.4 million and $6.6 million of outstanding principal balance on the term B loan and revolving credit facility borrowings, respectively.

For the repurchase activity described above, (gain) loss on debt repurchases consisted of the following (in thousands):

 

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

Net carrying amount of debt repurchased or repaid(1)

     (5,603     (74,502     (920     —          (81,025

Amount paid to repurchase debt(2)

     2,529        49,242        680        —          52,451   
                                        

(Gain) loss on debt repurchase

     (3,074     (25,260     (240     —          (28,574
                                        
     Three months ended September 30, 2010  
     HoldCo Notes     AcquisitionCo
Notes
    Term B loan     Revolving credit
facility
    Total  
                                        
     $     $     $     $     $  

Net carrying amount of debt repurchased or repaid(1)

     —          (20,703     —          —          (20,703

Amount paid to repurchase debt

     —          17,138        —          —          17,138   
                                        

(Gain) loss on debt repurchase

     —          (3,565     —          —          (3,565
                                        
     Nine months ended September 30, 2009  
     HoldCo Notes     AcquisitionCo
Notes
    Term B loan     Revolving credit
facility
    Total  
     $     $     $     $     $  

Net carrying amount of debt repurchased or repaid(1)

     (152,696     (138,890     (43,933     (6,404     (341,923

Amount paid to repurchase debt(2)

     39,414        67,754        37,502        4,029        148,699   
                                        

(Gain) loss on debt repurchase

     (113,282     (71,136     (6,431     (2,375     (193,224
                                        
     Nine months ended September 30, 2010  
     HoldCo Notes     AcquisitionCo
Notes
    Term B loan     Revolving credit
facility
    Total  
     $     $     $     $     $  

Net carrying amount of debt repurchased or repaid(1)

     (65,388     (20,703     (125,848     (215,930     (427,869

Amount paid to repurchase debt

     66,348        17,138        127,500        215,930        426,916   
                                        

(Gain) loss on debt repurchase

     960        (3,565     1,652        —          (953
                                        

 

(1)

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

(2)

Includes third party and creditor fees of $0.3 million and $1.2 million for the three and nine months ended September 30, 2009, respectively. These fees were related to amending our credit agreement in 2009 to allow debt repurchases.

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.

        In April, 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.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

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

 

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

Service cost

     2,183        2,256             56        71   

Interest cost

     4,709        4,452             187        124   

Expected return on plan assets

     (3,655     (4,199          —          —     

Actuarial (gain) loss

     1,811        1,242             (30     —     

Prior service cost

     85        83             —          —     

Settlement and termination benefits

     142        —               —          —     
                                     

Net periodic cost

     5,275        3,834             213        195   
                                     
     Noranda Pension            Noranda OPEB  
     Nine months ended September 30,            Nine months ended September 30,  
     2009     2010            2009     2010  
     $     $            $     $  

Service cost

     6,133        6,766             123        216   

Interest cost

     13,409        13,266             397        374   

Expected return on plan assets

     (9,855     (12,599          —          (2

Actuarial (gain) loss

     5,144        3,728             (50     (55

Prior service cost

     238        250             —          66   

Settlement and termination benefits

     406        1,630             —          —     
                                     

Net periodic cost

     15,475        13,041             470        599   
                                     

 

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

Service cost

     136             76   

Interest cost

     356             167   

Expected return on plan assets

     (517          —     

Actuarial loss

     13             18   
                     

Net periodic cost

     (12          261   
                     
     St. Ann Pension            St. Ann OPEB  
     Nine months ended September 30, 2010  
     $            $  

Service cost

     407             206   

Interest cost

     1,234             556   

Expected return on plan assets

     (1,774          —     

Recognized loss

     1,544             1,203   

Curtailment gain

     (1,511          (1,201

Actuarial loss

     22             30   
                     

Net periodic cost

     (78          794   
                     

Net periodic pension cost for St. Ann pension and OPEB plans for the period August 31, 2009 to September 30, 2009 is not presented as the costs were immaterial.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

Employer contributions

We plan to contribute a minimum of $10.0 million, $0.7 million, and $0.5 million for the Noranda pension plans, the St. Ann pension and OPEB plans, and the Noranda OPEB plans, respectively in 2010. During the nine months ended September 30, 2010, we contributed $7.1 million to the Noranda pension plans, $0.5 million to the St. Ann pension and OPEB plans and $0.5 million to the Noranda OPEB plans. In December 2009, we contributed $20.5 million to our pension plans in order to maintain an Adjusted Funding Target Attainment Percentage (“AFTAP”) under the Pension Protection Act of 2006 of 80%. We may elect to make similar additional contributions prior to December 31, 2010.

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 September 30, 2010, employees owned 950,232 shares and there were 2,276,632 option grants outstanding. The remaining 573,136 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 Award 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 September 30, 2010.

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

     (28,658     1.14         —          —     
                       

Outstanding - September 30, 2010

     2,136,632        1.84         140,000        9.00   
                       

Fully vested - end of period (weighted average remaining contractual term of 6.8 and 7.1 years, respectively)

     1,123,168        2.05         140,000        9.00   
                       

Currently exercisable - end of period (weighted average remaining contractual term of 6.8 and 7.1 years, respectively)

     1,025,088        2.05         140,000        9.00   
                       

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

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

 

     Three months ended September 30,      Nine months ended September 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   

Dividend yield

     —          —           —          —     

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

 

Quarter-to-date

   $  

Three months ended September 30, 2009

     371   

Three months ended September 30, 2010

     241   

Year-to-date

   $  

Nine months ended September 30, 2009

     1,111   

Nine months ended September 30, 2010

     4,210   

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 September 30, 2010.

As of September 30, 2010, total unrecognized stock compensation expense related to non-vested stock options was $3.9 million with a weighted average expense recognition period of 4.1 years.

16. INCOME TAXES

Our effective income tax rate was approximately 34.0% for the nine months ended September 30, 2010 and 28.3% for the nine months ended September 30, 2009.

 

   

The effective tax rate for the nine months ended September 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 nine months ended September 30, 2009 was primarily impacted by state income taxes, equity method investee income, goodwill impairment, and bargain purchase accounting.

As of September 30, 2010 and December 31, 2009, we had unrecognized income tax benefits (including interest) of approximately $11.7 million and $11.5 million, respectively (of which approximately $7.7 million and $7.5 million respectively, if recognized, would favorably impact the effective income tax rate). As of September 30, 2010, the gross amount of unrecognized tax benefits has not materially 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 August 2010, the Internal Revenue Service (“IRS”) concluded an examination of our U.S income tax return for 2006 and did not propose a change.

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.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

   

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 September 30, 2010, we have no outstanding fixed-price aluminum swaps.

 

   

Variable-price aluminum swaps. We 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.

As of September 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         19,335   

2011

     0.99         17,196   

2012

     0.98         75   
           
        36,606   
           

Natural gas swaps

 

Year

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

2010

     7.30         2,003   

2011

     7.28         8,048   

2012

     7.46         8,092   
           
        18,143   
           

Interest rate swap

 

     Hedged LIBOR Rate     Variable Rate Debt Hedged  
           $ (in thousands)  

November 15, 2010

     4.98     250,000   

May 15, 2011

     4.98     100,000   

November 15, 2011

     4.98     100,000   

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

We recognize all derivative instruments as either assets or liabilities at their estimated fair value in our unaudited consolidated 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     September 30, 2010  
     $     $  

Aluminum swaps-fixed-price

     196,602        —     

Aluminum swaps-variable-price

     6,813        3,855   

Interest rate swaps

     (13,312     (9,653

Natural gas swaps

     (25,839     (47,338
                

Total

     164,264        (53,136
                

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 unaudited 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     September 30, 2010  
     $     $  

Current derivative assets

     97,382        3,662   

Current derivative liabilities

     (28,627     (32,067
                

Current derivative assets (liabilities), net

     68,755        (28,405
                

Long-term derivative assets

     113,026        397   

Long-term derivative liabilities

     (17,517     (25,128
                

Long-term derivative assets (liabilities), net

     95,509        (24,731
                

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 September 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          —           —          4,059         (204

Interest rate swaps

     —           —          —           (13,312          —           —          —           (9,653

Natural gas swaps

     784         (3,608     —           (23,015          —           (24,951     —           (22,387
                                                                         

Total

     784         (3,608     209,624         (42,536          —           (24,951     4,059         (32,244
                                                                         

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.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

The following table presents the net amount of unrealized gains (losses) on cash flow hedges that were reported as a component of AOCI at September 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
September 30, 2010
 
   October 1, 2010 to
September 30, 2011
    Thereafter    
     $     $     $  

Aluminum swaps-fixed-price

     113,696        139,299        252,995   

Natural gas swaps

     (11,746     (13,203     (24,949
                        

Total

     101,950        126,096        228,046   
                        

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 unaudited consolidated statements of operations for each period.

 

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

Three months ended September 30, 2009:

            

Aluminum swaps-fixed-price

     (24,245     —          20,004        (4,241

Aluminum swaps-variable price

     —          —          (4,107     (4,107

Interest rate swaps

     —          —          2,065        2,065   

Natural gas swaps

     —          —          536        536   
                                

Total (gain) loss on hedging activities

     (24,245     —          18,498        (5,747
                                

Three months ended September 30, 2010:

            

Aluminum swaps-fixed-price

     (23,237     —          297        (22,940

Aluminum swaps-variable price

     —          —          (5,090     (5,090

Interest rate swaps

     —          —          536        536   

Natural gas swaps

     1,213        1        4,522        5,736   
                                

Total (gain) loss on hedging activities

     (22,024     1        265        (21,758
                                

Nine months ended September 30, 2009:

            

Aluminum swaps-fixed-price

     (149,272     (69     34,315        (115,026

Aluminum swaps-variable price

     —          —          (8,517     (8,517

Interest rate swaps

     —          —          2,915        2,915   

Natural gas swaps

     —          —          16,555        16,555   
                                

Total (gain) loss on hedging activities

     (149,272     (69     45,268        (104,073
                                

Nine months ended September 30, 2010:

            

Aluminum swaps-fixed-price

     (62,261     —          (1,202     (63,463

Aluminum swaps-variable price

     —          —          1,799        1,799   

Interest rate swaps

     —          —          1,940        1,940   

Natural gas swaps

     3,013        (33     12,704        15,684   
                                

Total (gain) loss on hedging activities

     (59,248     (33     15,241        (44,040
                                

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 September 30, 2010, the current and long-term portions of the reclamation obligation of $2.9 million and $6.6 million, respectively, are included in accrued liabilities and other long-term liabilities, respectively, in the accompanying unaudited consolidated balance sheets.

 

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Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

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

 

     Nine months ended
September 30, 2010
 
   $  

Balance, December 31, 2009

     8,942   

Additional liabilities incurred

     1,453   

Liabilities settled

     (1,401

Accretion expense

     487   
        

Balance, September 30, 2010

     9,481   
        

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 September 30, 2010, the current and long-term portions of the land obligation of $2.3 million and $4.7 million, respectively, are included in accrued liabilities and other long-term liabilities, respectively, in the accompanying unaudited consolidated balance sheets.

