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NOR > SEC Filings for NOR > Form 10-Q on 30-Oct-2012All Recent SEC Filings

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Form 10-Q for NORANDA ALUMINUM HOLDING CORP


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Except as otherwise indicated herein or as the context otherwise requires, references in this report to (a) "Noranda HoldCo" refer only to Noranda Aluminum Holding Corporation, a Delaware corporation, excluding its subsidiaries,
(b) "Noranda AcquisitionCo" refer only to Noranda Aluminum Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Noranda HoldCo, excluding its subsidiaries, and (c) "Noranda," the "Company," "we," "our," and "us" refer collectively to Noranda HoldCo and its subsidiaries on a consolidated basis. "AcquisitionCo Notes" refer to senior floating rate notes due 2015 issued by Noranda AcquisitionCo. Overview
We are a leading North American integrated producer of value-added primary aluminum and high quality rolled aluminum coils. We have two businesses: our upstream business and downstream business. Our upstream business consists of three reportable segments: Primary Aluminum, Alumina, and Bauxite. These three segments are closely integrated and consist of a smelter near New Madrid, Missouri, which we refer to as "New Madrid," and supporting operations at our bauxite mine and alumina refinery. In 2011, New Madrid produced approximately 583 million pounds (264,000 metric tonnes) of primary aluminum, representing approximately 13% of total 2011 U.S. primary aluminum production, based on statistics from CRU, an independent mining and metals consultancy group. Our downstream business comprises our Flat-Rolled Products segment, which is one of the largest aluminum foil producers in North America and consists of four rolling mill facilities with a combined maximum annual production capacity of 410 to 495 million pounds, depending on production mix.
Our third quarter 2012 operating results reflect continued decline in the London Metal Exchange ("LME") aluminum price. The impact of a lower LME aluminum price was compounded by seasonal peak power rates at New Madrid, lower external shipment volumes, and costs associated with the negative effects of Hurricane Isaac in the Alumina segment and production variability in the Primary and Flat-Rolled Products segments. Although we believe demand for our products was stable across all segments, these location specific production variability issues had a negative impact on our shipment volumes.
Lower prices negatively impacted our operating results by $61.1 million in third quarter 2012 relative to third quarter 2011, driven by lower LME aluminum prices.

?             Persisting global macro-economic concerns, particularly the
              European sovereign-debt crisis and fears of slowing economic growth
              in China, have dampened LME aluminum prices since the second half
              of 2011. Substantially all of our external revenues are linked to
              the LME aluminum price, which averaged $0.87 per pound in third
              quarter 2012 compared to $1.09 per pound in third quarter 2011.


?             In our Primary Aluminum segment, the effects of lower LME aluminum
              price levels have been partially offset by higher product premiums,
              particularly the Midwest Transaction Premium ("MWP"). The MWP
              increased to an average of $0.11 per pound in third quarter 2012
              from a third quarter 2011 average of $0.08 per pound. Our average
              realized price, the Midwest transaction price ("MWTP") inclusive of
              the MWP, was $0.96 in third quarter 2012 compared to $1.18 in third
              quarter 2011.


       Results for third quarter 2012 reflect a $5.9 million negative impact to
        segment profit from Hurricane Isaac, which made landfall near Gramercy,
        Louisiana on August 29, 2012. This $5.9 million impact is due to lost
        contribution margin, losses on replacement alumina, and production
        inefficiencies incurred while the refinery operated below normal levels.


?             Third quarter 2012 integrated primary aluminum net cash cost ("Net
              Cash Cost") was $0.92 per pound shipped compared to $0.81 per pound
              in third quarter 2011. The effects of the disruption caused by the
              hurricane and production decreases at our smelter due to the timing
              and concentration of pots taken out of production to be rebuilt
              both contributed to the increase in Net Cash Cost.


