NORANDA ALUMINUM HOLDING 10-Q 2011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2011
For the transition period from [ to ].
Commission file number: 001-34741
NORANDA ALUMINUM HOLDING CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Registrants Telephone Number, Including Area Code: (615) 771-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO þ
As of July 26, 2011, there were 67,222,884 shares of Noranda common stock outstanding.
TABLE OF CONTENTS
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share information)
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes
NORANDA ALUMINUM HOLDING CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Basis of presentation
The accompanying unaudited consolidated financial statements represent the consolidation of Noranda Aluminum Holding Corporation and all companies that we directly or indirectly control (Noranda, the Company, we, us, and our). Noranda HoldCo refers only to Noranda Aluminum Holding Corporation, excluding its subsidiaries. Noranda AcquisitionCo refers only to Noranda Aluminum Acquisition Corporation, the wholly-owned direct subsidiary of Noranda HoldCo, excluding its subsidiaries.
These unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) for interim financial information. The consolidated financial statements, including these condensed notes, are unaudited and exclude some of the disclosures required in annual consolidated financial statements. Consolidated balance sheet data as of December 31, 2010 was derived from our audited consolidated financial statements. In managements opinion, these unaudited consolidated financial statements include all adjustments (including normal recurring accruals) that are considered necessary for the fair presentation of our financial position and operating results. All intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications have been made to previously issued consolidated financial statements to conform to the current period presentation. These reclassifications had no impact on operating results or cash flows.
The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. For example, our interim operating results are affected by peak power usage rates from June through September each year which affect our operating costs at the New Madrid smelter. We are also subject to seasonality associated with the demand cycles of our end-use customers, which results in lower shipment levels from November to February.
These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (SEC) on March 7, 2011.
Common stock offerings
On May 19, 2010, we completed an initial public offering (IPO) of 11.5 million shares of common stock at an $8.00 per share public offering price on the New York Stock Exchange (NYSE: NOR). The net proceeds after the underwriting discounts, commissions, fees and expenses amounted to $82.9 million. We used those net proceeds from the offering together with $95.9 million of proceeds from settling all outstanding fixed price aluminum hedges, to repurchase the $66.4 million remaining principal amount of outstanding Noranda HoldCo Senior Floating Rate Notes due 2014 (HoldCo Notes), and to repay $110.0 million principal amount outstanding under the term B loan. The remaining $2.4 million was used for other corporate purposes.
In connection with the IPO, pursuant to our amended and restated certificate of incorporation, our authorized capital stock increased from 100.0 million to 225.0 million, of which 200.0 million ($0.01 par value) is designated as common stock and 25.0 million (at $0.01 par value) is designated as preferred stock. As of June 30, 2011, no preferred stock is outstanding.
On December 10, 2010, we completed a follow-on public offering of 11.5 million shares of common stock at an $11.35 per share public offering price on the NYSE. The net proceeds after the underwriting discounts, commissions, fees and expenses amounted to $123.1 million. We used those proceeds to repay $122.3 million principal amount outstanding under the term B loan. The remaining $0.8 million was used for other corporate purposes.
During third quarter 2010, we revised our segment performance measure to be segment profit rather than segment operating income. All segment information presented herein has been revised to reflect the new reporting measure. The segment changes had no impact on our historical consolidated financial position, results of operations or cash flows. Refer to the discussion in Note 18, Segments for further information.
Depreciation and amortization in the accompanying unaudited consolidated statements of cash flows includes depreciation of property, plant and equipment, amortization of intangibles and amortization of other long-term assets as follows (in millions):
Purchases of property, plant and equipment accrued in accounts payable and not yet paid were $3.0 million for the six months ended June 30, 2011 and are not reflected as capital expenditures in the accompanying unaudited consolidated statements of cash flows. For the six months ended June 30, 2011, we capitalized interest of $0.3 million related to long-term capital projects.
