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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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: 1-09447

KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
94-3030279
(State of incorporation)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
27422 Portola Parkway, Suite 200
Foothill Ranch, California    92610-2831
(Address of principal executive offices)    (Zip Code)

(949) 614-1740
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock, par value $0.01 per share
KALU
Nasdaq Global Select Market

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, and (2) has been subject to such filing requirements for the past 90 days.      Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth 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)
Smaller reporting company
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes No ☒
As of April 13, 2020, there were 15,789,594 shares of common stock of the registrant outstanding.
 




TABLE OF CONTENTS






































KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I – FINANCIAL INFORMATION


Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
March 31, 2020
 
December 31, 2019
 
(In millions of dollars, except share and per share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
307.2

 
$
264.3

Short-term investments
39.3

 
78.7

Receivables:
 
 
 
Trade receivables, net
175.2

 
167.1

Other
22.6

 
18.1

Contract assets
47.1

 
54.6

Inventories
194.6

 
177.6

Prepaid expenses and other current assets
20.4

 
19.4

Total current assets
806.4

 
779.8

Property, plant and equipment, net
630.9

 
622.0

Operating lease assets
28.8

 
25.8

Deferred tax assets, net
2.0

 
11.8

Intangible assets, net
28.9

 
29.6

Goodwill
18.8

 
18.8

Other assets
37.3

 
38.4

Total
$
1,553.1

 
$
1,526.2

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
113.9

 
$
92.0

Accrued salaries, wages and related expenses
28.3

 
34.4

Other accrued liabilities
56.9

 
44.0

Total current liabilities
199.1

 
170.4

Long-term portion of operating lease liabilities
27.8

 
25.2

Net liabilities of Salaried VEBA
32.5

 
32.6

Deferred tax liabilities
4.5

 
4.5

Long-term liabilities
75.3

 
67.0

Long-term debt
492.8

 
492.6

Total liabilities
832.0

 
792.3

Commitments and contingencies – Note 7


 


Stockholders' equity:
 
 
 
Preferred stock, 5,000,000 shares authorized at both March 31, 2020 and December 31, 2019; no shares were issued and outstanding at March 31, 2020 and December 31, 2019

 

Common stock, par value $0.01, 90,000,000 shares authorized at both March 31, 2020 and at December 31, 2019; 22,624,880 shares issued and 15,789,594 shares outstanding at March 31, 2020; 22,550,827 shares issued and 15,868,304 shares outstanding at December 31, 2019
0.2

 
0.2

Additional paid in capital
1,060.3

 
1,062.9

Retained earnings
190.6

 
172.8

Treasury stock, at cost, 6,835,286 shares at March 31, 2020 and 6,682,523 shares at December 31, 2019, respectively
(475.9
)
 
(463.4
)
Accumulated other comprehensive loss
(54.1
)
 
(38.6
)
Total stockholders' equity
721.1

 
733.9

Total
$
1,553.1

 
$
1,526.2


The accompanying notes to interim consolidated financial statements are an integral part of these statements.


1


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)

 
Quarter Ended
 
March 31,

2020
 
2019

(In millions of dollars, except share and per share amounts)
Net sales
$
369.3

 
$
395.2

Costs and expenses:
 
 
 
Cost of products sold, excluding depreciation and amortization and other items
286.6

 
315.1

Depreciation and amortization
13.2

 
11.9

Selling, general, administrative, research and development
23.9

 
25.2

Total costs and expenses
323.7

 
352.2

Operating income
45.6

 
43.0

Other (expense) income:
 
 
 
Interest expense
(6.1
)
 
(5.7
)
Other (expense) income, net – Note 9
(0.8
)
 
0.5

Income before income taxes
38.7

 
37.8

Income tax provision
(9.6
)
 
(9.8
)
Net income
$
29.1

 
$
28.0

 
 
 
 
Net income per common share:
 
 
 
Basic
$
1.83

 
$
1.74

Diluted
$
1.81

 
$
1.71

Weighted-average number of common shares outstanding (in thousands):
 
 
 
Basic
15,838

 
16,108

Diluted
16,008

 
16,372



The accompanying notes to interim consolidated financial statements are an integral part of these statements.


2


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

 
Quarter Ended
 
March 31,
 
2020
 
2019
 
(In millions of dollars)
Net income
$
29.1

 
$
28.0

Other comprehensive (loss) income, net of tax – Note 8:
 
 
 
Defined benefit pension plan and Salaried VEBA
1.1

 
1.1

Available for sale securities
(0.2
)
 
(0.2
)
Cash flow hedges
(15.9
)
 
8.8

Fair value hedges
(0.5
)
 

Other comprehensive (loss) income, net of tax
(15.5
)
 
9.7

Comprehensive income
$
13.6

 
$
37.7


The accompanying notes to interim consolidated financial statements are an integral part of these statements.