       Over the course of 2011, the costs of certain raw material inputs, such
        as carbon-based products used in our Primary Aluminum segment and
        chemical products used in our Alumina segment, increased significantly.
        During 2012, those costs plateaued, and have begun to decline, resulting
        in generally more favorable raw material input costs in third quarter
        2012 relative to third quarter 2011.


?             Through the period of raw material inflation, we maintained our
              emphasis on driving cost savings through our CORE productivity
              program--achieving $8.6 million in cost savings in third quarter
              2012, and a total of $109.5 million since the beginning of 2011.

Forward-looking Statements
This report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements about future, not past, events and involve certain important risks and uncertainties, any of which could cause the Company's actual results to differ materially from those expressed in forward-looking statements, including, without limitation: the cyclical nature of the aluminum industry and fluctuating commodity prices, which cause variability in earnings and cash flows; a downturn in general economic conditions, including changes in interest rates, as well as a downturn in the end-use markets for certain of the Company's products; fluctuations in the relative cost of certain raw materials and energy compared to the price


of primary aluminum and aluminum rolled products; the effects of competition in Noranda's business lines; Noranda's ability to retain customers, a substantial number of which do not have long-term contractual arrangements with the Company; the ability to fulfill the business's substantial capital investment needs; labor relations (i.e. disruptions, strikes or work stoppages) and labor costs; unexpected issues arising in connection with Noranda's operations outside of the United States; the ability to retain key management personnel; and Noranda's expectations with respect to its acquisition activity, or difficulties encountered in connection with acquisitions, dispositions or similar transactions.
Forward-looking statements contain words such as "believes," "expects," "may," "should," "seeks," "approximately," "intends," "plans," "estimates," or "anticipates" or similar expressions that relate to Noranda's strategy, plans or intentions. All statements Noranda makes relating to its estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to the Company's expectations regarding future industry trends are forward-looking statements. Noranda undertakes 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. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect management's current estimates, projections, expectations or beliefs. All forward-looking statements herein are based upon information available to us on the date of this report on Form 10-Q
Important factors that could cause actual results to differ materially from our expectations, which we refer to as cautionary statements, are disclosed herein under Part II, Item 1A "Risk Factors," and in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011. All forward-looking information in this report on Form 10-Q and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by our cautionary statements. In light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report on Form 10-Q may not in fact occur. Accordingly, investors should not place undue reliance on those statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Critical Accounting Policies and Estimates Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). Preparation of these financial statements requires management to make significant judgments and estimates. See Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1, "Accounting Policies" in our audited consolidated financial statements for the year ended December 31, 2011, included in our Annual Report on Form 10-K, as filed March 12, 2012, for a discussion of our critical accounting policies and estimates.
Goodwill Impairment
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. We evaluate goodwill for impairment using a two-step process. The first step is to compare the fair value of each of our reporting units to their respective book values, including goodwill. If the fair value of a reporting unit exceeds its book value, reporting unit goodwill is not considered impaired and the second step of the impairment test is not required. If the book value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit's goodwill with the book value of that goodwill. If the book value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The carrying value of our Primary Aluminum segment's goodwill was $137.6 million at September 30, 2012. As of October 1, 2011, the date of our last annual goodwill impairment, the fair value of the Primary Aluminum segment exceeded its carrying value by 11%. Our fair value analysis included assumptions about key factors affecting the Primary Aluminum segment's future profitability and cash flows. These key factors relate primarily to the long-term price for primary aluminum, as well as production inputs such as alumina, power, and carbon-based products. Should the Primary Aluminum segment's expected future cash flows decline beyond our current expectations, its goodwill may be at risk for impairment in the future. Factors that could cause such a decline include a sustained decline in demand for primary aluminum, a sustained downward shift in expected aluminum prices without corresponding decreases in expected prices for production inputs, or a significant increase in cash flow discount rates. Inventory Valuation
An actual valuation of inventory under the last-in, first-out ("LIFO") method is made only at the end of each year based on the inventory costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory costs. Because these calculations are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation which could significantly differ from interim estimates. To estimate the effect of LIFO on interim periods, we calculate a LIFO reserve each quarter, giving consideration to expected year-end inventory pricing.


