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NOR > SEC Filings for NOR > Form 10-Q on 28-Apr-2014All Recent SEC Filings

Show all filings for NORANDA ALUMINUM HOLDING CORP

Form 10-Q for NORANDA ALUMINUM HOLDING CORP


28-Apr-2014

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 unsecured notes due 2019, issued by Noranda AcquisitionCo. Overview and Recent Developments
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 is one of the largest U.S. producers of primary aluminum, and 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 mining operation ("St. Ann") and alumina refinery ("Gramercy"). In 2013, New Madrid produced approximately 586 million pounds (266,000 metric tonnes) of primary aluminum, representing approximately 14% of total 2013 U.S. primary aluminum production, based on statistics from CRU. 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.
We experienced unusually extreme winter weather in the first quarter 2014; however, we returned our facilities to normal operating levels by quarter end. The negative effects from those extreme conditions to alumina and primary aluminum production had a $14.9 million pre-tax impact on first quarter results. At the same time, we experienced robust aluminum product demand during the first quarter 2014. We managed through challenging conditions to mitigate the impact on our liquidity and to meet our customers needs.
The negative impact of extreme weather conditions included $3.6 million from a first quarter 2014 weather-driven spike in natural gas prices and $11.3 million from higher production costs. At our alumina refinery, unusually extreme cold temperatures created process instability which caused unfavorable usage rates for key production materials. Similar conditions at our aluminum smelter hampered electrical efficiency, decreased metal purity, increased anode production costs and drove higher maintenance and overtime costs.

The impact of extreme weather on production costs was partially offset by the favorable impact of lower prices for certain raw materials and by savings under the Company's CORE productivity program.

The average realized Midwest Transaction Price decreased to $0.95 in first quarter 2014 from $1.03 in first quarter 2013.

Integrated primary aluminum net cash cost ("Net Cash Cost") increased to $0.90 per pound shipped in first quarter 2014 compared to $0.81 per pound shipped in first quarter 2013, reflecting the negative impact from lower LME-linked prices in the Alumina segment and an $0.11 impact from extreme winter weather conditions during first quarter 2014. These negatives were partially offset by lower costs for certain key raw materials, and by the incremental impact of CORE productivity savings.

On April 16, 2014, the PSC issued two orders related to the Company's February 2014 petition to obtain a reduced power rate for the New Madrid smelter. First, the Missouri Public Service Commission ("PSC") denied a motion to dismiss the Company's petition. Second, the PSC established a schedule to hear and rule on the Company's petition which will allow a timely decision regarding the rate request. On April 23, 2014, the PSC revised the approved schedule. Evidentiary hearings will be held June 16 through 17, 2014, and the PSC anticipates making a decision in this case by August 6, 2014. 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, 2013. 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, 2013, included in our Annual Report on Form 10-K, as filed March 3, 2014, 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. Effective January 1, 2012, we adopted new accounting standards that allow a qualitative assessment to determine whether further impairment testing is necessary in certain circumstances. We elected to continue to evaluate goodwill and other indefinite-lived intangible assets for impairment using a two-step process, which is based on a quantitative assessment. 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 March 31, 2014. As of October 1, 2013, the date of our last annual goodwill impairment test, the fair value of the Primary Aluminum Segment exceeded its carrying value by approximately 22%. Our 2013 fair value analysis included assumptions about key factors affecting the Primary Aluminum segment's future profitability and cash flows, including the long-term price for primary aluminum. We continue to monitor our Primary Aluminum segment's expected future cash flows for risk of impairment. Factors that could cause a decline in expected future cash flows include a further decline in expected aluminum prices without corresponding decreases in expected prices for production inputs, significant increases in the cost of production inputs such as electricity, potential negative effects of proposed legislation related to sulfur dioxide ("SO2") emissions, or a significant increase in cash flow discount rates. Additionally, a sustained decline in our stock price or a downgrading of our credit ratings, when combined with the factors noted above, may cause us to further evaluate our impairment risk. We may perform interim goodwill impairment testing during 2014 based on our evaluation of the above factors. 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 quarter ended March 31, 2014, 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                           (1.4 )
Alumina                       $0.10 increase in LME per pound                 (1.9 )
Flat-Rolled Products segment:
Metal                         $0.10 increase in LME per pound                 (5.3 )