Cash paid for interest and income taxes was as follows (in millions):
We use the last in, first out (LIFO) method of valuing raw materials, work-in-process and finished goods inventories at our New Madrid smelter and our rolling mills. Supplies inventories at our rolling mills are valued using the first in, first out (FIFO) method. Product inventories at our bauxite mining operations in St. Ann, Jamaica and our alumina refinery operations in Gramercy, Louisiana, and supplies inventories at our smelter in New Madrid, Missouri are valued at weighted-average cost and are not subject to the LIFO adjustment. Gramercy and St. Ann inventories comprise 24.9% and 21.8% of total product inventories, at cost, at December 31, 2010 and June 30, 2011, respectively. Inventories, net, consisted of the following (in millions):
Property, plant and equipment, net, consisted of the following (in millions):
Cash and cash equivalents consisted of the following (in millions):
Accounts receivable, net, consisted of the following (in millions):
Other current assets consisted of the following (in millions):
Other assets consisted of the following (in millions):
Accrued liabilities consisted of the following (in millions):
Other long-term liabilities consisted of the following (in millions):
Accumulated other comprehensive income (AOCI) consisted of the following (in millions):
Our outstanding debt consisted of the following (dollars in millions):
In second quarter 2010, AcquisitionCo and HoldCo issued $9.1 million and $2.3 million in AcquisitionCo Notes and HoldCo Notes, respectively, as payment-in-kind for interest due May 15, 2010. During second quarter 2011, AcquisitionCo issued $8.9 million of AcquisitionCo Notes as payment-in-kind for interest due May 15, 2011. For subsequent periods after May 15, 2011, Noranda AcquisitionCo must pay all interest in cash.
Loss on debt repurchase
During second quarter 2010, we repaid $110.0 million of our term B loan and repurchased the remaining $66.4 million of outstanding principal balance of our HoldCo Notes with proceeds from our IPO in May 2010 and proceeds from the termination of fixed-price aluminum swaps, completed in connection with the IPO. Additionally, we repaid $10.0 million of our term B loan with proceeds from May 2010 hedge terminations. During the six months ended June 30, 2010, we repaid $127.5 million and $215.9 million of outstanding principal balances on the term B loan and revolving credit facility, respectively, and repurchased the $66.4 million of HoldCo Notes discussed above. No debt repurchases or repayments were made during the three and six months ended June 30, 2011. Debt repayments resulted in the accelerated amortization of $2.5 million and $2.6 million of deferred financing costs and unamortized debt issuance discount for the three and six months ended June 30, 2010, respectively. The loss on debt repurchased during the 2010 periods consisted of the following (in millions):
On February 26, 2010, we announced a workforce and business process restructuring in our U.S. operations that reduced operating costs, conserved liquidity and improved operating efficiency. The U.S. workforce restructuring plan reduced headcount through a combination of voluntary retirement packages and involuntary terminations. We completed substantially all activities associated with this workforce reduction as of February 26, 2010.
In connection with a decision to contract the substantial portion of our bauxite mining to third party contractors, on April 21, 2010, we announced a workforce reduction in our Jamaican bauxite mining operations. The workforce restructuring plan reduced headcount through involuntary terminations. We completed substantially all activities associated with this workforce reduction as of April 21, 2010.
These actions resulted in $3.2 million and $7.6 million of pre-tax restructuring charges in the three months and six months ended June 30, 2010, respectively, primarily due to one-time termination benefits and early retirement benefits. We recorded these charges in the accompanying unaudited consolidated statements of operations as a component of selling, general and administrative expenses and they were recorded when employee service requirements, if any, were met. We paid the majority of these restructuring expenses in 2010. We paid the remaining restructuring expenses of $0.5 million during the first six months of 2011.
We sponsor defined benefit pension plans for hourly and salaried employees. Benefits under our sponsored defined benefit pension plans are based on years of service and/or eligible compensation prior to retirement. We also sponsor other post-retirement benefit (OPEB) plans for certain employees. These benefits include life and health insurance. In addition, we provide supplemental executive retirement benefits for certain executive officers.
Net periodic cost (benefit) was as follows (in millions):
During the six months ended June 30, 2011, we contributed $8.5 million to the Noranda pension plans and $0.2 million to the St. Ann pension plans. For the full year 2011, we anticipate contributing a total of $21.5 million to the Noranda pension plans, in order to maintain an Adjusted Funding Target Attainment Percentage under the Pension Protection Act of 2006 of 80%, and a total of $0.4 million to the St. Ann pension plans.
We recorded stock compensation expense as follows (in millions):
We reserved 3,800,000 shares of common stock for issuance under our 2007 Long-Term Incentive Plan. Employees and non-employee directors held 1,688,385 options at June 30, 2011. The investor director provider group held 140,000 options at June 30, 2011. The investor director provider group consists of the six full-time employees of our principal stockholders affiliated with Apollo Management VI (Apollo) who serve on our Board of Directors. Common stock shares awarded or sold to employees and non-employee directors under the plan totaled 940,232 shares through June 30, 2011. We had 604,383 shares available for issuance under the 2007 Long-Term Incentive Plan as of June 30, 2011.