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 $2.2 million at December 31, 2009 and September 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 $12.2 million at December 31, 2009 and September 30, 2010, respectively, is included in other long-term liabilities in the accompanying unaudited consolidated balance sheets.

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

 

     Nine months ended
September 30, 2010
 
   $  

Balance, December 31, 2009

     13,442   

Additional liabilities incurred

     931   

Liabilities settled

     (763

Accretion expense

     762   
        

Balance, September 30, 2010

     14,372   
        

At December 31, 2009 and September 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 unaudited consolidated balance sheets. 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 a 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    

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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 unaudited consolidated 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 unaudited consolidated financial statements at the date of adoption.

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

 

     December 31, 2009            September 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             635        —          635   

Accounts receivable

     12,393        (12,393     —               16,346        (16,346     —     

Inventories, consisting of maintenance supplies, inventory and fuel

     11,813        —          11,813             10,113        —          10,113   

Property, plant and equipment, net

     36,911        —          36,911             36,188        —          36,188   

Other assets

     2,305        —          2,305             3,649        —          3,649   

Accounts payable and accrued liabilities

     (43,621     36,547        (7,074          (46,475     38,178        (8,297

Environmental, land and reclamation liabilities

     (8,152     —          (8,152          (8,691     —          (8,691

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             5,765        21,832        27,597   
                                                     

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 PER SHARE

We present both basic and diluted EPS on the face of the unaudited 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 amounts).

 

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Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

     Three months ended September 30,      Nine months ended September 30,  
     2009
(as adjusted)
     2010      2009
(as adjusted)
     2010  

Net income

   $ 125,949       $ 25,190       $ 158,102       $ 32,008   
                                   

Weighted-average common shares outstanding:

           

Basic

     43,534         55,280         43,501         49,421   

Effect of diluted securities

     —           1,019         —           890   
                                   

Diluted

     43,534         56,299         43,501         50,311   
                                   

Basic EPS

   $ 2.89       $ 0.46       $ 3.63       $ 0.65   

Diluted EPS

   $ 2.89       $ 0.45       $ 3.63       $ 0.64   

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 September 30,      Nine months ended September 30,  
     2009      2010      2009      2010  

Antidilutive options

     2,045,038         200,000         1,972,756         133,333   
                                   

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 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 to 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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Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

Valuations on a recurring basis

The table below presents our assets and liabilities that are measured at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy, as of September 30, 2010 (in thousands):

 

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

Cash equivalents

     24,762         —          —           24,762   

Derivative assets

     —           4,059        —           4,059   

Derivative liabilities

     —           (57,195     —           (57,195
                                  

Total

     24,762         (53,136     —           (28,374
                                  

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.

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 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.

The accounting for the Joint Venture Transaction involved a number of individual measurements based on significant inputs that are not observable in the market and, therefore, represent a Level 3 measurement.

 

   

Fair value of consideration:

 

   

Fair value of 50% equity interest. The fair values of our existing 50% interests in Gramercy and St. Ann were based on discounted cash flow projections. These projections require assumptions about future profitability and cash flows, which we believe reflected the best estimates of a hypothetical market participant at August 31, 2009. Key assumptions include: (a) cash flow periods of five 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 17.0% to 20.0%. Revenues included in the discounted cash flow projections were based on forecasted aluminum prices (on which alumina prices are based) per the LME and per aluminum analysts’ estimates, while forecasted volumes were based on our projected alumina needs and estimated third party customer demand. Expenses were based primarily on historical experience adjusted for inflation and production volume projections.

 

   

Noncontrolling interest. The value of GOJ’s noncontrolling interest in NJBP was calculated as 51% of the net fair value of NJBP’s assets and liabilities.

 

   

Fair values of assets acquired and liabilities assumed:

 

   

Cash and cash equivalents, accounts receivable, other assets, and accounts payable and accrued liabilities balances were recorded at their carrying values, which approximate fair value.

 

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Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

   

Inventories were valued at their net realizable value. Except for supplies inventory, the fair value of acquired inventory was a function of the inventories stage of production, with separate values established for finished goods, work-in-process, and raw materials. Key inputs included ultimate selling price, costs to complete in-process material, and disposal or selling costs, along with an estimate of the profit margin on the sales effort.

 

   

Property, plant and equipment were valued using a market approach where we were able to identify comparable sales of real estate and used machinery and equipment. Where comparable sales of used machinery and equipment were not available, we estimated fair value based on the replacement cost of new plant and equipment, less depreciation and decreases in value due to physical depreciation, functional obsolescence and economic obsolescence. Whether valuations were based on comparable sales or depreciated replacement cost, we considered the highest and best use for the assets being valued, which was determined to be their current use in the production of alumina or the mining of bauxite.

 

   

Intangible assets consist of contractual and non-contractual customer relationships. Valuations for these assets were based on discounted cash flow projections. These valuations require assumptions about future profitability and cash flows, which we believe reflected the best estimates of a hypothetical market participant at August 31, 2009. Key assumptions include: (a) cash flow periods over the estimated contract lives based on customer retention rates, and (b) discount rates based on a risk-adjusted weighted average cost of capital ranging 20.0% to 23.0%.

 

   

Asset retirement obligations and reclamation liabilities were valued at fair value using a discounted cash flow approach with credit-adjusted risk free rates ranging from 7.0% to 10.0%.

 

   

The fair values of the pension benefit obligations were actuarially determined using the Projected Unit Credit method with discount rates ranging from 5.3% to 5.7% for Gramercy and 16.0% for St. Ann. Pension plan assets were valued based on the fair market value of the underlying investments. Net pension asset and liabilities were calculated as the excess or deficiency of plan assets compared to benefit obligation.

22. COMMITMENTS AND CONTINGENCIES

Labor commitments

We are a party to six collective bargaining agreements that expire at various times within the next five years. The agreement with the United Steelworkers of America (“USWA”) at our Gramercy refinery expired in September 2010 and on October 1, 2010 a new five year labor agreement with the USWA was ratified by the refinery’s union members.

The agreement at St. Ann with the University and Allied Workers Union expired on April 30, 2010. We have received a new claim from the union and have begun negotiations. The agreement at St. Ann with the Union of Technical Administrative and Supervisory Personnel (“UTASP”) expires in December 2010. As of September 30, 2010, we have not received a new claim and have not begun negotiations with the UTASP. As customary in Jamaican labor practices, unions generally submit claims subsequent to the expiration of the collective bargaining agreements. We have completed the process of formalizing recognition of a third union at St. Ann with the Bustamante Industrial Trade Union. We are currently in negotiations to finalize terms of the agreement.

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 at the Gramercy refinery requiring remedial action or ongoing monitoring. As of September 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.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

Establishment Agreement

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 for fiscal years 2011 through 2014, of which $10.0 million was paid in June 2010 and the remainder will be paid in April 2011. As of September 30, 2010, $5.0 million of the prepayment is recorded in prepaid assets and $5.0 million is in other assets.

Under the establishment agreement, St. Ann is required to pay a dedication fee, an asset usage fee, a depletion fee, royalties, and a production levy. As of December 31, 2009 and September 30, 2010, we recorded accrued liabilities of $4.9 million and $3.9 million, respectively, for these fees. Prepaid GOJ fees of $10.7 million and $2.6 million were recorded in prepaid assets as of December 31, 2009 and September 30, 2010, respectively.

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 September 30, 2010 the remaining maximum future payments under these lease obligations totaled approximately $0.4 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 pursuant to which we have agreed to purchase substantially all of New Madrid’s electricity through May 2020. Our current rate structure with AmerenUE 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 AmerenUE on July 24, 2009. The MoPSC’s ruling resulted in no significant change to the base electricity rate for the New Madrid smelter. The fuel adjustment clause resulted in additional fuel charges of $1.3 million recorded in cost of goods sold during the three months ended September 30, 2010. We anticipate the fourth quarter 2010 impact of the fuel adjustment clause to be approximately $3.4 million. We are currently disputing the amount of cost increases related to the fuel adjustment clause. We are not able to predict these fuel adjustment charges, as they are dependent on Ameren’s fuel costs and off system sales volume and prices.

On September 3, 2010, AmerenUE filed a new rate case with the MoPSC seeking an 11% base rate increase. We expect a ruling on this request by July 29, 2011.

As of September 30, 2010, we hold $7.0 million in a restricted cash account which is reflected in other current assets on the unaudited consolidated balance sheet. This restricted cash represents money held in escrow by the Missouri Circuit Court for disputed amounts related to our appeal of AmerenUE’s rates.

 

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Condensed Notes to Unaudited 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.

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 U.S. 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.

During third quarter 2010, we revised our segment performance measure to be “segment profit” rather than U.S. GAAP-basis segment operating income. Segment profit (in which certain items, primarily non-recurring costs or non-cash expenses, are not allocated to the segments and in which certain items, primarily the income statement effects of current period cash settlements of hedges, are allocated to the segments) is also a measure used by management as a basis for resource allocation. We have provided a reconciliation of segment profit to segment operating income before income taxes for the periods presented. 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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Condensed Notes to Unaudited 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 year to date in 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 $51.4 million at September 30, 2010, which are located in Jamaica. The following tables summarize the operating results and assets of our reportable segments and a reconciliation of segment profit (loss) to income before income taxes (in thousands):

 

     Three months ended September 30, 2009
(as adjusted)
 
     Bauxite     Alumina
refining
    Primary
aluminum
products
    Flat rolled
products
    Corporate     Eliminations     Consolidated  
     $     $     $     $     $     $     $  

Sales:

              

External customers

     4,361        15,078        89,238        109,882        —          —          218,559   

Intersegment

     3,981        4,142        5,784        —          —          (13,907     —     
                                                        
     8,342        19,220        95,022        109,882        —          (13,907     218,559   
                                                        

Segment profit (loss)

     5,481        2,675        (855     15,147        (10,749     —          11,699   

Depreciation and amortization

     839        1,660        13,814        4,909        100        —          21,324   

Capital expenditures

     69        118        8,534        552        578        —          9,851   
     Three months ended September 30, 2009
(as adjusted)
 
     Bauxite     Alumina
refining
    Primary
aluminum
products
    Flat rolled
products
    Corporate     Eliminations     Consolidated  
     $     $     $     $     $     $     $  

Segment profit (loss)

     5,481        2,675        (855     15,147        (10,749     —          11,699   

Depreciation and amortization(1)

     (839     (1,660     (11,355     (4,909     (100     —          (18,863

LIFO/LCM

     —          —          2,244        1,235        —          —          3,479   

Loss on asset disposal

     —          —          (516     (2,999     —          —          (3,515

Non-cash pension, accretion and stock compensation

     (55     (55     (2,940     (2,692     2,741        —          (3,001

Cash settlements on hedging transactions

     —          —          855        2,048        —          —          2,903   

Power outage

     —          —          13,314        —          —          —          13,314   

Restructuring, relocation and severance

     —          (9     (338     (83     (185     —          (615

Consulting and sponsor fees

     —          —          —          —          (1,536     —          (1,536

Other, net(2)