3


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (UNAUDITED)

Quarter Ended March 31, 2020
 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid in Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
(In millions of dollars, except share and per share amounts)
BALANCE, December 31, 2019
15,868,304

 
$
0.2

 
$
1,062.9

 
$
172.8

 
$
(463.4
)
 
$
(38.6
)
 
$
733.9

Net income

 

 

 
29.1

 

 

 
29.1

Other comprehensive loss, net of tax

 

 

 

 

 
(15.5
)
 
(15.5
)
Common shares issued (including impacts from Long-Term Incentive programs)1
119,598

 

 

 

 

 

 

Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(45,545
)
 

 
(4.3
)
 

 

 

 
(4.3
)
Repurchase of common stock2
(152,763
)
 

 

 

 
(12.5
)
 

 
(12.5
)
Cash dividends declared3

 

 

 
(11.3
)
 

 

 
(11.3
)
Amortization of unearned equity compensation

 

 
1.7

 

 

 

 
1.7

BALANCE, March 31, 2020
15,789,594

 
$
0.2

 
$
1,060.3

 
$
190.6

 
$
(475.9
)
 
$
(54.1
)
 
$
721.1


____________________
1 
At March 31, 2020, 380,201 shares were available for awards under the Kaiser Aluminum Corporation 2016 Equity and Incentive Compensation Plan ("2016 Plan").
2 
Weighted-average repurchase price (dollars per share) for the quarter ended March 31, 2020 was $81.94. At March 31, 2020, $93.1 million remained available to repurchase our common shares pursuant to the stock repurchase program.
3 
Dividends declared per common share was $0.67 for the quarter ended March 31, 2020.

The accompanying notes to interim consolidated financial statements are an integral part of these statements.


4


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY CONTINUED (UNAUDITED)


Quarter Ended March 31, 2019
 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
(In millions of dollars, except share and per share amounts)
BALANCE, December 31, 2018
16,234,603

 
$
0.2

 
$
1,059.3

 
$
150.2

 
$
(420.5
)
 
$
(48.8
)
 
$
740.4

Net income

 

 

 
28.0

 

 

 
28.0

Other comprehensive income, net of tax

 

 

 

 

 
9.7

 
9.7

Common shares issued (including impacts from Long-Term Incentive programs)
122,309

 

 

 

 

 

 

Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(46,388
)
 

 
(5.0
)
 

 

 

 
(5.0
)
Repurchase of common stock1
(175,977
)
 

 

 

 
(17.4
)
 

 
(17.4
)
Cash dividends declared2

 

 

 
(10.2
)
 

 

 
(10.2
)
Amortization of unearned equity compensation

 

 
2.4

 

 

 

 
2.4

BALANCE, March 31, 2019
16,134,547

 
$
0.2

 
$
1,056.7

 
$
168.0

 
$
(437.9
)
 
$
(39.1
)
 
$
747.9

____________________
1 
Weighted-average repurchase price (dollars per share) for the quarter ended March 31, 2019 was $98.55.
2 
Dividends declared per common share were $0.60 for the quarter ended March 31, 2019.

The accompanying notes to interim consolidated financial statements are an integral part of these statements.


5


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 
Quarter Ended
 
March 31,
 
2020
 
2019
 
(In millions of dollars)
Cash flows from operating activities1:
 
 
 
Net income
$
29.1

 
$
28.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of property, plant and equipment
12.5

 
11.2

Amortization of definite-lived intangible assets
0.7

 
0.7

Amortization of debt discount and debt issuance costs
0.3

 
0.3

Deferred income taxes
14.8

 
10.4

Non-cash equity compensation
1.7

 
2.4

Gain on disposition of short-term investments
(0.5
)
 
(0.3
)
Loss on disposition of property, plant and equipment
0.2

 

Other non-cash changes in assets and liabilities
1.8

 
3.6

Changes in operating assets and liabilities:
 
 
 
Trade and other receivables
(12.6
)
 
(12.8
)
Contract assets
7.5

 
(3.5
)
Inventories
(17.0
)
 
(18.8
)
Prepaid expenses and other current assets
(2.8
)
 
(3.4
)
Accounts payable
21.7

 
7.4

Accrued liabilities
(2.3
)
 
(0.4
)
Annual variable cash contributions to Salaried VEBA
(2.9
)
 
(2.1
)
Long-term assets and liabilities, net
0.2

 
0.1

Net cash provided by operating activities
52.4

 
22.8

Cash flows from investing activities1:
 
 
 
Capital expenditures
(21.1
)
 
(13.6
)
Purchase of short-term investments
(39.1
)
 
(18.1
)
Proceeds from disposition of short-term investments
78.8

 
32.7

Net cash provided by investing activities
18.6

 
1.0

Cash flows from financing activities1:
 
 
 
Repayment of finance lease
(0.4
)
 
(0.3
)
Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares
(4.3
)
 
(5.0
)
Repurchase of common stock
(12.5
)
 
(18.5
)
Cash dividends and dividend equivalents paid
(11.3
)
 
(10.2
)
Net cash used in financing activities
(28.5
)
 
(34.0
)
Net increase (decrease) in cash, cash equivalents and restricted cash during the period
42.5

 
(10.2
)
Cash, cash equivalents and restricted cash at beginning of period
278.6

 
139.6

Cash, cash equivalents and restricted cash at end of period
$
321.1

 
$
129.4


____________________
1 
See Note 12 for supplemental cash flow information.
The accompanying notes to interim consolidated financial statements are an integral part of these statements.