The following table illustrates the sensitivity of our LIFO adjustment by showing the amount by which pre-tax income would have changed for the nine months ended September 30, 2012, given certain specified changes in inventory costs:

                                                              Increase (decrease) in
                                                               pre-tax income ($ in
       Inventory item                   Sensitivity                  millions)
Primary Aluminum segment:
Carbon-based products         10% increase in price                           (1.5 )
Alumina                       $0.10 increase in LME per pound                 (1.9 )
Flat-Rolled Products segment:
Metal                         $0.10 increase in LME per pound                 (5.4 )

Results of operations
To aid the reader in understanding the results of operations of each of these distinctive periods, we have provided the following discussion. You should read the following discussion of the results of operations and financial condition with the unaudited consolidated financial statements and related notes included herein.


Results of Operations
The following table sets forth certain consolidated financial information for
the periods ended September 30, 2012 and 2011 (in millions, except per share
data and where noted):
                                        Three months ended September 30,    Nine months ended September 30,
                                              2012              2011             2012              2011
                                               $                 $                 $                $
Statements of operations data:
Sales                                           336.8              400.4          1,062.0           1,221.3
Operating costs and expenses:
Cost of sales                                   323.3              350.4            959.4           1,031.8
Selling, general and administrative
expenses                                         24.3               26.8             64.8              72.3
Total operating costs and expenses              347.6              377.2          1,024.2           1,104.1
Operating income (loss)                         (10.8 )             23.2             37.8             117.2
Other expenses (income):
Interest expense, net                             8.9                5.2             24.2              16.4
Gain on hedging activities, net                 (25.4 )            (19.5 )          (62.5 )           (65.6 )
Debt refinancing expense                            -                  -              8.1                 -
Total other income, net                         (16.5 )            (14.3 )          (30.2 )           (49.2 )
Income before income taxes                        5.7               37.5             68.0             166.4
Income tax expense                                1.9                6.7             22.7              49.9
Net income                                        3.8               30.8             45.3             116.5
Net income per common share:
Basic                                            0.06               0.46             0.67              1.74
Diluted                                          0.05               0.45             0.66              1.71
Weighted-average common shares
outstanding:
Basic                                           67.68              67.23            67.49             67.00
Diluted                                         69.12              68.49            69.10             68.32
Cash dividends declared per common
share                                            0.04                  -             1.37                 -
Sales by segment:
Bauxite                                          33.6               40.9             99.1             115.4
Alumina                                          80.6              104.1            268.3             317.2
Primary Aluminum                                147.2              187.7            471.3             561.1
Flat-Rolled Products                            145.5              163.2            449.5             488.3
Eliminations                                    (70.1 )            (95.5 )         (226.2 )          (260.7 )
Total                                           336.8              400.4          1,062.0           1,221.3
Segment profit (loss):
Bauxite                                           0.3                6.8              3.9              19.2
Alumina                                           1.8               23.4             29.2              73.9
Primary Aluminum                                  3.1               21.8             51.9             117.6
Flat-Rolled Products                             12.0               12.1             41.1              41.8
Corporate                                        (7.3 )             (8.0 )          (22.3 )           (21.8 )
Eliminations                                      0.2               (2.1 )              -               0.1
Total                                            10.1               54.0            103.8             230.8
Financial and other data:
Average realized Midwest transaction
price (per pound)                                0.96               1.18             1.01              1.21
Net Cash Cost (per pound shipped)                0.92               0.81             0.81              0.72
Shipments:
Third party shipments:
Bauxite (kMts)                                  666.1              619.9          1,676.9           1,853.9
Alumina (kMts)                                  150.7              160.2            479.0             482.2
Primary Aluminum (pounds, in millions)          120.0              123.8            369.1             383.0
Flat-Rolled Products (pounds, in
millions)                                        97.6               94.9            292.8             286.3
Intersegment shipments:
Bauxite (kMts)                                  601.1              749.3          1,897.6           2,018.3
Alumina (kMts)                                  120.4              123.9            369.0             380.9
Primary Aluminum (pounds, in millions)           18.8               24.8             58.1              52.6