     (5,675     (824     482        (280     344        —          (5,953
                                                        

Operating income (loss)

     (1,088     127        891        7,467        (9,485     —          (2,088
                                                        

Interest expense, net

  

    12,577   

Gain on hedging activities, net

  

    (5,747

Equity in net loss of investments in affiliates

  

    1,553   

Gain on debt repurchase

  

    (28,574

Gain on business combination

  

    (120,276
                    

Income before income taxes

  

    138,379   
                    

 

(1)

Depreciation and amortization for the primary aluminum products segment is presented net of insurance proceeds for the three months ended September 30, 2009

(2)

Other includes the net effect of (i) adding those amounts related to depreciation, amortization, interest and taxes at our 50% Joint Ventures during those periods prior to the Joint Venture Transaction, (ii) removing the impacts of any allowable purchase accounting adjustments, most significantly inventory obsolescence and LCM type reserves and (iii) removing the impacts of other immaterial non-recurring items.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

     Three months ended September 30, 2010  
     Bauxite      Alumina
refining
     Primary
aluminum
products
     Flat rolled
products
     Corporate     Eliminations     Consolidated  
     $      $      $      $      $     $     $  

Sales:

                  

External customers

     17,609         52,170         110,826         133,623         —          —          314,228   

Intersegment

     17,875         35,406         38,275         108         —          (91,664     —     
                                                            
     35,484         87,576         149,101         133,731         —          (91,664     314,228   
                                                            

Segment profit (loss)

     7,735         10,116         12,464         14,433         (5,793     (56     38,899   

Depreciation and amortization

     2,451         5,011         12,063         5,111         259        —          24,895   

Capital expenditures

     2,407         2,278         4,852         2,354         618        —          12,509   

 

     Three months ended September 30, 2010  
     Bauxite     Alumina
refining
    Primary
aluminum
products
    Flat rolled
products
    Corporate     Eliminations     Consolidated  
     $     $     $     $     $     $     $  

Segment profit (loss)

     7,735        10,116        12,464        14,433        (5,793     (56     38,899   

Depreciation and amortization

     (2,451     (5,011     (12,063     (5,111     (259     —          (24,895

LIFO/LCM

     —          —          6,192        4,838        —          32        11,062   

Loss on asset disposal

     1        —          (1,268     (158     (84     —          (1,509

Non-cash pension, accretion and stock compensation

     (163     (117     (735     (609     (367     —          (1,991

Cash settlements on hedging transactions

     —          —          77        (597     —          —          (520

Restructuring, relocation and severance

     (41     (19     (28     (120     (492     —          (700

Consulting and sponsor fees

     —          —          —          —          (207     —          (207

Other, net

     (6     (134     1        119        (45     —          (65
                                                        

Operating income (loss)

     5,075        4,835        4,640        12,795        (7,247     (24     20,074   
                                                        

Interest expense, net

  

    7,218   

Gain on hedging activities, net

  

    (21,758

Gain on debt repurchase

  

    (3,565
                    

Income before income taxes

  

    38,179   
                    

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

     Nine months ended September 30, 2009
(as adjusted)
 
     Bauxite      Alumina
refining
     Primary
aluminum
products
    Flat rolled
products
     Corporate     Eliminations     Consolidated  
     $      $      $     $      $     $     $  

Sales:

                 

External customers

     4,361         15,078         216,152        304,962         —          —          540,553   

Intersegment

     3,981         4,142         24,640        —           —          (32,763     —     
                                                           
     8,342         19,220         240,792        304,962         —          (32,763     540,553   
                                                           

Segment profit (loss)

     5,481         2,675         (11,646     25,132         (21,556     —          86   

Depreciation and amortization

     839         1,660         46,603        16,659         244        —          66,005   

Capital expenditures

     69         118         27,296        3,095         1,633        —          32,211   

 

     Nine months ended September 30, 2009
(as adjusted)
 
     Bauxite     Alumina
refining
    Primary
aluminum
products
    Flat rolled
products
    Corporate     Eliminations      Consolidated  
     $     $     $     $     $     $      $  

Segment profit (loss)

     5,481        2,675        (11,646     25,132        (21,556     —           86   

Depreciation and amortization(1)

     (839     (1,660     (39,923     (16,659     (244     —           (59,325

LIFO/LCM

     —          —          3,662        6,492        —          —           10,154   

Loss on asset disposal

     —          —          (2,063     (3,126     —          —           (5,189

Non-cash pension, accretion and stock compensation

     (55     (55     (3,286     (2,692     (1,728     —           (7,816

Cash settlements on hedging transactions

     —          —          10,086        12,197        —          —           22,283   

Power outage

     —          —          30,568        —          —          —           30,568   

Impairment on goodwill and intangible assets

     —          —          —          (43,000     —          —           (43,000

Restructuring, relocation and severance

     —          (9     1        (754     (238     —           (1,000

Consulting and sponsor fees

     —          —          —          —          (3,554     —           (3,554

Other, net(2)

     (5,675     (824     (12,038     (996     1,410        —           (18,123
                                                         

Operating income (loss)

     (1,088     127        (24,639     (23,406     (25,910     —           (74,916
                                                         

Interest expense, net

  

     42,551   

Gain on hedging activities, net

  

     (104,073

Equity in net loss of investments in affiliates

  

     79,654   

Gain on debt repurchase

  

     (193,224

Gain on business combination

  

     (120,276
                     

Income before income taxes

  

     220,452   
                     

 

(1)

Depreciation and amortization for the primary aluminum products segment is presented net of insurance proceeds of $6.7 million for the nine months ended September 30, 2009

(2)

Other includes the net effect of (i) adding those amounts related to depreciation, amortization, interest and taxes at our 50% Joint Ventures during those periods prior to the Joint Venture Transaction, (ii) removing the impacts of any allowable purchase accounting adjustments, most significantly inventory obsolescence and LCM type reserves and (iii) removing the impacts of other immaterial non-recurring items.

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

     Nine months ended September 30, 2010  
     Bauxite      Alumina
refining
     Primary
aluminum
products
     Flat rolled
products
     Corporate     Eliminations     Consolidated  
     $      $      $      $      $     $     $  

Sales:

                  

External customers

     42,713         161,876         345,874         400,179         —          —          950,642   

Intersegment

     47,979         113,231         98,364         108         —          (259,682     —     
                                                            
     90,692         275,107         444,238         400,287         —          (259,682     950,642   
                                                            

Segment profit (loss)

     20,042         35,924         70,015         40,182         (19,490     (2,461     144,212   

Depreciation and amortization

     8,083         15,376         36,439         15,507         675        —          76,080   

Capital expenditures

     5,353         6,471         20,098         6,841         1,556        —          40,319   

 

     Nine months ended September 30, 2010  
     Bauxite     Alumina
refining
    Primary
aluminum
products
    Flat rolled
products
    Corporate     Eliminations     Consolidated  
     $     $     $     $     $     $     $  

Segment profit (loss)

     20,042        35,924        70,015        40,182        (19,490     (2,461     144,212   

Depreciation and amortization

     (8,083     (15,376     (36,439     (15,507     (675     —          (76,080

LIFO/LCM

     —          —          (322     808        —          1,588        2,074   

Loss on asset disposal

     14        —          (2,828     (514     (84     —          (3,412

Non-cash pension, accretion and stock compensation

     (520     (933     (2,584     (1,764     (5,560     —          (11,361

Cash settlements on hedging transactions

     —          —          192        (925     —          —          (733

Restructuring, relocation and severance

     (3,160     (1,648     (1,900     (1,470     (860     —          (9,038

Consulting and sponsor fees

     —          —          —          —          (18,867     —          (18,867

Other, net

     (14     1,927        1        (74     (177     —          1,663   
                                                        

Operating income (loss)

     8,279        19,894        26,135        20,736        (45,713     (873     28,458   
                                                        

Interest expense, net

  

    25,004   

Gain on hedging activities, net

  

    (44,040

Gain loss on debt repurchase

  

    (953
                    

Income before income taxes

  

    48,447   
                    

 

     December 31, 2009     September 30, 2010  
   $     $  

Segment assets:

    

Bauxite

     125,168        130,854   

Alumina refining

     237,886        218,417   

Primary aluminum products

     612,099        599,003   

Flat rolled products

     382,601        393,051   

Corporate

     373,645        92,402   

Eliminations

     (33,811     (44,560
                

Total assets

     1,697,588        1,389,167   
                

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

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 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 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

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Statement of Operations

Three months ended September 30, 2009

(as adjusted)

(dollars expressed in thousands)

(unaudited)

 

     Parent  guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantor
    Eliminations     Consolidated  
     $     $     $     $     $     $  
Sales      —          —          214,198        8,342        (3,981     218,559   

Operating costs and expenses:

            

Cost of sales

     —          —          211,552        8,619        (3,981     216,190   

Selling, general and administrative expenses

     724        522        16,784        709        —          18,739   

Excess insurance proceeds

     —          —          (14,282     —          —          (14,282
                                                
     724        522        214,054        9,328        (3,981     220,647   
                                                
Operating income (loss)      (724     (522     144        (986     —          (2,088
                                                
Other (income) expenses             

Interest expense (income), net

     4,372        11,019        109        (2,923     —          12,577   

Gain on hedging activities, net

     —          —          (5,747     —          —          (5,747

Equity in net loss of unconsolidated subsidiaries

     —          —          1,553        —          —          1,553   

Gain on debt repurchase

     (70     (28,504     —          —          —          (28,574

Gain on business combination

     —          (120,276     —          —          —          (120,276
                                                
Total other (income) expenses      4,302        (137,761     (4,085     (2,923     —          (140,467
                                                

Income (loss) before income taxes

     (5,026     137,239        4,229        1,937        —          138,379   

Income tax expense (benefit)

     21,388        (17,419     6,791        1,670        —          12,430   

Equity in net income of subsidiaries

     152,363        (2,295     —          —          (150,068     —     
                                                

Net income (loss) for the period

     125,949        152,363        (2,562     267        (150,068     125,949   
                                                

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Statement of Operations

Three months ended September 30, 2010

(dollars expressed in thousands)

(unaudited)

 

     Parent  guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantors
     Eliminations     Consolidated  
     $     $     $     $      $     $  
Sales      —          —          296,620        35,483         (17,875     314,228   

Operating costs and expenses:

             

Cost of sales

     —          —          264,380        27,722         (17,875     274,227   

Selling, general and administrative expenses

     573        157        16,505        2,692         —          19,927   
                                                 
     573        157        280,885        30,414         (17,875     294,154   
                                                 
Operating income (loss)      (573     (157     15,735        5,069         —          20,074   
                                                 
Other (income) expenses              

Interest expense (income), net

     (106     7,250        74        —           —          7,218   

Gain on hedging activities, net

     —          —          (21,758     —           —          (21,758

Gain on debt repurchase

     —          (3,565     —          —           —          (3,565
                                                 
Total other (income) expenses      (106     3,685        (21,684     —           —          (18,105
                                                 

Income (loss) before income taxes

     (467     (3,842     37,419        5,069         —          38,179   

Income tax expense (benefit)