6

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

NOTES INDEX
Note
 
Page
Basis of Presentation and Recent Accounting Pronouncements
Supplemental Balance Sheet Information
Leases
Employee Benefits
Derivatives, Hedging Programs and Other Financial Instruments
Debt and Credit Facility
Commitments and Contingencies
Accumulated Other Comprehensive Loss
Other (Expense) Income, Net
Income Tax Matters
Net Income Per Share
Supplemental Cash Flow Information
Business, Product and Geographical Area Information
Subsequent Events



7

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

1. Basis of Presentation and Recent Accounting Pronouncements
This Quarterly Report on Form 10-Q (this "Report") should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Unless the context otherwise requires, references in these notes to interim consolidated financial statements - unaudited to "Kaiser Aluminum Corporation," "we," "us," "our," "the Company" and "our Company" refer collectively to Kaiser Aluminum Corporation and its subsidiaries.
Principles of Consolidation and Basis of Presentation. The accompanying unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries and are prepared in accordance with United States generally accepted accounting principles ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") applicable for interim periods and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In management's opinion, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for our interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2020 fiscal year. The financial information as of December 31, 2019 is derived from our audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of our consolidated financial position and results of operations.
Adoption of New Accounting Pronouncements
Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), was issued in June 2016. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities have been replaced with a new forward-looking "expected loss" model that has resulted in the earlier recognition of allowances for losses. Our adoption of ASU 2016-13 during the quarter ended March 31, 2020 using the modified retrospective transition approach did not result in a material impact on our consolidated financial statements. As part of our assessment of the adequacy of our allowances for credit losses, we consider a number of factors including, but not limited to, customer credit ratings, bankruptcy filings, published or estimated credit default rates, age of receivables, expected loss rates and collateral exposures.
ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), was issued in August 2018. Under ASU 2018-15, requirements for capitalizing implementation costs incurred in a hosting arrangement (cloud computing) that is a service contract are to be aligned with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Our adoption of ASU 2018-15 during the quarter ended March 31, 2020 using the prospective transition approach did not result in a material impact on our consolidated financial statements.
Accounting Pronouncements Issued But Not Yet Adopted
ASU No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), was issued in December 2019. Under ASU 2019-12, the accounting for income taxes is simplified by eliminating certain exceptions and implementing additional requirements which result in a more consistent application of ASC 740 Income Taxes. We are currently in the process of evaluating the impact of adopting ASU 2019-12 in 2021, but do not expect it to have a material impact on our consolidated financial statements.


8

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

2. Supplemental Balance Sheet Information
 
March 31, 2020
 
December 31, 2019
 
(In millions of dollars)
Cash and Cash Equivalents
 
 

Cash and money market funds
$
199.6

 
$
28.2

Commercial paper
107.6

 
236.1

Total
$
307.2

 
$
264.3

 
 
 
 
Trade Receivables, Net
 
 
 
Billed trade receivables
$
176.6

 
$
168.5

Allowance for doubtful receivables
(1.4
)
 
(1.4
)
Trade receivables, net
$
175.2

 
$
167.1

 
 
 
 
Inventories1
 
 
 
Finished products
$
43.1

 
$
42.6

Work-in-process
89.8

 
63.5

Raw materials
55.2

 
65.0

Operating supplies
6.5

 
6.5

Total
$
194.6

 
$
177.6

 
 
 
 
Property, Plant and Equipment, Net
 
 
 
Land and improvements
$
20.8

 
$
21.4

Buildings and leasehold improvements
106.8

 
104.5

Machinery and equipment
821.0

 
813.5

Construction in progress
44.0

 
33.2

Property, plant and equipment, gross
992.6

 
972.6

Accumulated depreciation
(364.0
)
 
(352.2
)
Assets held for sale
2.3

 
1.6

Property, plant and equipment, net
$
630.9

 
$
622.0

 
 
 
 
Other Accrued Liabilities
 
 
 
Uncleared cash disbursements
$
5.7

 
$
4.2

Accrued income taxes and taxes payable
10.3

 
6.2

Accrued annual contribution to Salaried VEBA

 
2.9

Accrued interest
2.0

 
2.3

Short-term environmental accrual – Note 7
4.7

 
5.5

Other – Note 3 and Note 5
34.2

 
22.9

Total
$
56.9

 
$
44.0

 
 
 
 



9

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 
March 31, 2020
 
December 31, 2019
 
(In millions of dollars)
Long-Term Liabilities
 
 
 