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 unaudited consolidated financial
information for the periods ended March 31, 2014 and 2013 (in millions, except
per share data and where noted):
                                                                Three months ended March 31
                                                                   2014              2013
                                                                     $                 $
Statements of operations data:
Sales                                                                 311.6             338.4
Operating costs and expenses:
Cost of sales                                                         302.0             305.6
Selling, general and administrative expenses                           20.7              24.6
Total operating costs and expenses                                    322.7             330.2
Operating income (loss)                                               (11.1 )             8.2
Other (income) expense:
Interest expense, net                                                  12.5              10.1
(Gain) loss on hedging activities, net                                  0.3              (5.4 )
Debt refinancing expense                                                  -               2.5
Total other expense, net                                               12.8               7.2
Income (loss) before income taxes                                     (23.9 )             1.0
Income tax expense (benefit)                                           (7.1 )             0.4
Net income (loss)                                                     (16.8 )             0.6
Net income (loss) per common share:
Basic                                                       $         (0.25 )   $        0.01
Diluted                                                     $         (0.25 )   $        0.01
Weighted-average common shares outstanding:
Basic                                                                 68.23             67.78
Diluted                                                               68.23             69.06
Cash dividends declared per common share                    $          0.01     $        0.04
External sales by segment:
Bauxite                                                                11.7              11.8
Alumina                                                                45.8              42.0
Primary Aluminum                                                      120.8             138.7
Flat-Rolled Products                                                  133.3             145.9
Total                                                                 311.6             338.4
Segment profit (loss):
Bauxite                                                                 2.5               4.2
Alumina                                                               (11.9 )             4.1
Primary Aluminum                                                       18.4              24.2
Flat-Rolled Products                                                   10.9              13.8
Corporate                                                              (7.8 )            (8.7 )
Eliminations                                                           (1.4 )            (1.3 )
Total                                                                  10.7              36.3
Financial and other data:
Average realized Midwest transaction price (per pound)      $          0.95     $        1.03
Net Cash Cost (per pound shipped)                           $          0.90     $        0.81
Shipments:
External shipments:
Bauxite (kMts)                                                        520.7             506.0
Alumina (kMts)                                                        150.6             125.0
Primary Aluminum (pounds, in millions)                                111.7             119.5
Flat-Rolled Products (pounds, in millions)                             92.4              93.8
Intersegment shipments:
Bauxite (kMts)                                                        622.7             703.0
Alumina (kMts)                                                        127.3             151.0
Primary Aluminum (pounds, in millions)                                 30.2              22.3


Discussion of consolidated operating results for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 Sales
Sales for the three months ended March 31, 2014 were $311.6 million compared to $338.4 million in the three months ended March 31, 2013, a decrease of 7.9%. Lower realized prices and volumes decreased sales by $24.5 million and $2.3 million, respectively. The extreme winter conditions minimally impacted shipments to external customers during first quarter 2014.
Sales to external customers from our Primary Aluminum segment decreased to $120.8 million in the three months ended March 31, 2014 from $138.7 million in the three months ended March 31, 2013, driven primarily by lower realized prices and lower volume.
Our average realized MWTP for the three months ended March 31, 2014 was $0.95 per pound, compared to $1.03 per pound in the three months ended March 31, 2013.

Lower external shipments from the Primary Aluminum segment decreased external sales by $9.1 million in the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Sales to external customers from our Alumina segment in the three months ended March 31, 2014 were $45.8 million compared to $42.0 million in the three months ended March 31, 2013. Higher volumes increased external sales by $8.6 million offset by $4.8 million lower sales primarily due to lower LME-linked realized pricing.
Sales to external customers from our Bauxite segment in the three months ended March 31, 2014 were $11.7 million compared to $11.8 million in the three months ended March 31, 2013. Lower external sales prices resulted in a $0.4 million sales decrease, offset by external shipment volumes that were higher by 2.9%, resulting in a $0.3 million external sales increase.
Sales to our external customers in our Flat-Rolled Products segment were $133.3 million during the three months ended March 31, 2014 compared to $145.9 million in the three months ended March 31, 2013. Lower volume and the negative impact of lower LME prices decreased external sales by $2.2 million and $10.4 million, respectively.
Cost of sales
Cost of sales for the three months ended March 31, 2014 was $302.0 million compared to $305.6 million in the three months ended March 31, 2013. Total cost of sales in the Primary Aluminum segment decreased to $137.6 million for first quarter 2014 from $142.9 million for first quarter 2013. The decrease primarily related to lower input cost pricing for both alumina and carbon based products and incremental CORE productivity savings, offset by the $1.9 million higher production costs due to extreme winter weather conditions.
Total cost of sales in the Alumina segment was $92.4 million for first quarter 2014 compared to $85.5 million for first quarter 2013. The increase in cost of sales was primarily due to extreme weather conditions resulting in higher natural gas prices and production costs in first quarter 2014 totaling $13.0 million, partially offset by favorable impact from lower first quarter 2014 bauxite and caustic soda prices and by incremental CORE productivity savings. Total cost of sales in the Bauxite segment was $25.9 million for first quarter 2014 compared to $30.0 million for first quarter 2013. The decrease in cost of sales was primarily a result of lower fuel prices and productivity-driven reductions in mine operations.
Flat-Rolled Products segment cost of sales decreased to $124.6 million for first quarter 2014 from $137.1 million for first quarter 2013. The decrease related principally to lower LME related raw material input costs. Selling, general and administrative expenses Selling, general and administrative expenses in the three months ended March 31, 2014 were $20.7 million, compared to $24.6 million in the three months ended March 31, 2013. In first quarter 2014, selling, general and administrative expenses decreased primarily due to lower compensation expenses and benefits as a result of 2013 workforce reductions and decreased relocation, severance and professional fees.
Operating income (loss)
Operating loss for the three months ended March 31, 2014 was $11.1 million compared to operating income of $8.2 million in the three months ended March 31, 2013. The decrease in operating income primarily related to the sales margin decline of $23.2 million, offset by a $3.9 million decrease in selling, general and administrative expenses.
Sales margin was $9.6 million for the three months ended March 31, 2014 compared to $32.8 million in the three months ended March 31, 2013. This decrease resulted from the unfavorable impacts of lower LME aluminum prices and effects of extreme weather conditions on alumina and primary aluminum production costs.