     (339     (2,043     13,470        1,901         —          12,989   

Equity in net income of subsidiaries

     25,318        27,117        —          —           (52,435     —     
                                                 

Net income (loss) for the period

     25,190        25,318        23,949        3,168         (52,435     25,190   
                                                 

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Statement of Operations

Nine months ended September 30, 2009

(as adjusted)

(dollars expressed in thousands)

(unaudited)

 

     Parent  guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantor
    Eliminations     Consolidated  
     $     $     $     $     $     $  
Sales      —          —          536,192        8,342        (3,981     540,553   

Operating costs and expenses:

            

Cost of sales

     —          —          559,616        8,619        (3,981     564,254   

Selling, general and administrative expenses

     2,356        1,977        46,633        716        —          51,682   

Goodwill and other intangible asset impairment

     —          —          43,000        —          —          43,000   

Excess insurance proceeds

     —          —          (43,467     —          —          (43,467
                                                
     2,356        1,977        605,782        9,335        (3,981     615,469   
                                                
Operating loss      (2,356     (1,977     (69,590     (993     —          (74,916
                                                
Other (income) expenses              —       

Interest expense (income), net

     13,960        38,640        279        (10,328     —          42,551   

Gain on hedging activities, net

     —          —          (104,073     —          —          (104,073

Gain on debt repurchase

     (11,079     (182,145     —          —          —          (193,224

Gain on business combination

     —          (120,276     —          —          —          (120,276

Equity in net loss of unconsolidated subsidiaries

     —          —          79,654        —          —          79,654   
                                                
Total other (income) expenses      2,881        (263,781     (24,140     (10,328     —          (295,368
                                                

Income (loss) before income taxes

     (5,237     261,804        (45,450     9,335        —          220,452   

Income tax expense (benefit)

     24,559        (3,011     34,930        5,872        —          62,350   

Equity in net income of subsidiaries

     187,898        (76,917     —          —          (110,981     —     
                                                

Net income (loss) for the period

     158,102        187,898        (80,380     3,463        (110,981     158,102   
                                                

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Statement of Operations

Nine months ended September 30, 2010

(dollars expressed in thousands)

(unaudited)

 

     Parent  guarantor
(Noranda HoldCo)
    Issuer (Noranda
AcquisitionCo)
    Subsidiary
guarantors
    Subsidiary
non-guarantors
    Eliminations     Consolidated  
     $     $     $     $     $     $  
Sales      —          —          907,930        90,691        (47,979     950,642   

Operating costs and expenses:

            

Cost of sales

     —          —          808,197        69,908        (47,979     830,126   

Selling, general and administrative expenses

     5,410        18,643        55,482        12,523        —          92,058   
                                                
     5,410        18,643        863,679        82,431        (47,979     922,184   
                                                
Operating income (loss)      (5,410     (18,643     44,251        8,260        —          28,458   
                                                
Other (income) expenses             

Interest expense (income), net

     6,067        22,823        240        (4,126     —          25,004   

Gain on hedging activities, net

     —          —          (44,040     —          —          (44,040

(Gain) loss on debt repurchase

     960        (1,913     —          —          —          (953
                                                
Total other (income) expenses      7,027        20,910        (43,800     (4,126     —          (19,989
                                                

Income (loss) before income taxes

     (12,437     (39,553     88,051        12,386        —          48,447   

Income tax expense (benefit)

     (3,942     (13,685     29,780        4,286        —          16,439   

Equity in net income of subsidiaries

     40,503        66,371        —          —          (106,874     —     
                                                

Net income (loss) for the period

     32,008        40,503        58,271        8,100        (106,874     32,008   
                                                

 

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NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited 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 assets

     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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Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

NORANDA ALUMINUM HOLDING CORPORATION

Consolidating Balance Sheet

September 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

     6,818        22,022        1,557        2,625        —          33,022   

Accounts receivable, net:

            

Trade

     —          —          110,442        4,724        —          115,166   

Affiliates

     21,207        7,331        143        12,859        (41,540     —     

Inventories

     —          —          168,071        28,709        (873     195,907   

Taxes receivable

     15,173        6,203        (13,767     (1,771     313        6,151   

Prepaid assets

     188        —          4,274        8,390        1        12,853   

Other current assets

     —          69        9,628        4,780        6        14,483   
                                                

Total current assets

     43,386        35,625        280,348        60,316        (42,093     377,582   
                                                

Investments in affiliates

     225,017        1,251,451        —          —          (1,476,468     —     

Advances due from affiliates

     —          19,348        517,147        63,524        (600,019     —     

Property, plant and equipment, net

     —          —          661,943        51,442        —          713,385   

Goodwill

     —          —          137,570        —          —          137,570   

Other intangible assets, net

     —          —          74,531        —          —          74,531   

Other assets

     —          12,817        57,601        15,681        —          86,099   
                                                

Total assets

     268,403        1,319,241        1,729,140        190,963        (2,118,580     1,389,167   
                                                

Current liabilities:

            

Accounts payable:

            

Trade

     64        —          73,927        5,219        —          79,210   

Affiliates

     —          21,207        12,860        7,473        (41,540     —     

Accrued liabilities

     —          —          43,635        15,089        2        58,726   

Accrued interest

     —          737        —          —          —          737   

Derivative liabilities, net

     —          —          28,405        —          —          28,405   

Deferred tax liabilities

     (13,077     (36,448     73,358        4,596        (1,023     27,406   
                                                

Total current liabilities

     (13,013     (14,504     232,185        32,377        (42,561     194,484   
                                                

Long-term debt, net

     —          533,084        —          —          —          533,084   

Long-term derivative liabilities, net

     —          —          24,731        —          —          24,731   

Pension and OPEB liabilities

     —          —          106,262        6,835        —          113,097   

Other long-term liabilities

     80        6,873        43,477        11,406        —          61,836   

Advances due to affiliates

     77,915        522,098        —          4        (600,017     —     

Deferred tax liabilities

     49,774        46,673        210,732        643        (5,534     302,288   

Common stock subject to redemption

     2,000        —          —          —          —          2,000   

Shareholders’ equity:

            

Common stock

     551        —          —          —          —          551   

Capital in excess of par value

     103,127        229,605        1,199,712        83,683        (1,513,000     103,127   

Accumulated deficit

     (43,115     (95,672     (182,047     53,019        224,700        (43,115

Accumulated other comprehensive income

     91,084        91,084        94,088        (3,004     (182,168     91,084   
                                                

Total Noranda shareholders’ equity

     151,647        225,017        1,111,753        133,698        (1,470,468     151,647   

Noncontrolling interest

     —          —          —          6,000        —          6,000   
                                                

Total shareholders’ equity

     151,647        225,017        1,111,753        139,698        (1,470,468     157,647   
                                                

Total liabilities and shareholders’ equity

     268,403        1,319,241        1,729,140        190,963        (2,118,580     1,389,167   
                                                

 

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Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

NORANDA ALUMINUM HOLDING CORPORATION

Condensed Consolidating Statement of Cash Flows

Nine months ended September 30, 2009

(as adjusted)

(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

     (4,181     209,655        24,313        1,348        (694     230,441   

INVESTING ACTIVITIES

            

Capital expenditures

     —          —          (32,211     —          —          (32,211

Purchase of debt

     —          —          —          (36,742     36,742        —     

Proceeds from insurance related to capital expenditures

     —          —          11,495        —          —          11,495   

Proceeds from sale of property, plant and equipment

     —          —          7        —          —          7   

Cash acquired in business combination

     —          —          5,108        6,028        —          11,136   
                                                

Cash provided by (used in) investing activities

     —          —          (15,601     (30,714     36,742        (9,573
                                                

FINANCING ACTIVITIES

            

Proceeds from issuance of shares

     41        —          —          —          —          41   

Repurchase of shares

     (90     —          —          —          —          (90

Borrowings on revolving credit facility

     —          13,000        —          —          —          13,000   

Repayments on revolving credit facility

     —          (14,500     —          —          —          (14,500

Repayment of long-term debt

     (2,673     (108,798     —          —          (36,048     (147,519

Intercompany advances

     3,049        (3,249     —          200        —          —     

Capital contribution (to subsidiary from parent)

     —          (36,088     —          36,088        —          —     

Distribution (to parent from subsidiary)

     1,280        (1,280     —          —          —          —     
                                                

Cash provided by (used in) financing activities

     1,607        (150,915     —          36,288        (36,048     (149,068
                                                

Change in cash and cash equivalents

     (2,574     58,740        8,712        6,922        —          71,800   

Cash and cash equivalents, beginning of period

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

Cash and cash equivalents, end of period

     21,527        218,734        9,333        6,922        —          256,516   
                                                

 

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Table of Contents

NORANDA ALUMINUM HOLDING CORPORATION

Condensed Notes to Unaudited Consolidated Financial Statements—(Continued)

 

 

NORANDA ALUMINUM HOLDING CORPORATION

Condensed Consolidating Statement of Cash Flows

Nine months ended September 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

     (32,102     242,985        32,125        6,936        —           249,944   

INVESTING ACTIVITIES

             

Capital expenditures

     —          —          (34,966     (5,353     —           (40,319

Proceeds from sale of property, plant and equipment

     —          —          132        36        —           168   
                                                 

Cash used in investing activities

     —          —          (34,834     (5,317     —           (40,151
                                                 

FINANCING ACTIVITIES

             

Proceeds from issuance of shares

     82,925        —          —          —          —           82,925   

Repayments on revolving credit facility

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

Repurchase of shares

     (16     —          —          —          —           (16

Repayment of long-term debt

     (66,348     (144,638     —          —          —           (210,986

Distribution (to parent from subsidiary)

     915        (915     —          —          —           —     
                                                 

Cash provided by (used in) financing activities

     17,476        (361,483     —          —          —           (344,007
                                                 

Change in cash and cash equivalents

     (14,626     (118,498     (2,709     1,619        —           (134,214

Cash and cash equivalents, beginning of period

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

Cash and cash equivalents, end of period

     6,818        22,022        1,557        2,625        —           33,022   
                                                 

 

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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 third quarter 2010 results reflect these significant events:

 

   

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 third quarter 2010 had a favorable impact on third quarter 2010 operating results compared to third quarter 2009.

 

   

Demand conditions remained strong during third quarter 2010, particularly across the majority of product groups in our flat rolled products segment, for billet and rod in the primary aluminum products segment, and for chemical grade alumina product in the alumina segment.

 

   

Realized pricing was higher in third quarter 2010 compared to third quarter 2009. During third quarter 2010, the London Metal Exchange (“LME”) aluminum price improved from $0.87 per pound at the beginning of the quarter to $1.05 per pound at the end of the third quarter. Our average realized Midwest transaction price (“MWTP”) for third quarter 2010 was $0.99, down approximately 5.0% from second quarter 2010, but moderately higher than third quarter 2009.

 

   

During third quarter 2010 we repurchased $20.6 million aggregate principal balance of AcquisitionCo Notes for $17.1 million. These debt repayments resulted in a $3.6 million net gain on debt repurchase.

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.