Workers' compensation accrual2
$
28.5

 
$
27.7

Long-term environmental accrual – Note 7
12.3

 
11.5

Other long-term liabilities
34.5

 
27.8

Total
$
75.3

 
$
67.0


____________________
1 
At March 31, 2020 and December 31, 2019, the current cost of our inventory exceeded its stated LIFO value by $1.9 million and $11.9 million, respectively.
2 
Our workers' compensation accrual was estimated using a discount rate of 1.00% and 1.75% at March 31, 2020 and December 31, 2019, respectively. The undiscounted workers' compensation liabilities were estimated at $29.0 million and $29.2 million as of March 31, 2020 and December 31, 2019, respectively.
3. Leases
We determine whether an agreement is a lease at inception. We have operating and finance leases for equipment and real estate that primarily have fixed lease payments. Our leases have remaining lease terms of approximately one to 13 years, some of which may include options to extend the lease for up to 20 years, and some of which may include options to terminate the lease within one year. None of our options to extend or terminate are reasonably certain of being exercised, and are therefore not included in our determination of lease assets and liabilities. Short-term leases with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheets.
As most of our leases do not provide an implicit rate, we use information available at the lease commencement date in determining an incremental borrowing rate when calculating our operating lease assets and operating lease liabilities. In determining the inputs to the incremental borrowing rate calculation, we make judgments about the value of the leased asset, our credit rating and the lease term, including the probability of our exercising options to extend or terminate the underlying lease. Additionally, we make judgments around contractual asset substitution rights in determining whether a contract contains a lease.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. These non-lease components include items such as common area maintenance, taxes and insurance for our real estate leases, as well as maintenance charges related to our equipment leases. We have, however, applied the practical expedient within ASU 2016-02 to not separate lease and non-lease components to our embedded supply system equipment leases and have therefore accounted for both lease and non-lease components in determining the lease assets and liabilities.
Many of our equipment leases contain clauses that require us to return the equipment with certain functionality intact. We account for these costs as residual value guarantees when the guarantee becomes probable of being owed. Our lease agreements do not contain any material restrictive covenants.
The following table presents lease terms and discount rates as of March 31, 2020:
 
 
Finance Leases
 
Operating Leases
Weighted-average lease term (in years)
 
5.7

 
9.7

Weighted-average discount rate
 
4.5
%
 
5.6
%



10

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

The following table summarizes the classification of lease assets and lease liabilities on our Consolidated Balance Sheet as of the periods presented (in millions of dollars):
Leases
 
Classification
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
28.8

 
$
25.8

Finance lease assets
 
Property, plant and equipment, net
 
6.3

 
6.6

Total lease assets
 
 
 
$
35.1

 
$
32.4

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current:
 
 
 
 
 
 
Operating lease liabilities
 
Other accrued liabilities
 
$
4.5

 
$
3.9

Finance lease liabilities
 
Other accrued liabilities
 
1.2

 
1.2

Non-current:
 
 
 
 
 
 
Operating lease liabilities
 
Long-term portion of operating lease liabilities
 
27.8

 
25.2

Finance lease liabilities
 
Long-term liabilities
 
5.1

 
5.4

Total lease liabilities
 
 
 
$
38.6

 
$
35.7


The following table summarizes the components of lease cost on our Statements of Consolidated Income for the periods presented (in millions of dollars):
 
 
Quarter Ended
 
 
March 31,
Lease Cost
 
2020
 
2019
Operating lease cost
 
$
1.8

 
$
2.0

Short-term lease cost
 
0.3

 
0.3

Finance lease cost:
 
 
 
 
Amortization of leased assets
 
0.4

 
0.4

Interest on lease liabilities
 
0.1

 
0.1

Total lease cost
 
$
2.6

 
$
2.8


The following table presents the maturity of our lease liabilities as of March 31, 2020 (in millions of dollars):
Maturity of Lease Liabilities
 
Finance Leases
 
Operating Leases
Remainder of 2020
 
$
1.2

 
$
4.7

2021
 
1.4

 
5.5

2022
 
1.3

 
4.7

2023
 
1.2

 
4.3

2024
 
0.6

 
4.1

2025
 
0.6

 
2.2

2026 and thereafter
 
0.7

 
16.9

Total minimum lease payments
 
$
7.0

 
$
42.4

 
 
 
 
 
Less: interest
 
(0.7
)
 
