KALU

Business Context and Reporting Period

Company: Kaiser Aluminum Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Kaiser is an independent manufacturer of fabricated aluminum products (rolled, extruded, drawn, and forged) serving aerospace, general engineering, and custom automotive/industrial markets. The company also holds a 49% interest in Anglesey Aluminium Limited, a primary aluminum smelter in Wales. Operations include nine U.S. facilities and one in Canada.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Reversal: The company shifted from a net income of $101.0 million in 2007 to a net loss of $68.5 million in 2008. This was driven by significant non-run-rate charges totaling approximately $206.6 million.
• Derivative Losses: Recorded $87.1 million in non-cash, unrealized mark-to-market losses on derivative positions due to declining metal prices.
• Inventory Write-Down: Recorded a $65.5 million lower of cost or market inventory adjustment due to the sharp decline in London Metal Exchange (LME) aluminum prices.
• Anglesey Impairment: Fully impaired its 49% equity investment in Anglesey Aluminium Limited, recording a $37.8 million charge. This decision followed the announcement that Anglesey would curtail smelting operations in September 2009 due to the expiration of its power contract and inability to secure affordable alternative power.
• Restructuring: Incurred $8.8 million in restructuring charges related to the closure of the Tulsa, Oklahoma facility and curtailment of operations at the Bellwood, Virginia facility.
• Liquidity: Cash and cash equivalents dropped from $68.7 million to $0.2 million. The company began drawing on its revolving credit facility, with $36.0 million outstanding at year-end.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued strength in aerospace and high-strength product demand but expects weak demand in general industrial and ground transportation markets for 2009. Visibility into future market conditions is described as "poor."
• Anglesey Uncertainty: The company does not expect to receive dividends from Anglesey in the future and will not recognize its share of operating results unless recoverability is determined. The loss of Anglesey's production eliminates the company's "natural hedge" against primary aluminum price fluctuations, necessitating increased third-party hedging activity.
• Restructuring: The company expects to incur an additional $1 million to $3 million in charges in 2009 related to vendor contract terminations and facility consolidation.
• Capital Constraints: An amendment to the revolving credit facility in January 2009 prohibits share repurchases and restricts dividend payments to $25 million annually, contingent on maintaining $100 million in borrowing availability.
• Key Risks: Extreme volatility in commodity prices, disruption in global financial markets, reduced customer demand, and the potential for further plant closures or workforce reductions.

Investor Verification Checklist

• Anglesey Power Contract: Verify the status of negotiations for alternative power sources for Anglesey and the likelihood of operations continuing beyond September 2009.
• Derivative Exposure: Assess the company's updated hedging strategy and margin requirements given the loss of the "natural hedge" provided by Anglesey production.
• Inventory Valuation: Monitor LME aluminum prices to determine if further lower of cost or market write-downs are necessary (management noted a potential additional $8.3 million write-down based on January 2009 prices).
• Credit Facility Covenants: Review the amended credit agreement terms regarding dividend restrictions and borrowing availability thresholds.
• Customer Concentration: Note that the largest customer, Reliance Steel & Aluminum, accounted for 18% of net sales in 2008; verify the stability of this relationship.