 

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Critical Accounting Policies and Estimates

Our unaudited 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 unaudited consolidated 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. 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. Specifically, our interim operating results are affected by peak power usage rates which apply to New Madrid from June through September each year. We are also subject to seasonality associated with the demand cycles of our end-use customers, which results in lower shipment levels from November to February each year. 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 unaudited consolidated financial statements involves the use of certain estimates that are consistent with those used in the preparation of our annual consolidated 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 condensed notes to the unaudited consolidated financial statements elsewhere in this report unless the context otherwise requires.

 

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Results of Operations

 

      Three months ended September 30,     Nine months ended September 30,  
     2009
(as adjusted)(1)
    2010     2009
(as adjusted) (1)
    2010  
     $     $     $     $  

Statements of Operations Data (unaudited, in millions) (2):

        

Sales

     218.6        314.2        540.6        950.6   

Operating costs and expenses:

        

Cost of sales

     216.2        274.2        564.3        830.1   

Selling, general and administrative expenses

     18.7        19.9        51.7        92.1   

Goodwill and other intangible asset impairment

     —          —          43.0        —     

Excess insurance proceeds

     (14.3     —          (43.5     —     
                                
     220.6        294.2        615.5        922.2   
                                

Operating income (loss)

     (2.1     20.1        (74.9     28.5   
                                

Other expenses (income):

        

Interest expense, net

     12.6        7.2        42.6        25.0   

Gain on hedging activities, net

     (5.7     (21.8     (104.1     (44.0

Equity in net loss of investments in affiliates

     1.6        —          79.7        —     

Gain on debt repurchase

     (28.6     (3.6     (193.2     (1.0

Gains on business combination

     (120.3     —          (120.3     —     
                                

Total other deductions (income)

     (140.5     (18.1     (295.4     (20.0
                                

Income before income taxes

     138.4        38.2        220.5        48.4   

Income tax expense

     12.4        13.0        62.4        16.4   
                                

Net income for the period

     125.9        25.2        158.1        32.0   
                                

Net income per share

        

Basic

     2.89        0.46        3.63        0.65   

Diluted

     2.89        0.45        3.63        0.64   

Weighted-average shares outstanding (in millions)

        

Basic

     43.53        55.28        43.50        49.42   

Diluted

     43.53        56.30        43.50        50.31   

Sales by segment (in millions) (2):

        

Bauxite

     8.3        35.5        8.3        90.7   

Alumina refining

     19.2        87.6        19.2        275.1   

Primary aluminum products

     95.0        149.1        240.8        444.2   

Flat rolled products

     109.9        133.7        305.0        400.3   

Eliminations

     (13.9     (91.7     (32.8     (259.7
                                

Total

     218.6        314.2        540.6        950.6   

Segment profit (loss) (in millions) (2):

        

Bauxite

     5.5        7.7        5.5        20.0   

Alumina refining

     2.7        10.1        2.7        35.9   

Primary aluminum products

     (0.9     12.5        (11.6     70.0   

Flat rolled products

     15.1        14.4        25.1        40.2   

Corporate

     (10.7     (5.8     (21.6     (19.5

Eliminations

     —          (0.1     —          (2.5
                                

Total

     11.7        38.9        0.1        144.2   

Financial and other data:

        

Average realized Midwest transaction price per pound(4)

     0.86        0.99        0.75        1.02   

Integrated net cash cost for primary aluminum products (per pound shipped)(5)

     0.76        0.77        0.76        0.71   

Shipments:

        

Third party shipments:

        

Bauxite (kMts)

     145.0        570.5        145.0        1,392.7   

Alumina refining (kMts)(3)

     103.5        164.7        103.5        507.3   

Primary aluminum products (pounds, in millions)

     76.6        102.3        221.9        310.5   

Flat rolled products (pounds, in millions)

     84.4        92.0        235.3        267.7   

Intersegment shipments:

        

Bauxite (kMts)

     165.9        665.8        165.9        1,920.1   

Alumina refining (kMts)

     17.1        124.8        17.1        354.0   

Primary aluminum products (pounds, in millions)

     6.8        38.4        34.4        97.5   

 

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(1)

On August 3, 2009, we entered into an agreement with Century Aluminum Company 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.” During third quarter 2009, we believed the Joint Venture Transaction would result in a bargain purchase gain; however, we were in the process of reassessing the recognition and measurement of identifiable assets acquired and liabilities assumed. During third quarter 2009, we recorded $127.3 million unallocated purchase price on the balance sheet as a long-term liability. During fourth quarter 2009, upon the conclusion of our reassessment process and the finalization of the valuations, we recorded a $120.3 million gain on the Joint Venture Transaction. As required, we have revised comparative information for prior periods presented in our unaudited consolidated financial statements as necessary, including recording the gain on business combination of $120.3 million.

(2)

Figures may not add due to rounding.

(3)

External alumina shipments represent 51.2 kMts from our Gramercy refinery as well as 52.3 kMts of excess alumina sold from our New Madrid smelter during the three and nine months ended September 30, 2009.

(4)

The price for primary aluminum products consists of two components: the price quoted for primary aluminum ingot by the LME and the Midwest transaction premium, a premium to LME price reflecting domestic market dynamics as well as the cost of shipping and warehousing. 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.

(5)

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 September 30,      Nine months ended September 30,  
     2009      2010      2009      2010  
     $      $      $      $  

Total upstream integrated net cash cost (in millions)

     63.0         108.6         194.8         290.1   

Total primary aluminum shipments (pounds in millions)

     83.4         140.7         256.3         408.1   
                                   

Net upstream integrated net cash cost for primary aluminum

     0.76         0.77         0.76         0.71   
                                   

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2009
(as adjusted)
    2010     2009
(as adjusted)
    2010  

(in millions)

   $     $     $     $  

Bauxite cost of sales

     8.7        27.7        8.7        69.9   

Alumina refining cost of sales

     21.6        80.2        21.6        247.4   

Primary aluminum products cost of sales

     102.6        138.9        292.9        400.5   

Flat rolled products cost of sales

     97.2        119.0        273.8        371.1   

Intersegment cost of sales

     (13.9     (91.6     (32.7     (258.8
                                

Total cost of sales

     216.2        274.2        564.3        830.1   
                                

Primary aluminum products cost of sales

     102.6        138.9        292.9        400.5   

LIFO and lower of cost or market adjustments(a)

     2.3        6.2        3.7        (0.3

Fabrication premium(b)

     (8.5     (9.8     (24.1     (27.4

Depreciation and amortization expense

     (12.8     (13.0     (46.6     (36.4

Alumina and bauxite impact(c)

     (0.7     (17.9     (8.6     (56.0

Selling, general and administrative expenses(d)

     0.1        4.8        7.2        12.2   

External alumina(e)

     (14.2     —          (14.2     —     

Other(f)

     (5.8     (0.6     (15.5     (2.5
                                

Total upstream integrated net cash cost of primary aluminum products

     63.0        108.6        194.8        290.1   
                                

 

(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 sales.

(e)

Represents the impact of sales of excess alumina from New Madrid, as the cash costs presented are for primary aluminum only.

(f)

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 nine months ended September 30, 2009 and September 30, 2010.

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

Three months ended September 30, 2009 compared to three months ended September 30, 2010 discussion of operating results.

Sales

Sales in the three months ended September 30, 2009 were $218.6 million compared to $314.2 million in the three months ended September 30, 2010.

Sales to external customers from our primary aluminum products segment increased from $89.2 million reported in third quarter 2009 to $110.8 million in third quarter 2010, driven primarily by the increase in LME prices, higher volumes of value-added shipments related to increased end-market demand.

 

   

A 15.1% increase in realized MWTP in the third quarter 2010 compared to third quarter 2009 increased external primary aluminum products revenue by $10.6 million.

 

   

A 33.6% increase in external primary aluminum shipments generated $25.2 million additional revenue comparing third quarter 2010 to third quarter 2009. Shipment increases in third quarter 2010 compared to third quarter 2009 were driven by increased end-market demand for billet and rod.

 

   

Revenues in the primary aluminum products segment for the three months ended September 30, 2009 include $14.2 million related to quantities of excess alumina shipped to external customers from our New Madrid smelter.

 

   

Total primary aluminum shipments in third quarter 2010 were 5.8 million pounds lower than in second quarter 2010 due to production and shipping timing differences in July. These production issues were resolved in August, and normal shipping operations occurred through the end of September.

Sales in our flat rolled products segment were $109.9 million in third quarter 2009, compared to $133.7 million in third quarter 2010, primarily due to the increase in LME prices, as well as higher shipments to external customers.

 

   

Rising LME prices contributed $13.8 million to the sales increase. Additionally, fabrication premiums were slightly higher during third quarter 2010 compared to third quarter 2009.

 

   

Higher shipment volumes increased revenues by $9.9 million in the third quarter 2010 compared to third quarter 2009. Shipment volumes from our flat rolled products segment increased 9.0% to 92.0 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 September 30, 2010 were $52.2 million and $17.6 million, respectively, compared to $15.1 million and $4.4 million for the three months ended September 30, 2009. We did not acquire the remaining 50% interests until the end of August of 2009, therefore third quarter 2009 results only reflected one month of sales for these segments.

Cost of sales

Cost of sales for third quarter 2009 was $216.2 million compared to $274.2 million in third quarter 2010. The increase in cost of sales is mainly the result of higher shipment volumes in both the primary aluminum segment and the flat rolled products segment, as well as the increase in LME prices reflected in the pass-through nature of the flat rolled products segment. Additionally, third quarter 2010 cost of sales were favorably impacted by $11.7 million of lower-of-cost-or-market adjustments on a LIFO basis due to the sell through of inventory and an increase in the LME aluminum price at September 30, 2010 compared to June 30, 2010. Third quarter 2009 cost of sales was favorably impacted by $20.0 million of such adjustments.

 

   

Total cost of sales in the primary aluminum products segment increased from $102.6 million in third quarter 2009 to $138.9 million in third quarter 2010. The increase relates to several factors, including a 68.7% increase in total shipments of primary aluminum due to the factors referenced in the discussion of sales, offset in part by decreased depreciation expense related to certain fixed assets which became fully-depreciated in second quarter 2009.

 

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Flat rolled products segment cost of sales increased from $97.2 million in third quarter 2009 to $119.0 million in third quarter 2010. The increase related principally to the increase in the LME aluminum price, since much of that segment’s product cost represents the pass-through cost of metal.

 

   

Cost of sales in the bauxite and alumina refining segments, before the effects of intercompany eliminations, totaled $8.7 million and $21.6 million, respectively, during third quarter 2009 compared to $27.7 million and $80.2 million, respectively, during third 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 only one month of costs for third 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 not 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.

The integrated net cash cost of primary aluminum was in-line with the Company’s expectations at $0.77 per pound in third quarter 2010, compared to $0.76 per pound in third quarter 2009. Cash cost in the third quarter 2009 was favorably impacted by the sale of 52.3 kMts of excess alumina sold from the New Madrid smelter. Third quarter in both periods includes the full effects of seasonal peak power rates. Additionally, the fuel adjustment clause resulted in additional fuel charges of $1.3 million recorded in cost of goods sold during the three months ended September 30, 2010. We anticipate the fourth quarter 2010 impact of the fuel adjustment clause to be approximately $3.4 million. We are not able to predict future fuel adjustment charges, as they are dependent on Ameren’s fuel costs and off system sales volume and prices.