We reserved 5,200,000 shares of common stock for issuance under our 2010 Incentive Award Plan. As of June 30, 2011, employees and non-employee directors held 493,927 service-vesting restricted stock units awards (RSUs) and a target amount of 243,038 performance-vesting RSUs. The number and grant date fair value of the performance awards to be issued, a maximum of 486,076 awards, will be based on Company performance for the years 2011 through 2013. We had 4,463,035 shares available for issuance under the 2010 Incentive Award Plan as of June 30, 2011.
In the first six months of 2011, we granted 90,000 service-vesting RSUs, (the investor director provider RSUs,) in lieu of RSUs that would otherwise be granted under the director compensation program to the investor director provider group. These investor director provider RSUs vest in December 2011 and June 2012, subject to the continued service of the Apollo employees as our directors. We will make a cash payment to Apollo equal to the fair market value of the outstanding investor director provider RSUs on the vesting dates. We account for the investor director provider RSUs as liability awards. We remeasure the fair value of the liability at each reporting date and adjust stock compensation expense so that the amount ultimately recorded as stock compensation expense will equal the cash paid on the vesting date (see Note 17 Fair Value Measurements). As of June 30, 2011, we have recorded $0.5 million in accrued liabilities in the accompanying unaudited consolidated balance sheet for these awards.
In May 2010, in connection with the Companys IPO, stock options were modified to remove a call option which had created an implicit seven year vesting period. The effect of this modification was to accelerate expense recognition for certain fully-vested options
and to change the amount of expense to be recognized based on an assumed forfeiture rate. We recognized $3.2 million of compensation expense for the three and six months ended June 30, 2010 in connection with this modification.
Our stock option activity and related information follows:
Our RSU activity follows:
We determined grant date fair value of service-vesting RSUs based on the closing price of our common stock on the grant date. We estimated a forfeiture rate of 2% for service-vesting RSUs based on the historical forfeiture rate for employee stock option grants of comparable size. We expect all non-employee director and investor director provider RSUs to vest. Service-vesting RSUs will generally vest over three years, on the anniversary of the grant date, in the following increments: 25% on the first anniversary, 25% on the second anniversary and 50% on the third anniversary. We recognize stock compensation expense on a straight-line basis over the three year vesting period.
As of June 30, 2011, unrecognized stock compensation expense related to non-vested options, service-vesting RSUs and investor director provider RSUs was $7.9 million. We will recognize this amount over a weighted-average period of 1.5 years. We have not yet recognized stock compensation expense for performance-vesting RSUs because the performance conditions have not been determined as of June 30, 2011.
Our effective income tax rate was 34.0% for the six months ended June 30, 2010 and 33.5% for the six months ended June 30, 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.
We present both basic and diluted earnings per share (EPS) on the face of the accompanying unaudited consolidated statements of operations. The calculation of basic and diluted EPS follows (in millions, except per share values):
Certain stock options could potentially dilute basic EPS in the future, but were not included in the computation of diluted EPS because to do so would have been antidilutive. Those antidilutive options were as follows (in millions):
12. DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative instruments to mitigate the risks associated with fluctuations in aluminum prices, natural gas prices and interest rates. All derivatives are held for purposes other than trading.
Fixed price aluminum swaps. In 2007 and 2008, we implemented a hedging strategy designed to reduce commodity price risk and protect operating cash flows in our primary aluminum products segment through the use of fixed price aluminum sale swaps. In addition, during first quarter 2009, we entered into fixed price aluminum purchase swaps to lock in a portion of the favorable market position of our fixed price aluminum sale swaps. In March 2009, we entered into a hedge settlement agreement with Merrill Lynch to provide a mechanism for us to monetize our favorable net fixed price swap positions to fund debt repurchases, subject to certain limitations.
At the closing of our IPO in May 2010, we settled all of our remaining fixed price aluminum swaps and used the proceeds to repay indebtedness. We have no outstanding fixed price aluminum swaps at June 30, 2011.