(10.1
)
Present value
 
$
6.3

 
$
32.3




11

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

4. Employee Benefits
Short-Term Incentive Plans ("STI Plans"). We have annual short-term incentive compensation plans for senior management and certain other employees payable at our election in cash, shares of common stock or a combination of cash and shares of common stock. Amounts earned under STI Plans are based on our adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), modified for certain safety, quality, delivery, cost and individual performance factors. The Adjusted EBITDA targets are determined based on the return on adjusted net assets. Most of our production facilities have similar programs for both hourly and salaried employees. As of March 31, 2020, we had a liability of $3.7 million recorded within Accrued salaries, wages and related expenses for estimated probable future payments relating to the three month performance period of our 2020 STI Plan.
Pension and Similar Benefit Plans. We provide contributions to: (i) defined contribution 401(k) savings plans for salaried employees and certain hourly employees; (ii) a non-qualified, unfunded, unsecured plan of deferred compensation (see "Deferred Compensation Plan" below); (iii) multi-employer pension plans sponsored by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC, the International Association of Machinists and certain other unions at certain of our production facilities; and (iv) a defined benefit pension plan for salaried employees at our London, Ontario (Canada) facility.
Deferred Compensation Plan. We have a non-qualified, unfunded, unsecured plan of deferred compensation for certain employees who would otherwise suffer a loss of benefits under our defined contribution plan as a result of the limitations imposed by the Internal Revenue Code of 1986. Despite the plan being an unfunded plan, we make an annual contribution to a rabbi trust to fulfill future funding obligations as contemplated by the terms of the plan. The assets in the trust are held in various investment funds at certain registered investment companies and are accounted for as equity investments with changes in fair value recorded within Other (expense) income, net (see Note 9). Assets of our deferred compensation plan are included in Other assets, classified within Level 2 of the fair value hierarchy and are measured and recorded at fair value based on their quoted market prices. The fair value of these assets at March 31, 2020 and December 31, 2019 was $7.6 million and $8.1 million, respectively. Offsetting liabilities relating to the deferred compensation plan are included in Other accrued liabilities and Long-term liabilities.
Salaried VEBA Postretirement Obligation. Certain retirees who retired prior to 2004 and certain employees who were hired prior to February 2002 and have subsequently retired or will retire with the requisite age and service, along with their surviving spouses and eligible dependents, are eligible to participate in a voluntary employees' beneficiary association ("VEBA") that provides healthcare cost, medical cost and long-term care insurance cost reimbursement benefits ("Salaried VEBA"). We have an ongoing obligation with no express termination date to make annual variable cash contributions up to a maximum of $2.9 million to the Salaried VEBA. We paid $2.9 million with respect to 2019 during the quarter ended March 31, 2020. We account for the Salaried VEBA as a defined benefit plan in our financial statements.
The following table presents the total (benefit) expense related to all postretirement benefit plans for the periods presented (in millions of dollars):
 
Quarter Ended
 
March 31,
 
2020
 
2019
Defined contribution plans1
$
3.9

 
$
3.9

Deferred compensation plan1
(0.4
)
 
0.7

Multiemployer pension plans1
1.3

 
1.2

Net periodic postretirement benefit cost relating to Salaried VEBA2
1.2

 
1.7

Total
$
6.0

 
$
7.5

____________________
1 
Substantially all of the expense related to employee benefits are in Cost of products sold, excluding depreciation and amortization and other items ("COGS") with the remaining balance in Selling, general, administrative, research and development ("SG&A and R&D").
2 
The current service cost component of Net periodic postretirement benefit cost relating to Salaried VEBA is included within our Statements of Consolidated Income in SG&A and R&D for all periods presented. All other components of Net


12

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

periodic postretirement benefit cost relating to Salaried VEBA are included within Other (expense) income, net, on our Statements of Consolidated Income.
Components of Net Periodic Benefit Cost. Our results of operations included the following impacts associated with our Canadian pension plan and the Salaried VEBA: (i) a charge for service rendered by employees; (ii) a charge for accretion of interest; (iii) a benefit for the expected return on plan assets; (iv) amortization of prior service costs associated with plan amendments; and (v) amortization of net actuarial differences. Net periodic benefit cost related to our Canadian pension plan was not material for the quarters ended March 31, 2020 and March 31, 2019.
The following table presents the components of Net periodic postretirement benefit cost relating to Salaried VEBA for the periods presented (in millions of dollars):
 
Quarter Ended
 
March 31,
 
2020
 
2019
Salaried VEBA1:
 
 
 
Interest cost
$
0.6

 
$
0.8

Expected return on plan assets
(0.7
)
 
(0.6
)
Amortization of prior service cost2
1.2

 
1.4

Amortization of net actuarial loss
0.1

 
0.1

Total net periodic postretirement benefit cost relating to Salaried VEBA
$
1.2

 
$
1.7

____________________
1 
The service cost was insignificant for all periods presented.
2 
We amortize prior service cost on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan participants.
5. Derivatives, Hedging Programs and Other Financial Instruments
Overview. In conducting our business, we enter into derivative transactions, including forward contracts and options, to limit our exposure to: (i) metal price risk related to our sale of fabricated aluminum products and the purchase of metal used as raw material for our fabrication operations; (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in our production processes; and (iii) foreign currency requirements with respect to cash commitments for equipment purchases denominated in foreign currency. We do not use derivative financial instruments for trading or other speculative purposes. Hedging transactions are executed centrally on behalf of all of our operations to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors.
Our derivative activities are overseen by a committee ("Hedging Committee"), which is composed of our chief executive officer, chief operating officer, chief financial officer, chief accounting officer, vice president of metal management, treasurer and other officers and employees selected by the chief executive officer. The Hedging Committee meets regularly to review commodity price exposure, derivative positions and strategy. Management reviews the scope of the Hedging Committee's activities with our Board of Directors.
We are exposed to counterparty credit risk on all of our derivative instruments, which we manage by monitoring the credit quality of our counterparties and allocating our hedging positions among multiple counterparties to limit exposure to any single entity. Our counterparties are major, investment grade financial institutions or trading companies. Hedging transactions are governed by negotiated reciprocal credit lines, which generally require collateral to be posted above specified credit thresholds. We believe the risk of loss is remote and contained due to counterparty credit quality, our diversification practice and collateral requirements.
In a majority of our hedging counterparty agreements, our counterparty offers us a credit line that adjusts up or down, depending on our liquidity. Below specified liquidity thresholds, we may have to post collateral if the fair value of our net liability with such counterparty exceeds our reduced credit line. We manage this risk by allocating hedging transactions among multiple counterparties, using options as part of our hedging activities or both. The aggregate fair value of our derivative