CORE stands for “Cost-Out, Reliability, and Effectiveness”, and represents our productivity program. We believe CORE is an effective part of our efforts to manage for productivity, where we identify opportunities throughout the organization to either remove existing costs, or to affect processes or business arrangements. We then utilize project teams to address the opportunity. Although results will vary from year to year, our over-arching aim is to use CORE projects to offset the effects of inflation and to mitigate the impact of unexpected cost increases. Our CORE program target is to generate in total over $140.0 million of savings from 2009 through 2011—either in the form of cost savings, capital expenditure savings, or cash generation. In third quarter 2010, our results reflect approximately $15.4 million in cost savings, plus $3.7 million in capital expenditure savings, pursuant to our CORE program. For the nine months ended September 30, 2010, our results reflect approximately $46.7 million in cost savings and over $11.0 million in capital expenditure savings. Added to the $43.0 million of CORE savings accomplished in 2009, we have generated $100.7 million of our three year $140.0 million CORE program goal.

Selling, general and administrative expenses

Selling, general and administrative expenses in third quarter 2009 were $18.7 million compared to $19.9 million in third quarter 2010. The increase relates primarily to 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. Third quarter 2010 SG&A expenses for the bauxite and alumina segments reflect three months of SG&A costs in third quarter 2010. Third quarter 2009 only reflects one month of SG&A costs for these segments, as this was the period in which we became the sole owner of those operations.

Excess insurance proceeds

We reached an insurance settlement with our primary insurance carrier in the three months ended September 30, 2009. The settlement proceeds 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 $14.3 million residual after applying the total proceeds recognized against losses incurred through September 30, 2009. This amount is not intended to represent a gain on the insurance claim, but only a timing difference between proceeds recognized and claim-related costs incurred.

Operating income

Operating income in third quarter 2009 was a loss of $2.1 million compared to operating income of $20.1 million in third quarter 2010. The increase in operating income relates to quarter-over-quarter sales margin (sales minus cost of sales) improvements of $37.6 million, offset in part by $1.2 million increase in selling, general and administrative expenses.

Sales margin for third quarter 2009 was $2.4 million compared to $40.0 million in third quarter 2010. This increase resulted from the increase in realized MWTP coupled with efficiencies gained in bringing the smelter back to full production.

 

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Selling, general and administrative expenses were $18.7 million in third quarter 2009 compared to $19.9 million in third quarter 2010, due to increased costs associated with the Joint Venture Transaction.

Interest expense, net

Interest expense in third quarter 2009 was $12.6 million compared to $7.2 million in third quarter 2010, a decrease of $5.4 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 $5.7 million in third quarter 2009 compared to $21.8 million in third quarter 2010. Reclassification of hedge gains from accumulated other comprehensive income into earnings was comparable in both periods. The difference primarily relates to third quarter 2009 changes in fair value of aluminum hedges which were terminated in May 2010.

Equity in net loss of investments in affiliates

Equity in net loss of investments in affiliates was $1.6 million in third quarter 2009. We had no equity income or loss of investments in affiliates in third quarter 2010. 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 third quarter 2009, we repurchased $81.1 million aggregate principal amount of outstanding HoldCo Notes, AcquisitionCo Notes, term B loan and revolving credit facility for a price of $52.2 million plus fees, resulting in a $28.6 million gain. During third quarter 2010, we repurchased $20.6 million principal balance of AcquisitionCo Notes for $17.1 million, resulting in a net gain on debt repurchase of $3.6 million.

Gain on business combination

During third quarter 2009, we believed the Joint Venture Transaction would result in a bargain purchase gain; however, we were in the process of reassessing the recognition and measurement of identifiable assets acquired and liabilities assumed. During third quarter 2009, we recorded $127.3 million unallocated purchase price on the balance sheet as a long-term liability. During fourth quarter 2009, upon the conclusion of our reassessment process and the finalization of the valuations, we recorded a $120.3 million gain on the Joint Venture Transaction. As required, we have revised comparative information for prior periods presented in our unaudited consolidated financial statements as necessary, including recording the gain on business combination of $120.3 million. These adjustments had no impact on our results of operations as reported for the year ended December 31, 2009, but only represent a reclassification of earnings from fourth quarter 2009 to third quarter 2009. Any expenses related to the Joint Venture Transaction such as valuation, legal and consulting costs are included in selling, general, and administrative expenses.

Income before income taxes

Income before income taxes was $138.4 million in third quarter 2009 compared to $38.2 million in third quarter 2010. The special items outlined below significantly impacted the comparability of our pre-tax income:

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

 

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

Special items:

     

Insurance recoveries in excess of cost and losses

     14.3         —     

Gain on debt repurchase

     28.6         3.6   

Gain on business combination

     120.3         —     

Gain on hedging activities

     5.7         21.8   
                 

Total

     168.9         25.4   
                 

 

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Income tax expense (benefit)

Income tax expense was $12.4 million in third quarter 2009, compared to $13.0 million in third quarter 2010. The provision for income taxes resulted in an effective tax rate of 9.0% for third quarter 2009, compared with an effective tax rate of 34.0% for third quarter 2010.

The effective tax rate for the three months ended September 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 September 30, 2009 was primarily impacted by goodwill impairment, state income taxes, equity method investee income and bargain purchase accounting.

Net income

Net income was $125.9 million in third quarter 2009 compared to $25.2 million in third quarter 2010. The decrease in net income resulted from the net effects of (i) favorable impacts of $22.2 million of increased operating income, $16.1 million of increased gains on hedging activities and $5.4 million in reduced interest expenses, offset by (ii) reductions in other income, specifically, a $25.0 million reduction in gains on debt repurchase and the prior year $120.3 million gain on business combination.

Three months ended September 30, 2009 compared to three months ended September 30, 2010 discussion of segment results.

Primary aluminum products. Segment loss in third quarter 2009 was $0.9 million, compared to a segment profit of $12.5 million in third quarter 2010. Segment profit in third quarter 2010 was negatively impacted by production and shipping timing differences in July; however, in September 2010, our smelter produced 47.8 million pounds of metal, a new record for the smelter. Third quarter 2009 segment results reflect the continued negative impact from the power outage, as average pots in operation were only approximately 56%.

Flat rolled products. Segment profit in third quarter 2009 was $15.1 million, compared to $14.4 million in third quarter 2010. Shipment volumes from our flat rolled products segment increased 9.0% to 92.0 million pounds primarily due to higher end-market demand. Third quarter 2009 results were favorably affected by a pension adjustment.

Corporate. Corporate costs in third quarter 2009 were $10.7 million, compared to $5.8 million in third quarter 2010. The decrease is largely due to an unfavorable pension adjustment that occurred in the third quarter 2009.

A comparison of third quarter 2009 to third quarter 2010 of our bauxite and alumina refining segments is not meaningful, as we only wholly-owned the bauxite mining operations and the alumina refinery for one month in the three months ended September 30, 2009.

Nine months ended September 30, 2009 compared to nine months ended September 30, 2010.

Sales

Sales in the nine months ended September 30, 2009 were $540.6 million compared to $950.6 million in the nine months ended September 30, 2010, an increase of 75.9%.

Sales to external customers from our primary aluminum products segment increased 60% from $216.2 million in the first nine months of 2009 to $345.9 million in the first nine months of 2010, driven primarily by the increase in LME prices, higher volumes of value-added shipments related to increased end-market demand and higher sow volumes related to the New Madrid power outage in the prior year.

 

   

A 36.0% increase in realized MWTP increased external primary aluminum products revenue by $63.1 million in the nine months ended September 30, 2010 compared to the first nine months of 2009.

 

   

A 39.9% increase in external primary aluminum shipments generated $80.7 million additional revenue comparing the first nine months of 2010 to the first nine months of 2009. This increase is largely the result of the New Madrid smelter becoming fully operational during first quarter 2010. Shipments of value-added products in the first nine months of 2010 were 43.2% higher than in the first nine months of 2009. This higher volume was driven by increased end-market demand for billet and rod.

 

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Revenues in the primary aluminum products segment for the nine months ended September 30, 2009 include $14.2 million related to quantities of excess alumina shipped to external customers from our New Madrid smelter.

Sales in our flat rolled products segment increased 31.2% from the first nine months of 2009 to $400.3 million in the first nine months of 2010, primarily due to the increase in LME prices, as well as higher shipments to external customers.

 

   

Rising LME prices contributed $53.3 million to the sales increase. Fabrication premiums were relatively unchanged.

 

   

Higher shipment volumes increased revenues by $42.0 million. Shipment volumes from our flat rolled products segment increased 13.8% to 267.7 million pounds primarily due to higher end-market demand.

Sales to external customers from our alumina refining and bauxite segments for the nine months ended September 30, 2010 were $161.9 million and $42.7 million, respectively.

Cost of sales

Cost of sales for the first nine months of 2009 was $564.3 million compared to $830.1 million in the first nine months of 2010. The increase in cost of sales is mainly the result of higher shipment volumes in both the primary aluminum and flat rolled products segments, as well as the increase in LME prices, reflected in the pass-through nature of the flat rolled products segment. Additionally, cost of sales in the nine months ended September 30, 2010 were favorably impacted by $2.3 million of lower-of-cost-or-market adjustments on a LIFO basis due to the sell through of inventory and an increase in the LME aluminum price at September 30, 2010 compared to December 31, 2009. Costs of sales in the nine months ended September 30, 2009 were favorably impacted by $35.4 million of such adjustments.

 

   

Total cost of sales in the primary aluminum products segment increased from $292.9 million in the first nine months of 2009 to $400.5 million in the first nine months of 2010. The increase relates to several factors, including a 59.2% 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 the first nine months of 2009, and (ii) a significant reduction in our integrated net cash cost to produce primary aluminum of $0.71 per pound in the first nine months of 2010, compared to $0.76 per pound in the first nine months of 2009. This decrease in integrated net cash cost reflects efficiencies gained from bringing the smelter back to full capacity during the first nine months of 2010 (average operating capacity during the first nine months of 2009 was approximately 58% versus approximately 92% in the first nine months of 2010), as well as reduced raw materials inputs.

 

   

Flat rolled products segment cost of sales increased from $273.8 million in the first nine months of 2009 to $371.1 million in the first nine months of 2010. The increase related principally to the increase in the LME aluminum price, since much of that segment’s product cost represents the pass-through cost of metal.

 

   

Cost of sales in the bauxite and alumina refining segments were $8.7 million and $21.6 million, respectively, during the first nine months of 2009. Cost of sales in the bauxite and alumina refining segments, before the effects of intercompany eliminations, totaled $69.9 million and $247.4 million, respectively during the first nine months 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.

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 nine months of 2010, the integrated net cash cost of primary aluminum was approximately $0.71 per pound.