Variable price aluminum swaps and other. From time to time, we enter into forward contracts with our customers to sell aluminum in the future at fixed prices in the normal course of business. Because these contracts expose us to aluminum market price fluctuations, we economically hedge this risk by entering into variable price aluminum swap contracts with various brokers, typically for terms less than one year. As of June 30, 2011, our outstanding variable price aluminum swaps were as follows:
Natural gas swaps. We purchase natural gas to meet our production requirements. These purchases expose us to the risk of fluctuating natural gas prices. To offset changes in the Henry Hub Index Price of natural gas, we enter into financial swaps by purchasing the fixed forward price for the Henry Hub Index and simultaneously entering into an agreement to sell at the actual Henry Hub Index Price. As of June 30, 2011, our outstanding natural gas swaps were as follows:
Interest rate swaps. We have floating rate debt, which is subject to variations in interest rates. We have entered into an interest rate swap agreement to limit our exposure to floating interest rates through November 15, 2011. As of June 30, 2011, our outstanding interest rate swaps were as follows:
We recognize all derivative instruments as either assets or liabilities at their estimated fair value in our consolidated balance sheets. The following table presents the fair values of our derivative instruments outstanding (in millions):
Merrill Lynch is the counterparty for a substantial portion of our derivatives. All swap arrangements with Merrill Lynch are part of a master arrangement which is subject to the same guarantee and security provisions as the senior secured credit facilities. The master arrangement does not require us to post additional collateral, or cash margin. We present the fair values of derivatives where
Merrill Lynch is the counterparty in a net position on the consolidated balance sheets as a result of our master netting agreement. The following is a presentation of the gross components of our net derivative balances (in millions):
The following is a gross presentation of the derivative balances segregated by type of contract and between derivatives that are designated and qualify for hedge accounting and those that are not (in millions):
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of any gain or loss on the derivative is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The following table presents the net amount of unrealized gains (losses) on cash flow hedges that were reported as a component of AOCI at June 30, 2011, and the expected timing of those amounts being reclassified into earnings (in millions):
Gains and losses on the derivatives representing hedge ineffectiveness are recognized in current earnings, along with amounts that are reclassified from AOCI. Derivatives that do not qualify for hedge accounting or have not been designated for hedge accounting treatment are adjusted to fair value through gains (losses) on hedging activities in the accompanying unaudited consolidated statements of operations. The following table presents how our hedging activities affected our accompanying unaudited consolidated statements of operations for each period (in millions):
St. Ann has a reclamation obligation to rehabilitate land disturbed by St. Anns bauxite mining operations. A summary of our reclamation obligation activity at St. Ann follows (in millions):
In cases where land to be mined is privately owned, St. Ann offers to purchase the residents homes for cash, relocate the residents to another area, or a combination of these two options. We record land acquired for mining in other assets in our consolidated balance sheets and amortize these costs over three years. We record land acquired to relocate residents as property, plant and equipment in our consolidated balance sheets until we develop the land into a subdivision. Costs to develop the land and move the residents are recorded as land obligation liabilities in our consolidated balance sheets as these costs are incurred. Relocating residents occurs over a period of time, often over several years. As such, estimates of the cost to complete our obligations are subject to revision; therefore, it is reasonably possible that adjustment to the land obligations liabilities maybe necessary as we fulfill our obligations.
During second quarter 2011, we recorded $1.3 million of additional amortization expense related to a first quarter increase to the land obligation to reflect updated estimates related to relocating residents. The additional amortization was not material to our financial statements as of and for the three months ended March 31, 2011 or for the three months ended June 30, 2011.
Asset retirement obligations
Our asset retirement obligations (ARO) consist of costs related to the disposal of certain spent pot liners associated with the New Madrid smelter, as well as costs associated with the future closure and post-closure care of red mud lakes at the Gramercy facility, where Gramercy disposes of red mud wastes from its refining process.
A summary of our asset retirement obligation activity follows (in millions):
We had $9.2 million of restricted cash in an escrow account at December 31, 2010 and $9.2 million at June 30, 2011 as security for the payment of red mud lake closure obligations that will arise under state environmental laws upon the termination of operations at the Gramercy facility. This amount is included in other assets in the accompanying unaudited consolidated balance sheets. The remaining restricted cash in other assets relates primarily to funds for workers compensation claims.