13

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

instruments that were in a net liability position was $29.2 million and $7.2 million at March 31, 2020 and December 31, 2019, respectively, and we had no collateral posted as of those dates.
Additionally, our firm-price customer sales commitments create incremental customer credit risk related to metal price movements. Under certain circumstances, we mitigate this risk by periodically requiring cash collateral from them, which we classify as deferred revenue and include as a component of Other accrued liabilities. Cash collateral posted from our customers was $2.1 million at March 31, 2020 and $0.2 million at December 31, 2019.
Cash Flow Hedges
We designate our aluminum and energy derivatives and our forward swap contracts for zinc and copper ("Alloying Metals") used in our fabrication operations as cash flow hedges. Unrealized gains and losses associated with our cash flow hedges are deferred in Other comprehensive (loss) income, net of tax, and reclassified to COGS when such hedges settle. See Note 8 for the total amount of gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments and fair value hedging instruments that was reported in Accumulated other comprehensive loss ("AOCI"), as well as the related reclassifications into earnings and tax effects. Cumulative gains and losses related to cash flow hedges are reclassified out of AOCI and recorded within COGS when the associated hedged commodity purchases impact earnings.
Aluminum Hedges. Our pricing of fabricated aluminum products is generally intended to lock in a conversion margin (representing the value added from the fabrication process(es)) and to pass through metal price fluctuations to our customers. For some of our higher value added products sold on a spot basis, the pass through of metal price movements can sometimes lag by as much as several months, with a favorable impact to us when metal prices decline and an adverse impact to us when metal prices increase. Additionally, in certain instances, we enter into firm-price arrangements with our customers for stipulated volumes to be delivered in the future. Because we generally purchase primary and secondary aluminum on a floating price basis, the lag in passing through metal price movements to customers on some of our higher value added products sold on a spot basis and the volume that we have committed to sell to our customers under a firm-price arrangement create metal price risk for us. We use third-party hedging instruments to limit exposure to metal price risk related to the metal pass through lag on some of our products and firm-price customer sales contracts.
Alloying Metals Hedges. We are exposed to risk of fluctuating prices for Alloying Metals used as raw materials in our fabrication operations. We, from time to time, in the ordinary course of business, use third-party hedging instruments to mitigate our risk from price fluctuations in Alloying Metals.
Energy Hedges. We are exposed to risk of fluctuating prices for natural gas and electricity. We, from time to time, in the ordinary course of business, enter into hedging transactions and/or physical delivery commitments with third parties to mitigate our risk from fluctuations in natural gas and electricity prices.
Fair Value Hedges
We are exposed to foreign currency exchange risk related to firm-price commitments for equipment purchases from foreign manufacturers. We, from time to time, in the ordinary course of business, use third-party hedging instruments to mitigate our exposure to currency exchange rate fluctuations on these purchases, and designate such hedging instruments as fair value hedges. Gain or loss related to components excluded from the assessment of effectiveness from these fair value hedges is first recognized in AOCI and subsequently reclassified to Depreciation and amortization on a straight-line basis over the term of the hedge. Gain or loss on the hedged item (e.g., equipment purchase firm commitments) and the remaining gain or loss on the fair value hedge is recorded within Depreciation and amortization in the period that the gain or loss occurs. Any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI.


14

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Notional Amount of Derivative Contracts
The following table summarizes our derivative positions at March 31, 2020:
Aluminum
 
Maturity Period
(month/year)
 
Notional Amount of Contracts (mmlbs)
Fixed price purchase contracts
 
4/20 through 12/22
 
115.3

Fixed price sales contracts
 
4/20 through 11/21
 
0.8

Midwest premium swap contracts1
 
4/20 through 12/22
 
110.4

Alloying Metals
 
Maturity Period
(month/year)
 
Notional Amount of Contracts (mmlbs)
Fixed price purchase contracts
 
4/20 through 12/21
 
16.9

Natural Gas2
 
Maturity Period
(month/year)
 
Notional Amount of Contracts (mmbtu)
Fixed price purchase contracts
 
4/20 through 12/24
 
7,970,000

Electricity3
 
Maturity Period
(month/year)
 
Notional Amount of Contracts (Mwh)
Fixed price purchase contracts
 
4/20 through 12/22
 
613,820

Euro
 
Maturity Period
(month/year)
 
Notional Amount of Contracts (euro)
Fixed price forward contracts
 
2/21 through 5/22
 
34,323,380

____________________
1 
Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on our purchases of primary aluminum.
2 
As of March 31, 2020, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 75% of the expected natural gas purchases for the remainder of 2020, 76% of the expected natural gas purchases for 2021, 80% of the expected natural gas purchases for both 2022 and 2023 and 75% of the expected natural gas purchases for 2024.
3 
As of March 31, 2020, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 55% of our expected electricity purchases for both the remainder of 2020 and 2021 and 46% of our expected electricity purchases for 2022.