Selling, general and administrative expenses

Selling, general and administrative expenses in the first nine months of 2009 were $51.7 million compared to $92.1 million in the first nine months of 2010. This change reflects (i) $22.1 million of increased costs from the inclusion of St. Ann and Gramercy since the Joint Venture Transaction, (ii) $8.1 million of costs related to our workforce and contract mining restructuring plans, (iii) $12.0 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) $3.3 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 nine months ended September 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 nine months ended September 30, 2010.

Excess insurance proceeds

We reached an insurance settlement with our primary insurance carrier in the nine months ended September 30, 2009. The settlement proceeds of $67.5 million were allocated to cost of sales and selling, general and administrative expenses to the extent losses were realized and eligible for recovery under our insurance policies. The line item titled “Excess insurance proceeds” reflects the residual after applying the total proceeds recognized against losses incurred through September 30, 2009. This amount is not intended to represent a gain on the insurance claim, but only a timing difference between proceeds recognized and claim-related costs incurred.

Operating income (loss)

Operating income (loss) in the first nine months of 2009 was a loss of $74.9 million compared to operating income of $28.5 million in the first nine months of 2010. The increase in operating income relates to sales margin improvements of $144.2 million, offset in part by $40.4 million increase in selling, general and administrative expenses.

Sales margin was a loss of $23.7 million for the first nine months of 2009 compared to income of $120.5 million the first nine months of 2010. This $144.2 million increase resulted from the impact of a 36% increase in realized MWTP coupled with efficiencies gained in bringing the smelter back to full production.

Selling, general and administrative expenses were $51.7 million in the first nine months of 2009 compared to $92.1 million in the first nine months of 2010 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 first nine months of 2009 was $42.6 million compared to $25.0 million in the first nine months of 2010, a decrease of $17.6 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 $104.1 million in the first nine months of 2009 compared to $44.0 million in the nine months ended September 30, 2010. Reclassifications of aluminum and natural gas hedge gains and losses from accumulated other comprehensive income into earnings in 2010 were $59.2 million, compared to $149.3 million in the nine months ended September 30, 2009. Of this amount in 2009, $78.5 million was reclassified into earnings related to the January 2009 de-designation of our then remaining fixed-price aluminum swaps because it was probable that the original forecasted transactions would not occur.

Equity in net loss of investments in affiliates

We had a net loss of investments in affiliates of $79.7 million for the first nine months of 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. We had no equity in net income of investments in affiliates for the first nine months of 2010.

(Gain) loss on debt repurchase

During the first nine months of, 2010 we used net proceeds from our completed IPO, available cash balances and proceeds from the termination of fixed-price aluminum swaps to repay $127.5 million and $215.9 million of aggregate principal balances on the term B loan and revolving credit facility, respectively, and repurchase $66.3 million and $20.6 million aggregate principal balance of our HoldCo Notes and AcquisitionCo Notes, respectively. The debt repurchases resulted in a $1.0 million net gain. During the first nine months of 2009, we repurchased $154.7 million and $139.6 million aggregate principal balance of our HoldCo and AcquisitionCo notes, respectively, and repaid $44.4 million and $6.6 million of outstanding principal balance on the term B loan and revolving credit facility borrowings, respectively. The debt repurchases resulted in a $193.2 million net gain.

 

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Gain on business combination

During third quarter 2009, we believed the Joint Venture Transaction would result in a bargain purchase gain; however, we were in the process of reassessing the recognition and measurement of identifiable assets acquired and liabilities assumed. During third quarter 2009, we recorded $127.3 million unallocated purchase price on the balance sheet as a long-term liability. During fourth quarter 2009, upon the conclusion of our reassessment process and the finalization of the valuations, we recorded a $120.3 million gain on the Joint Venture Transaction. As required, we have revised comparative information for prior periods presented in our unaudited consolidated financial statements as necessary, including recording the gain on business combination of $120.3 million. These adjustments had no impact on our results of operations as reported for the year ended December 31, 2009, but only represent a reclassification of earnings from fourth quarter 2009 to third quarter 2009. Any expenses related to the Joint Venture Transaction such as valuation, legal and consulting costs are included in selling, general, and administrative expenses.

Income (loss) before income taxes

Income before income taxes was $220.5 million in the first nine months of 2009 compared to $48.4 million in the first nine months of 2010. The special items outlined below significantly impacted the comparability of our pre-tax income:

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

 

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

Special items:

    

Insurance recoveries in excess of costs and losses

     43.5        —     

Management agreement termination

     —          (12.5

Modification of stock options

     —          (3.2

Other transaction related legal costs

     —          (5.4

Restructuring

     —          (8.1

Gain on debt repurchase

     193.2        1.0   

Gain on business combination

     120.3        —     

Impairment of equity method investment

     (80.3     —     

Goodwill and other intangible asset impairment

     (43.0     —     

Gain on hedging activities

     104.1        44.0   
                

Total

     337.8        15.8   
                

Income tax expense (benefit)

Income tax expense was $62.4 million in the first nine months of 2009, compared to $16.4 million in the first nine months of 2010.

The effective tax rate for the nine months ended September 30, 2009 was primarily impacted by goodwill impairment, state income taxes, equity method investee income and bargain purchase accounting. The effective tax rate for the nine months ended September 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.

Net income

Net income was $158.1 million in the first nine months of 2009 compared to $32.0 million in the first nine months of 2010. The decrease in net income resulted from the net effects of (i) favorable impacts of $103.4 million of increased operating income, $80.3 million of prior year impairment losses on our investment in affiliates and $63.6 million in reduced interest and income tax expenses, offset by (ii) reductions in other income, specifically, a $60.1 million reduction in gains on hedging activities, a $192.2 million reduction in gains on debt repurchase and the prior year $120.3 million gain on business combination.

Nine months ended September 30, 2009 compared to nine months ended September 30, 2010 discussion of segment results.

Primary aluminum products. Segment loss in the first nine months of 2009 was $11.6 million compared to segment profit of $70.0 million in the first nine months of 2010. Segment profit in the first nine months of 2010 reflects increases in LME prices, higher volumes of value-added shipments related to increased end-market demand. The first nine months of 2009 segment results reflect the negative impact from the power outage, as average pots in operation were only approximately 58%.

 

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Flat rolled products. Segment profit in the first nine months of 2009 was $25.1 million, compared to $40.2 million in the first nine months of 2010. Shipment volumes from our flat rolled products segment increased 13.8% to 267.7 million pounds primarily due to higher end-market demand along with increased efficiencies associated with higher production.

Corporate. Corporate costs in the first nine months of 2009 were $21.6 million compared to $19.5 million in the first nine months of 2010.

A comparison of the first nine months of 2009 to the first nine months of 2010 for our bauxite and alumina refining segments is not meaningful, as we only wholly-owned the bauxite mining operations and the alumina refinery for one month in the nine months ended September 30, 2009.

Liquidity and Capital Resources

Our primary sources of liquidity are available cash balances, cash provided by operating activities and available borrowings under our revolving credit facility. For the nine months ended September 30, 2010, cash provided by operating activities amounted to $249.9 million. At September 30, 2010 we had cash and cash equivalents of $33.0 million. Our revolving credit facility (“the facility”) has a $242.7 million borrowing capacity. We had no amounts outstanding, although we had outstanding letters of credit of $27.5 million, which resulted in $215.2 million available for borrowing under the facility at September 30, 2010.

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

 

     Outstanding balance at
September 30, 2010
     Ratings at October 15, 2010  
     

(in millions)

   $      Moody’s(1)      S&P(2)  

Noranda HoldCo:

        

Senior Floating Rate Notes due 2014

     —           

Noranda AcquisitionCo:

        

Senior Floating Rate Notes due 2015

     332.5         B3         CCC+   

Term B loan due 2014

     200.6         Ba3         B+   

Revolving credit facility

     —           
              

Total debt

     533.1         
              

 

(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:

 

     Nine months ended September 30,  
     2009     2010  

(in millions)

   $     $  

Cash provided by operating activities

     230.4        249.9   

Cash used in investing activities

     (9.6     (40.1

Cash used in financing activities

     (149.0     (344.0
                

Net change in cash and cash equivalents

     71.8        (134.2
                

Operating Activities

Cash provided by operating activities in the nine months ended September 30, 2010 reflected $164.6 million of proceeds from hedge terminations under our hedge settlement agreement with Merrill Lynch, offset by $31.8 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.

 

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We plan to contribute a minimum of $11.2 million to our pension and OPEB plans in 2010, of which $8.1 million has been contributed through the nine months ended September 30, 2010. In December 2009, we contributed $20.5 million to our pension plans in order to maintain an Adjusted Funding Target Attainment Percentage (“AFTAP”) under the Pension Protection Act of 2006 of 80%. We may elect to make similar additional contributions prior to December 31, 2010.

Investing Activities

Capital expenditures amounted to $40.3 million through September 30, 2010 and $32.2 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 nine months ended September 30, 2009, $11.5 million was related to the New Madrid restart, all of which was funded with insurance proceeds.

During third quarter 2010, we announced that we had initiated steps to complete a $38 million capital project at our New Madrid smelter facility. We expect the project to increase the smelter’s annual metal production by approximately 35 million pounds by 2013. We anticipate the capital spending will be spread primarily over 2011 and 2012 and do not expect additional capacity on-line until late 2013.

Financing Activities

During the nine months ended September 30, 2010 our financing cash flows mainly reflected debt reduction. Through September 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 and, $127.5 million of term B loan borrowings and to repurchase, $66.3 million principal balance of our HoldCo Notes and $20.6 million principal balance of our AcquisitionCo 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 Payment-in-Kind (“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 November 15, 2010 and May 15, 2011, 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)
     September 30,
2010
 

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         4.5 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   

 

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(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 was $15.6 million.

(2)

During second quarter 2010, we repurchased all outstanding HoldCo Notes; therefore ratio as of September 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 September 30, 2010 were $53.9 million and $42.4 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 September 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 September 30, 2010, senior secured debt was $200.6 million and unrestricted cash and permitted investments aggregated $26.2 million, resulting in senior secured net debt of $174.4 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 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.