Through St. Ann, we hold a 49% partnership interest in Noranda Jamaica Bauxite Partners (NJBP), in which the Government of Jamaica (GOJ) holds a 51% interest. NJBP mines bauxite, approximately 50% of which is sold to Gramercy, with the balance sold to third parties. We have determined that NJBP is a variable interest entity under U.S. GAAP, and St. Ann is NJBPs primary beneficiary. The determination that St. Ann is the primary beneficiary was based on the fact that St. Ann absorbs the profits and losses associated with the partnership, while the GOJ receives certain fees from St. Ann, such as royalties, production and asset usage fees. Therefore, we consolidate NJBP into our consolidated financial statements.
The following amounts related to NJBP are included in our unaudited consolidated balance sheets (in millions):
We entered into a management consulting and advisory services agreement with Apollo on May 18, 2007 for the provision of certain structuring, management and advisory services for an initial term ending on May 18, 2017. Terms of the agreement provided for annual fees of $2.0 million, payable in one lump sum annually. Historically, we expensed approximately $0.5 million of such fees each quarter within selling, general and administrative expenses in our consolidated statements of operations. Upon completion of our IPO in second quarter 2010, as permitted by the terms of that management agreement, Apollo terminated the agreement and received a $13.5 million fee from the Company. This payment consisted of $1.0 million in management fees accrued in 2010 prior to the termination of the management agreement and $12.5 million in accelerated management fees due upon termination of the management
agreement. The fee is included in selling, general and administrative expenses in our consolidated statements of operations for the three months and six months ended June 30, 2010.
We sell flat rolled aluminum products to Berry Plastics Corporation, a portfolio company of Apollo, under an annual sales contract. Sales to this entity were as follows (in millions):
We have historically sold flat rolled aluminum products to Richardson Trident Co., which was acquired in first quarter of 2011 by Metals USA Holdings Corp, a portfolio company of Apollo. Sales to Metals USA Holdings Corp. and its subsidiaries were as follows (in millions):
We are a party to six collective bargaining agreements: the United Steelworkers of America (USWA); the International Association of Machinists and Aerospace Workers (IAMAW); the University and Allied Workers Union (UAWU); and the Union of Technical, Administrative and Supervisory Personnel (UTASP).
We have completed the process of formalizing recognition of a third union at St. Ann with the Bustamante Industrial Trade Union (BITU). During third quarter 2011, we expect to finalize terms of a three year agreement with the BITU, which is expected to extend through December 2012.
We are a party to legal proceedings incidental to our business. In the opinion of management, the ultimate liability with respect to these actions will not materially affect our financial position, results of operations or cash flows.
In addition to our asset retirement obligations discussed in Note 13, Reclamation, Land and Asset Retirement Obligations, we have identified certain environmental conditions requiring remedial action or ongoing monitoring at the Gramercy refinery. As of both December 31, 2010 and June 30, 2011, we have undiscounted liabilities of $2.0 million in accrued liabilities and $2.3 million in other long-term liabilities for remediation of Gramercys known environmental conditions. Approximately two-thirds of the recorded liability represents clean-up costs expected to be incurred during the next five years. The remainder represents monitoring costs which will be incurred ratably over a 30 year period. Because the remediation and subsequent monitoring related to these environmental conditions occurs over an extended period of time, these estimates are subject to change based on future costs. No other third parties are involved in any ongoing environmental remediation activities with us.
We cannot predict what environmental laws or regulations will be enacted or amended in the future, how existing or future laws or regulations will be interpreted or enforced or the amount of future expenditures that may be required to comply with such laws or regulations. Such future requirements may result in liabilities which may have a material adverse effect on our financial condition, results of operations or cash flows.
At the end of 2009, we and the GOJ reached an agreement setting the fiscal regime structure for St. Anns bauxite mining operations through December 31, 2014. The agreement covers the fiscal regime, as well as commitments for certain expenditures for haulroad development, maintenance, dredging, land purchases, contract mining, training and other general capital expenditures from 2009 through 2014. If we do not meet our commitment to the GOJ regarding these expenditures, we would owe to the GOJ a penalty that could be material to our financial statements. We believe there is a remote possibility that we will not meet the commitment.
Electricity is our largest cash cost component in the production of primary aluminum and is a key factor to our long-term competitive position in the primary aluminum business. We have a power purchase agreement with Ameren pursuant to which we have agreed to purchase substantially all of New Madrids electricity through May 2020. Included in the contract is a minimum purchase requirement equal to five mega watts, calculated at peak and non-peak demand charges, or approximately $4.2 million over the life of the contract. These minimum purchase requirements represent significantly less power usage than we require, given the power-intensive nature of our smelter facility. Our current rate structure with Ameren consists of two components: a base rate and a fuel adjustment clause (FAC).