Interest expense, net
Interest expense during first quarter 2014 increased to $12.5 million compared to $10.1 million in first quarter 2013. Our average outstanding indebtedness increased to $665.6 million in first quarter 2014 from $601.2 million in first quarter 2013.
(Gain) loss on hedging activities, net
Loss on hedging activities was $0.3 million in the three months ended March 31, 2014 compared to a gain on hedging activities of $5.4 million in the three months ended March 31, 2013. During the three months ended March 31, 2013, we reclassified $6.4 million of aluminum and natural gas hedge net gains from AOCI into earnings. There were no remaining derivative gains or losses on hedging activities in AOCI to reclassify into earnings during the three months ended March 31, 2014.
Income (loss) before income taxes
Loss before income taxes was $23.9 million in the three months ended March 31, 2014, compared to income before income taxes of $1.0 million in the three months ended March 31, 2013. The special items outlined below impacted the comparability of our pre-tax income (in millions):

                                      Three months ended March 31
                                         2014              2013
                                          $                  $
                                   Increase (decrease) to net income
Special items:
Transaction costs                             -               (2.5 )
Gain (loss) on hedging activities          (0.3 )              5.4
Total special items (pre-tax)              (0.3 )              2.9

Income tax expense (benefit)
Income tax benefit was $7.1 million in the three months ended March 31, 2014, compared to income tax expense of $0.4 million in the three months ended March 31, 2013.
Our effective income tax rate was approximately 29.7% for the three months ended March 31, 2014 and 40.0% for the three months ended March 31, 2013. The effective income tax rate for the three months ended March 31, 2014 and for the three months ended March 31, 2013 was primarily impacted by state income taxes, the Internal Revenue Code Section 199 manufacturing deduction, and a foreign deferred tax asset valuation allowance.
Net income (loss)
Net loss was $16.8 million in the three months ended March 31, 2014, compared to net income of $0.6 million in the three months ended March 31, 2013. The decrease in net income resulted from a $19.3 million decrease in operating income, a $5.7 million decrease in gain on hedging activities, and a $2.4 million increase in interest expense, offset by a $7.5 million decrease in income tax expense.
Discussion of quarterly segment results
Bauxite
Bauxite segment sales, including intersegment sales, for the three months ended March 31, 2014 were $30.1 million, compared to $35.5 million for the three months ended March 31, 2013. Lower realized pricing decreased sales by $3.5 million and lower shipment volume decreased sales by $1.9 million. Segment profit in the three months ended March 31, 2014 was $2.5 million compared to $4.2 million in the three months ended March 31, 2013. The decrease in segment performance was driven by lower internal and external selling prices, which offset favorably lower fuel prices and productivity-driven reductions in mine operating costs.
Alumina
Alumina segment sales, including intersegment sales, for the three months ended March 31, 2014 were $77.2 million compared to $86.1 million for the three months ended March 31, 2013. This decrease is primarily related to lower LME-linked prices.
Segment loss in the three months ended March 31, 2014 was $11.9 million compared to segment profit of $4.1 million in the three months ended March 31, 2013. Lower Alumina segment profit reflects the combination the $13.0 million impact of extreme winter weather conditions and a $7.8 million unfavorable impact from lower LME-linked prices.These negatives factors were partially offset by the $3.4 million favorable impact from lower first quarter 2014 bauxite and caustic soda prices and by incremental CORE productivity savings in first quarter 2014.


Primary Aluminum
Primary Aluminum segment sales, including intersegment sales, decreased to $149.5 million in the three months ended March 31, 2014 from $161.2 million in the three months ended March 31, 2013.
The average realized MWTP decreased 7.8% in the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Segment profit in the three months ended March 31, 2014 was $18.4 million compared to $24.2 million in the three months ended March 31, 2013. This decline was driven largely by a net $7.9 million negative impact from lower LME-linked prices and a $1.9 million impact of extreme winter weather conditions during first quarter 2014. These negative factors were partially offset by the $4.1 million impact from incremental CORE productivity savings, as well as lower input cost pricing. Medical and workers compensation costs were also higher in first quarter 2014 than in first quarter 2013. Flat-Rolled Products
Sales in our Flat-Rolled Products segment were $133.3 million in the three months ended March 31, 2014 compared to $145.9 million in the three months ended . . .

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