15

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Loss (Gain)
The amount of loss (gain) included on our Statements of Consolidated Income associated with all derivative contracts consisted of the following for the periods presented (in millions of dollars):
 
Quarter Ended
March 31,
 
2020
 
2019
Total of income and expense line items presented in our Statements of Consolidated Income in which the effects of cash flow hedges are recorded
$
286.6

 
$
315.1

 
 
 
 
Loss (gain) recognized in income related to cash flow hedges:
 
 
 
Aluminum
5.7

 
4.2

Alloying metals
0.6

 
0.1

Natural gas
0.5

 
(0.1
)
Electricity
0.2

 

Total loss recognized in income related to cash flow hedges
$
7.0

 
$
4.2

 
 
 
 
Total of income and expense line items presented in our Statements of Consolidated Income in which the effects of fair value hedges are recorded
$
13.2

 
$
11.9

 
 
 
 
Loss (gain) recognized in income related to fair value hedges:
 
 
 
Foreign exchange contracts
0.2

 

Hedged item
(0.2
)
 

Excluded component amortized from AOCI to income
0.2

 

Total loss recognized in income related to fair value hedges
$
0.2

 
$


Fair Values of Derivative Contracts
The fair values of our derivative contracts are based upon trades in liquid markets. Valuation model inputs can be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are classified within Level 2 of the fair value hierarchy.
All of our derivative contracts with counterparties are subject to enforceable master netting arrangements. We reflect the fair value of our derivative contracts on a gross basis on our Consolidated Balance Sheets. The following table presents the fair value of our derivative financial instruments as of the periods presented (in millions of dollars):
 
March 31, 2020
 
December 31, 2019
 
Derivative Assets
 
Derivative Liabilities
 
Net Amount
 
Derivative Assets
 
Derivative Liabilities
 
Net Amount
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
Aluminum –
 
 
 
 
 
 
 
 
 
 
 
Fixed price purchase contracts
$

 
$
(14.2
)
 
$
(14.2
)
 
$
1.0

 
$
(4.1
)
 
$
(3.1
)
Fixed price sales contracts
0.1

 

 
0.1

 

 

 

Midwest premium swap contracts

 
(4.3
)
 
(4.3
)
 

 
(1.2
)
 
(1.2
)
Alloying Metals – Fixed price purchase contracts

 
(5.5
)
 
(5.5
)
 
0.4

 
(1.5
)
 
(1.1
)
Natural gas – Fixed price purchase contracts
0.1

 
(3.0
)
 
(2.9
)
 

 
(2.8
)
 
(2.8
)
Electricity – Fixed price purchase contracts
1.6

 
(2.8
)
 
(1.2
)
 
2.6

 
(1.6
)
 
1.0



16

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 
March 31, 2020
 
December 31, 2019
 
Derivative Assets
 
Derivative Liabilities
 
Net Amount
 
Derivative Assets
 
Derivative Liabilities
 
Net Amount
Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency – Fixed price forward contracts

 
(1.0
)
 
(1.0
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1.8

 
$
(30.8
)
 
$
(29.0
)
 
$
4.0

 
$
(11.2
)
 
$
(7.2
)
The following table presents the total amounts of derivative assets and liabilities on our Consolidated Balance Sheets as of the periods presented (in millions of dollars):
 
March 31, 2020
 
December 31, 2019
Derivative assets:
 
 
 
Prepaid expenses and other current assets
$
0.6

 
$
2.1

Other assets
1.2

 
1.9

Total derivative assets
$
1.8

 
$
4.0

 
 
 
 
Derivative liabilities:
 
 
 
Other accrued liabilities
$
(19.0
)
 
$
(7.6
)
Long-term liabilities
(11.8
)
 
(3.6
)
Total derivative liabilities
$
(30.8
)
 
$
(11.2
)
Fair Value of Other Financial Instruments
Cash and Cash Equivalents. See Note 2 for components of cash and cash equivalents.
Available for Sale Securities. We hold debt investment securities that are accounted for as available for sale securities and are presented as cash equivalents and short-term investments on our Consolidated Balance Sheets. The fair value of the debt investment securities, which consist of commercial paper, is determined based on valuation models that use observable market data. All of our short-term investments generally have maturity dates under 12 months, however, due to market conditions existing as of March 31, 2020, all short-term investments had maturity dates of less than 90 days. We review our debt investment portfolio for credit loss at least quarterly or when there are changes in credit risk or other potential valuation concerns. At March 31, 2020 and December 31, 2019, the total unrealized loss, net of tax, included in AOCI was immaterial. We believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the unrealized loss on these securities was due to normal market fluctuations, and not due to increased credit risk or other valuation concerns. The fair value input of our available for sale securities, which are classified within Level 2 of the fair value hierarchy, is calculated based on broker quotes. The amortized cost for available for sale securities approximates their fair value.
The following table classifies our other financial assets under the appropriate level of the fair value hierarchy as of March 31, 2020 (in millions of dollars):
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
199.6

 
$
107.6

 
$

 
$
307.2

Short-term investments

 
39.3

 