On June 21, 2010, the Missouri Public Service Commission (MoPSC) ruled on the power rate case filed by Ameren on July 24, 2009. The MoPSCs ruling resulted in no significant change to the base power rate for the New Madrid smelter. Charges related to the FAC were $4.5 million and $8.7 million in the three months and six months ended June 30, 2011, respectively, and are recorded in cost of goods sold in the accompanying unaudited consolidated statements of operations. We anticipate the third quarter 2011 impact of FAC to be approximately $4.1 million; however, we are not able to predict future FAC charges, as they are dependent on Amerens fuel costs and off system sales volume and prices.
On September 3, 2010, Ameren filed a new rate case with the MoPSC seeking an 11% base rate increase. In July 2011, the MoPSC ruled on this rate case approving Ameren to increase its base rates by $172 million state-wide, which will increase our base rate by 5.2% effective July 31, 2011. We are currently appealing several rate-related issues, including the previous two rate rulings and the amount of cost increases related to the fuel adjustment clause. As of December 31, 2010 and June 30, 2011, other current assets (See Note 5, Supplemental Balance Sheet Information) included $9.8 million and $21.9 million, respectively, held in escrow by the Missouri Circuit Court for disputed amounts related to these appeals.
The fair values and fair value hierarchy level of our assets and liabilities that are measured at fair value on a recurring basis were as follows (in millions):
Cash equivalents are temporary cash investments with high credit quality financial institutions, which include money market funds invested in U.S. treasury securities, short-term treasury bills and commercial paper. These instruments are valued based upon unadjusted, quoted prices in active markets and are classified within Level 1.
Fair values of all derivative instruments are classified as Level 2. Those fair values are primarily measured using industry standard models that incorporate inputs including: quoted forward prices for commodities, interest rates, and current market prices for those assets and liabilities. Substantially all of the inputs are observable throughout the full term of the instrument. The counterparty of our derivative trades is Merrill Lynch, with the exception of a small portion of our variable price aluminum swaps.
We discuss the RSU liability awards in Note 9, Shareholders Equity and Share-Based Payments. The fair value of this Level 1 liability was determined based on the closing market price of our common stock on June 30, 2011.
In Note 6, Long-Term Debt, we disclose the fair values of our debt instruments. We use bid prices obtained through broker quotes to determine the fair value of our AcquisitionCo Notes. These fair values are classified as Level 2 within the hierarchy. While the AcquisitionCo Notes have quoted market prices used to determine fair value, we do not believe transactions on those instruments occur in sufficient frequency or volume to warrant a Level 1 classification. Further, the fair values of the term B loan and revolving credit facility are based on interest rates available at each balance sheet date, resulting in a Level 2 classification as well.
There were no transfers between fair value hierarchy levels during the six months ended June 30, 2011.
We manage and operate our business segments based on the markets we serve and the products we produce. We have five reportable segments consisting of bauxite, alumina refining, primary aluminum products, flat rolled products and corporate.
During third quarter 2010, as we continued to formalize our internal reporting practices, we revised our segment performance measure to be segment profit (loss) rather than the previously reported U.S. GAAP basis segment operating income. Segment profit (loss) (in which certain items, primarily non-recurring costs or non-cash expenses, are not allocated to the segments and in which certain items, primarily the income statement effects of current period cash settlements of hedges, are allocated to the segments) is a measure used by management as a basis for resource allocation. We have reported our segment results for the three and six months ended June 30, 2010 in conformity with the updated segment performance measure. This change in segment performance measure had no impact on our historical consolidated financial position, results of operations or cash flows.
The following tables summarize operating results and assets of our reportable segments and include a reconciliation of segment profit (loss) to income before income taxes (in millions):
The following unaudited condensed consolidating financial statements present separately the financial condition and results of operations and cash flows for Noranda HoldCo (as parent guarantor), Noranda AcquisitionCo (as the issuer), the subsidiary guarantors, the subsidiary non-guarantors and eliminations (the guarantor financial statements.) The guarantor financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.
The accounting policies used in the preparation of the guarantor financial statements are consistent with those found elsewhere in the accompanying unaudited consolidated financial statements. Intercompany transactions have been presented gross in the guarantor financial statements; however these transactions eliminate in consolidation.
NORANDA ALUMINUM HOLDING CORPORATION
Consolidating Balance Sheet
As of December 31, 2010