Discussion of quarterly consolidated operating results Sales
Sales for third quarter 2012 were $336.8 million compared to $400.4 million in third quarter 2011, a decrease of 15.9%. Of the decrease in sales, $61.1 million was attributable to lower realized prices. LME aluminum prices averaged $0.87 per pound in third quarter 2012 compared to $1.09 per pound in third quarter 2011. Our average realized MWTP, inclusive of the MWP, was $0.96 in third quarter 2012 compared to $1.18 in third quarter 2011.
Sales to external customers from our Primary Aluminum segment reflected a decrease of 18.9% to $129.1 million in third quarter 2012 from $159.2 million in third quarter 2011, driven by lower realized prices for aluminum and decreased shipment volumes.
Average LME aluminum price declined as noted above and average realized MWTP for third quarter 2012 was $0.96 per pound, compared to $1.18 per pound in third quarter 2011.

External shipment volumes in the Primary Aluminum segment showed a decrease of 3.1%, comparing third quarter 2012 to third quarter 2011, attributable to a difference in the timing of shipments, compounded by the timing and concentration of pots taken out of production to be rebuilt.

Sales to our external customers in our Flat-Rolled Products segment reflected a decrease of 10.8% to $145.5 million during third quarter 2012 from $163.2 million in third quarter 2011, primarily due to the decline in the average LME aluminum price, partially offset by slightly more favorable volume.
Lower LME prices contributed $22.3 million to the sales decline. Fabrication premiums were relatively unchanged.

Shipment volumes showed an increase of 2.8% or $4.6 million when compared to third quarter 2011in our Flat-Rolled Products segment.

Sales to external customers from our Bauxite and Alumina segments for third quarter 2012 were $13.6 million and $48.6 million, respectively, compared to $17.4 million and $60.6 million, respectively, in third quarter 2011. These decreases were primarily due to lower LME-linked realized pricing across both segments and lower external shipment volumes in the Alumina segment, due to the production disruption following Hurricane Isaac. Cost of sales
Cost of sales for third quarter 2012 was $323.3 million compared to $350.4 million in third quarter 2011. The decrease in cost of sales is mainly the result of the decrease in LME prices combined with more favorable raw material prices.
Selling, general and administrative expenses Selling, general and administrative expenses in the third quarter 2012 were $24.3 million, compared to $26.8 million in third quarter 2011. The majority of the decrease is attributable to lower incentive compensation expenses, due to the negative impacts on operating results from declining LME aluminum prices. Operating income (loss)
Operating loss in third quarter 2012 was $10.8 million compared to $23.2 million of operating income in third quarter 2011. The decrease in operating income related to the sales margin decline, partially offset by the decrease in selling, general and administrative expenses.
Sales margin was $13.5 million for third quarter 2012 compared to $50.0 million in third quarter 2011. This decrease resulted from the unfavorable impacts of lower realized prices and shipment volumes, compounded by the effects of production variability in the Alumina, Primary, and Flat Rolled segments, offset by more favorable raw material prices.
Interest expense, net
In first quarter 2012, we refinanced our existing senior secured credit facilities and entered into our new senior secured credit facilities consisting of the 2012 Term B Loan ($325.0 million) and the 2012 Revolver (up to $250.0 million.) We also repaid the remaining $78.2 million balance of our existing loan. We refer to this transaction as the "2012 Refinancing." Using proceeds from the 2012 Refinancing, in first quarter 2012, Noranda AcquisitionCo repurchased $75.0 million in aggregate principal amount of AcquisitionCo Notes. Due to the refinancing activities discussed above, our average outstanding indebtedness increased to $596.5 million in third quarter 2012 from $428.5 million in third quarter 2011. Interest expense during third quarter 2012 increased to $8.9 million compared to $5.2 million in third quarter 2011. Gain on hedging activities, net
Gain on hedging activities was $25.4 million in third quarter 2012 compared to $19.5 million in third quarter 2011. Reclassifications of aluminum and natural gas hedge gains and losses from AOCI into earnings in third quarter 2012 were $25.3 million, compared to $27.1 million in third quarter 2011.