 
39.3

Total
$
199.6

 
$
146.9

 
$

 
$
346.5



17

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

The following table classifies our other financial assets under the appropriate level of the fair value hierarchy as of December 31, 2019 (in millions of dollars):
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
28.2

 
$
236.1

 
$

 
$
264.3

Short-term investments

 
78.7

 

 
78.7

Total
$
28.2

 
$
314.8

 
$

 
$
343.0


All Other Financial Assets and Liabilities. We believe that the fair values of our accounts receivable, contract assets, accounts payable and accrued liabilities approximate their respective carrying values due to their short maturities and nominal credit risk.
6. Debt and Credit Facility
Senior Notes
4.625% Senior Notes. In November 2019, we issued $500.0 million principal amount of 4.625% unsecured senior notes due March 1, 2028 ("4.625% Senior Notes") at 100% of the principal amount. The unamortized amount of debt issuance costs as of March 31, 2020 was $7.2 million. Interest expense, including amortization of debt issuance costs, relating to the 4.625% Senior Notes was $6.0 million for the quarter ended March 31, 2020, of which $0.3 million was capitalized as construction in progress. The effective interest rate of the 4.625% Senior Notes was approximately 4.8% per annum, taking into account the amortization of debt issuance costs. The fair value of the outstanding 4.625% Senior Notes, which are Level 1 liabilities, was approximately $438.1 million and $513.5 million at March 31, 2020 and December 31, 2019, respectively.
5.875% Senior Notes. In May 2016, we issued $375.0 million principal amount of 5.875% unsecured senior notes due May 15, 2024 ("5.875% Senior Notes") at 100% of the principal amount. On December 18, 2019, we redeemed in full all outstanding 5.875% Senior Notes at a redemption price of 104.406% of the principal amount. The effective interest rate of the 5.875% Senior Notes was approximately 6.1% per annum, taking into account the amortization of debt issuance costs. Interest expense, including amortization of debt issuance costs, relating to the 5.875% Senior Notes was $5.7 million for the quarter ended March 31, 2019 net of $0.5 million capitalized as construction in progress.
Revolving Credit Facility
Our credit agreement with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto ("Revolving Credit Facility") provides us with a $375.0 million funding commitment through October 2024.
The table below summarizes availability and usage of our Revolving Credit Facility as determined by a borrowing base calculated as of March 31, 2020 (in millions of dollars except for borrowing rate):
Revolving Credit Facility borrowing commitment
$
375.0

Borrowing base availability
$
349.2

Less: Outstanding borrowings under Revolving Credit Facility

Less: Outstanding letters of credit under Revolving Credit Facility
(7.7
)
Remaining borrowing availability
$
341.5

Borrowing rate (if applicable)1
3.50
%
____________________
1 
Such borrowing rate, if applicable, represents the interest rate for any overnight borrowings under the Revolving Credit Facility.


18

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

7. Commitments and Contingencies
Commitments. We have a variety of financial commitments, including purchase agreements, forward foreign exchange and forward sales contracts, indebtedness and letters of credit (see Note 5 and Note 6).
Environmental Contingencies. We are subject to a number of environmental laws and regulations, to potential fines or penalties assessed for alleged breaches of such laws and regulations and to potential claims based upon such laws and regulations. We are also subject to legacy environmental contingencies related to activities that occurred at operating facilities prior to July 6, 2006, which represent the majority of our environmental accruals. The status of these environmental contingencies are discussed below. We have established procedures for regularly evaluating environmental loss contingencies. Our environmental accruals represent our undiscounted estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, existing requirements, currently available facts, existing technology and our assessment of the likely remediation actions to be taken.
We continue to pursue remediation activities, primarily to address the historical use of oils containing polychlorinated biphenyls ("PCBs") at our Spokane, Washington ("Trentwood") facility. Our remediation efforts are in collaboration with the Washington State Department of Ecology ("Washington State Ecology"), to which we submitted a feasibility study in 2012 of remediation alternatives and from which we received permission to begin certain remediation activities pursuant to a signed work order. As we have finished a number of sections of the work plan, we have received approval from Washington State Ecology on satisfactory completion of those sections. Additionally, in cooperation with Washington State Ecology, to determine the treatability and evaluate the feasibility of removing PCBs from ground water under the Trentwood facility, we constructed an experimental treatment facility and began treatment operations in 2016. As the long-term success of the new methodology cannot be reasonably determined at this time, it is possible we may need to make upward adjustments to our related accruals and cost estimates as the long-term results become available. 
 During 2013, at the request of the Ohio Environmental Protection Agency ("OEPA"), we initiated an investigational study of the Newark, Ohio ("Newark") facility related to historical on-site waste disposal. In the fourth quarter of 2018, we submitted our remedial investigation study to the OEPA, which is subject to their review and approval. Following OEPA approval of the remedial investigational study, we will then prepare the final feasibility study and update estimates for probable and estimable remediation, if any. The actual and final cost for remediation will not be fully determinable until a final feasibility study is submitted and accepted by the OEPA and work plans are prepared, which is expected to occur in the next six to 12 months.