 

      Twelve months
ended
December 31,
2009
    Last twelve
months ended
September  30,
2010
    Nine months
ended
September 30,
2009
(as adjusted)
    Nine months
ended
September  30,

2010
    Three months
ended
September 30,
2009

(as adjusted)
    Three months
ended

September 30,
2010
 

(in millions)

   $     $     $     $     $     $  

Net income (loss) for the period

     101.4        (24.7     158.1        32.0        125.9        25.2   

Income tax expense

     58.6        12.6        62.4        16.4        12.5        13.0   

Interest expense, net

     53.6        36.0        42.6        25.0        12.6        7.2   

Depreciation and amortization

     86.6        103.4        59.3        76.1        18.8        24.9   

Joint Venture EBITDA(a)

     8.0        —          8.0        —          0.7        —     

LIFO adjustment(b)

     26.0        1.1        25.2        0.3        16.4        0.7   

LCM adjustment(c)

     (43.4     (10.3     (35.4     (2.3     (20.0     (11.7

(Gain) loss on debt repurchase

     (211.2     (19.0     (193.2     (1.0     (28.5     (3.6

New Madrid power outage(d)

     (30.6     —          (30.6     —          (13.3     —     

Charges related to termination of derivatives

     17.9        9.1        17.8        9.0        6.1        —     

Non-cash hedging gains, net(e)(g)

     (86.1     (46.8     (80.2     (40.9     1.1        (27.1

Goodwill and other intangible asset impairment

     108.0        65.0        43.0        —          —          —     

Joint Venture impairment

     80.3        —          80.3        —          —          —     

Gain on business combination

     (120.3     —          (120.3     —          (120.3     —     

Purchase accounting(f)

     8.9        0.4        6.5        (2.0     6.5        —     

Other items, net(h)

     40.6        64.0        25.2        48.6        9.0        4.4   
                                                

Adjusted EBITDA

     98.3        190.8        68.7        161.2        27.5        33.0   
                                                

 

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

 

      Twelve  months
ended
December 31, 2009
    Last twelve
months ended
September 30, 2010
    Nine months
ended
September 30, 2009
(as adjusted)
    Nine months
ended
September 30, 2010
 

(in millions)

   $     $     $     $  

Cash flow from operating activities

     220.4        239.9        230.4        249.9   

Loss on disposal of property, plant and equipment

     (9.3     (5.4     (7.3     (3.4

Gain on hedging activities

     68.9        38.1        63.1        32.3   

Settlements from hedge terminations, net

     (120.8     (165.7     (119.7     (164.6

Insurance proceeds applied to capital expenditures

     11.5        —          11.5        —     

Equity in net income of investments in affiliates

     0.7        —          0.7        —     

Stock compensation expense

     (1.5     (4.6     (1.1     (4.2

Changes in deferred charges and other assets

     (0.8     (0.5     8.4        8.7   

Changes in pension and other long-term liabilities

     2.9        22.2        (32.0     (12.7

Changes in asset and liabilities, net

     (21.2     28.6        (18.0     31.8   

Income tax expense (benefit)

     0.9        17.5        (16.6     —     

Interest expense, net

     12.1        5.3        17.5        10.7   

Joint Venture EBITDA(a)

     8.0        —          8.0        —     

LIFO adjustment(b)

     26.0        1.1        25.2        0.3   

LCM adjustment(c)

     (43.4     (10.3     (35.4     (2.3

New Madrid power outage(d)

     (30.6     —          (30.6     —     

Non-cash hedging gains(e) (g)

     (86.1     (46.8     (80.2     (40.9

Charges related to termination of derivatives

     17.9        9.1        17.8        9.0   

Purchase accounting(f)

     8.9        (1.6     8.5        (2.0

Insurance proceeds applied to depreciation expense

     (6.8     (6.8     —          —     

Other items, net(h)

     40.6        70.7        18.5        48.6   
                                

Adjusted EBITDA

     98.3        190.8        68.7        161.2   
                                

 

(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
September 30,
2010
    Nine months
ended
September 30,
2009
    Nine months
ended
September 30,
2010
    Three months
ended

September 30,
2009
    Three months
ended

September 30,
2010
 
      $     $     $     $     $     $  

Aluminum swaps—fixed-price

     (93.1     (42.3     (75.0     (24.2     (18.9     —     

Aluminum swaps—variable-price

     23.8        0.8        22.2        (0.8     3.2        (0.5

Natural gas swaps

     31.8        23.8        24.3        16.3        8.9        5.9   

Interest rate swaps

     11.9        12.8        4.7        5.6        —          —     
                                                

Total

     (25.6     (4.9     (23.8     (3.1     (6.8     5.4   
                                                

This table reflects cash settlements net of early termination discounts totaling $17.9 million in 2009 and $4.1 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.

(g)

During third quarter 2010, we revised our previous interpretation of the definition of non-cash hedge gains in the credit agreement governing our senior secured credit facilities and the indentures governing our notes. We believe the revised interpretation is more consistent with the spirit of those agreements as they pertain to non-cash items. As such, we excluded from the calculation of Adjusted EBITDA cash gains from hedge monetization of $23.2 million and $30.9 million for the three and nine months ended September 30, 2010, respectively. The exclusion of this gain would not have caused us to fall us below the required thresholds of restrictive covenants as of June 30, 2010.

(h)

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

 

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     Twelve months
ended
December 31,
2009
    Last twelve
months ended
September  30,
2010
     Nine months
ended
September 30,
2009
     Nine months
ended
September 30,
2010
     Three months
ended
September 30,
2009
     Three months
ended

September 30,
2010
 
   $     $      $      $      $      $  

Sponsor fees

     2.0        14.0         1.5         13.5         0.5         —     

Pension expense-non cash portion

     8.1        8.0         6.0         5.9         2.3         1.3   

Employee compensation items

     1.8        4.9         1.4         4.5         0.4         0.2   

Loss on disposal of property, plant and equipment

     7.3        5.5         5.2         3.4         3.5         1.5   

Interest rate swap

     11.9        12.8         4.7         5.6         —           —     

Consulting and non-recurring fees

     5.6        7.3         3.7         5.4         1.0         0.2   

Restructuring

     (0.2     7.9         —           8.1         —           0.3   

Other

     4.1        3.6         2.7         2.2         1.3         0.9   
                                                    

Total

     40.6        64.0         25.2         48.6         9.0         4.4   
                                                    

 

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 summaries 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 September 30, 2010.

 

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 September 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.

 

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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 September 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

None.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

Compensatory Arrangements of Certain Officers

On October 26, 2010, we agreed to amended and restated Management Equity Investment and Incentive Termsheets with Messrs. Layle K. Smith, Kyle D. Lorentzen, Robert B. Mahoney and Ms. Gail Lehman and entered into new termsheets with Messrs. Scott Croft and Alan K. Brown (each, an “Executive”). Each of the termsheets has a three-year employment term commencing on October 26, 2010. The employment term will be automatically renewed for consecutive one-year periods, unless either party gives written notice of intent not to renew prior to an expiration date.

Amended and Restated Termsheets with Messrs. Smith and Lorentzen

Pursuant to the terms of their amended and restated termsheets, Messrs. Smith and Lorentzen will continue to serve as the Company’s Chief Executive Officer and Chief Operating Officer, respectively. The termsheets provide that Mr. Smith will have an annual base salary of $900,000 and a target annual bonus of 100% of base salary, and Mr. Lorentzen will have an annual base salary of $550,000 and a target annual bonus of 75% of base salary.

In the event that either of Messrs. Smith or Lorentzen incurs a termination without “cause” or a resignation for “good reason” (each as defined in the applicable termsheet), he will be entitled, subject to his execution and non-revocation of a general release, to (i) two times base salary plus target bonus, (ii) a pro-rated annual bonus, based on the Company’s actual performance, (iii) an additional twelve months of vesting (in the case of Mr. Smith) or full vesting (in the case of Mr. Lorentzen) of his stock options granted prior to our initial public offering (which we refer to as “Pre-IPO Options”) and (iv) eighteen months of post-termination continued health benefits. In the event such severance-qualifying termination occurs within the eighteen month period following a change in control of the Company (a “CIC Termination”), the Executive would be entitled to generally the same severance benefits as described above, except that the severance payment would be in an amount equal to three times base salary plus target bonus and there would be full vesting of the Pre-IPO Options. In the case of Mr. Smith, the amended and restated termsheet retains a provision to the effect that in the event a change in control occurs on or prior to March 3, 2013 and Mr. Smith remains employed at the Company through the twelve month anniversary of such a change in control (or, if earlier, experiences a severance-qualifying termination of employment), he will have the right to sell certain of his investment shares at a price of at least $7,530,000.

Amended and Restated Termsheets with Mr. Mahoney and Ms. Lehman and New Termsheets with Messrs. Croft and Brown

Pursuant to the termsheets, Mr. Mahoney, Ms. Lehman, Mr. Croft and Mr. Brown will continue to serve as the Company’s Chief Financial Officer, Vice President/General Counsel, President of the Downstream Business and Vice President of Human Resources, respectively. The termsheets provide that Mr. Mahoney, Ms. Lehman, Mr. Croft and Mr. Brown will have annual base salaries of $382,500, $300,000, $275,000, and $244,735, respectively, and target annual bonuses of 60% of base salary (for Mr. Mahoney and Ms. Lehman) and 50% of base salary (for Messrs. Croft and Brown).

In the event that Mr. Mahoney, Ms. Lehman, Mr. Croft, or Mr. Brown incurs a termination without “cause” or a resignation for “good reason” (each as defined under the applicable termsheet), he or she will be entitled, subject to the

 

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execution and non-revocation of a general release, to (i) one times (two times, in the event of a CIC Termination) base salary plus target bonus, (ii) a pro-rated annual bonus, determined based on the Company’s actual performance, (iii) an additional twelve months of vesting (full vesting in the event of a CIC Termination) of the Executive’s Pre-IPO Options and (iv) twelve months (eighteen months, in the event of a CIC Termination) of post-termination continued health benefits. In addition, Mr. Mahoney’s Pre-IPO Options will also fully vest if he remains employed at the Company through the eighteen month anniversary of a change in control.

General

Under the termsheets, each of the Executives is subject to non-solicitation and non-competition provisions during the duration of their employment at the Company and for two years (in the case of Messrs. Smith and Lorentzen) or one year (in the case of Messrs. Mahoney, Croft and Brown and Ms. Lehman) thereafter.

Under the termsheets, in the event any payments would be subject to the golden parachute excise tax under the Internal Revenue Code, the payments will be reduced such that no payments will become subject to the excise tax, unless the Executive would be in a better after-tax position by receiving all payments and paying the applicable excise tax.

The foregoing description of the new and amended and restated termsheets for each of the executives is qualified in its entirety by the full text of the termsheets, which are included as Exhibits 10.1 through 10.6 hereto and incorporated herein by reference.

Item 6.

Exhibits

 

10.1    Amended and Restated Management Equity Investment and Incentive Term Sheet, dated October 26, 2010, between Noranda Aluminum Holding Corporation and Layle K. Smith.
10.2    Amended and Restated Management Equity Investment and Incentive Term Sheet, dated October 26, 2010, between Noranda Aluminum Holding Corporation and Kyle D. Lorentzen.
10.3    Amended and Restated Management Equity Investment and Incentive Term Sheet, dated October 26, 2010, between Noranda Aluminum Holding Corporation and Robert B. Mahoney.
10.4    Amended and Restated Management Equity Investment and Incentive Term Sheet, dated October 26, 2010, between Noranda Aluminum Holding Corporation and Gail Lehman.
10.5    Equity Investment and Incentive Term Sheet, dated October 26, 2010, between Noranda Aluminum Holding Corporation and Alan K. Brown.
10.6    Equity Investment and Incentive Term Sheet, dated October 26, 2010, between Noranda Aluminum Holding Corporation and Scott Croft.
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.

 

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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: October 29, 2010     /s/    ROBERT B. MAHONEY        
   

Robert B. Mahoney

Chief Financial Officer

 

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