Income before income taxes
Income before income taxes was $5.7 million in third quarter 2012, compared to $37.5 million in third quarter 2011. The special items outlined below significantly impacted the comparability of our pre-tax income (in millions):

                                                           Three months ended September 30,
                                                                2012               2011
                                                                 $                  $
                                                           Increase (decrease) to net income
Special items:
Release of indemnification receivables related to
uncertain tax positions (1)                                          -               (3.4 )
Labor negotiation contingency cost (2)                            (3.5 )                -
Gain on hedging activities                                        25.4               19.5
Total special items (pre-tax)                                     21.9               16.1

(1) In third quarter 2011, we expensed $3.4 million of an indemnification receivable from Xstrata through selling, general and administrative expenses because statutes to examine certain income tax returns expired. Net income was not impacted by the release of this indemnification receivable as a corresponding tax benefit of $3.4 million was recorded.

(2) In third quarter 2012, we incurred $3.5 million of contingency costs related to assembling a back-up labor force during the renegotiation of our collective bargaining agreement at our New Madrid smelter.

Income tax expense
Income tax expense was $1.9 million in third quarter 2012, compared to $6.7 million in third quarter 2011.
Our effective income tax rate was approximately 33.3% for the third quarter 2012 and was 17.9% for the third quarter 2011. The effective tax rate for both periods 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 income tax rate for third quarter 2011 was impacted by the release of a portion of our reserve for uncertain tax positions which reduced third quarter 2011 income tax expense, as noted in the table above.
Net income
Net income was $3.8 million in third quarter 2012, compared to $30.8 million in third quarter 2011. The decrease in net income resulted from a $34.0 million decrease in operating income and a $3.7 million increase in interest expense offset by a $4.8 million decrease in income tax expense and a $5.9 million increase in gain on hedging activities.
Discussion of quarterly segment results
Bauxite
Bauxite segment sales for third quarter 2012 were $33.6 million, compared to $40.9 million for third quarter 2011. The sales volume decreased by 7.4%, a decrease related to the impact of lower volumes of $3.0 million, coupled with a $4.3 million impact of lower realized pricing.
Segment profit in third quarter 2012 was $0.3 million compared to $6.8 million in third quarter 2011. Compared to third quarter 2011, third quarter 2012 Bauxite segment profit decreased due primarily to lower LME-linked external bauxite prices and increased shipping demurrage costs. Alumina
Alumina segment sales for third quarter 2012 were $80.6 million compared to $104.1 million for third quarter 2011. This decrease is primarily pricing related, as reflected by the LME-indexed nature of alumina pricing, coupled with a decline in production following Hurricane Isaac.
Segment profit in third quarter 2012 was $1.8 million compared to $23.4 million in third quarter 2011. In addition to the $5.9 million impact from the production disruption following Hurricane Isaac, alumina results reflect the negative impact of lower LME-indexed internal and external selling prices, which were partially offset by the favorable impact of lower natural gas prices. Primary Aluminum
Primary Aluminum segment sales decreased to $147.2 million in third quarter 2012 from $187.7 million in third quarter 2011.
An 18.6% decrease in average realized MWTP in third quarter 2012 compared to third quarter 2011 decreased Primary Aluminum segment revenue by approximately $28.1 million.

A 6.6% decrease in total primary aluminum shipments decreased revenue by . . .

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