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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2014
Fair Value Disclosures [Abstract] |
Fair Value Measurement | Fair Value Measurements Overview The Company applies the fair value hierarchy established by GAAP for the recognition and measurement of assets and liabilities. An asset or liability’s fair value classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers counterparty risk in its assessment of fair value. The fair values of financial assets and liabilities are evaluated and measured on a recurring basis. As part of that evaluation process, the Company reviews the underlying inputs that are significant to the fair value measurement of financial instruments to determine if a transfer among hierarchy levels is appropriate. The Company historically has not had significant transfers into or out of each hierarchy level. Financial assets and liabilities that the Company measures at fair value as required by GAAP include: (i) its derivative instruments; (ii) the plan assets of the VEBAs and the Company’s Canadian defined benefit pension plan measured annually at December 31; and (iii) available for sale securities, consisting of debt investment securities and investments related to the Company’s deferred compensation plan (see Note 5). The Company records certain other financial assets and liabilities at carrying value (see the tables below for the fair value disclosure of those assets and liabilities). The majority of the Company’s non-financial assets and liabilities, which include goodwill, intangible assets, inventories and property, plant, and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill), an evaluation of a non-financial asset or liability is required, potentially resulting in an adjustment to the carrying amount of such asset or liability. For the quarter and six months ended June 30, 2014 and June 30, 2013, the Company concluded that none of its non-financial assets and liabilities subject to fair value assessments on a non-recurring basis required a material adjustment to the carrying amount of such assets and liabilities. Fair Values of Financial Assets and Liabilities Fair Values of Derivative Assets and Liabilities. The Company’s derivative contracts are valued at fair value using significant observable and unobservable inputs. Commodity, Energy and Foreign Currency Derivatives - The fair values of a majority of these derivative contracts are based upon trades in liquid markets. Valuation model inputs can generally be verified, and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy. The Company, however, has some derivative contracts that do not have observable market quotes. For these financial instruments, management uses significant unobservable inputs (e.g., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors, such as bid/offer spreads. The fair value of these financial instruments are classified as Level 3 in the fair value hierarchy. Bifurcated Conversion Feature and Call Options - The fair value of the Bifurcated Conversion Feature is measured as the difference in the estimated fair value of the Convertible Notes and the estimated fair value of the Convertible Notes without the cash conversion feature. The Convertible Notes are valued based on the trading price of the Convertible Notes each period-end (see “All Other Financial Assets and Liabilities” below). The fair value of the Convertible Notes without the cash conversion feature is the present value of the series of the remaining fixed income cash flows under the Convertible Notes, with a maturity of April 1, 2015. During the second quarter of 2014, the Bifurcated Conversion Feature and Call Options were reclassified as current liabilities and assets, respectively, and were included in the Consolidated Balance Sheet as a portion of Other accrued liabilities and Prepaid expenses and other current assets, respectively, as of June 30, 2014. The Company determines the fair value of the Call Options using a binomial lattice valuation model. The inputs to the model at June 30, 2014 were as follows:
The Company’s stock price at June 30, 2014 | $ | 72.87 |
Quarterly dividend yield (per share) upon purchase of the Call Option 1 | $ | 0.24 |
Risk-free interest rate 2 | 0.08 | %
Credit spread (basis points)3 | 130 |
Expected volatility rate 4 | 17.0 | %
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1 | The quarterly dividend in the second quarter of 2014 was $0.35 per share, but the model assumes a $0.24 per share quarterly dividend as was paid at the inception of the Call Options. Quarterly dividends in excess of $0.24 per share do not affect the Call Options’ value due to anti-dilution adjustments.
2 | The risk-free rate was based on the six-month Constant Maturity Treasury rate and one-year Constant Maturity Treasury rate on June 30, 2014.
3 | The credit spread is based on the Company’s long-term credit rating of BB issued by Standard & Poor’s.
4 | The volatility rate was based on both observed volatility, which is based on the Company’s historical stock price, and implied volatility from the Company’s traded options. Such volatility was further adjusted to take into consideration market participant risk tolerance.
The aggregate fair value of our derivatives, recorded on the Consolidated Balance Sheets at June 30, 2014 and December 31, 2013, was a net asset of $0.6 and a net liability of $4.3, respectively. The increase in net position from liability to asset during the six months ended June 30, 2014 was primarily due to changes in the underlying commodity and energy prices during such period. Changes in the fair value of our derivative contracts relating to operational hedging activities are reflected in operating income. Such changes in the fair value of these contracts resulted in the recognition of a $3.5 unrealized mark-to-market gain during the six months ended June 30, 2014. VEBA and Canadian Pension Plan Assets. The fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan is measured annually on December 31. In determining the fair value of the plan assets at each annual period end, the Company utilizes primarily the results of valuations supplied by the investment advisors responsible for managing the assets of each plan. See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information with respect to the fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan. Available for sale securities. The Company holds debt investment securities. The fair value of the debt investment securities, which consist of commercial paper and corporate bonds, is determined based on valuation models that use observable market data. At June 30, 2014, the remaining maturity period with respect to short-term investments ranged from 32 days to approximately nine months. In addition to debt investment securities, the Company also holds assets in various investment funds at certain registered investment companies in connection with its deferred compensation program (see Note 5). Such assets are accounted for as available for sale securities and are measured and recorded at fair value based on the net asset value of the investment funds on a recurring basis. The fair value input of the available for sale securities is considered either a Level 1 or Level 2 input depending on whether the debt security or investment fund is traded on a public exchange. The amortized cost for available for sale securities approximates their fair value. All Other Financial Assets and Liabilities. The Company believes that the fair value of its cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective carrying values due to their short maturities and nominal credit risk. The fair value of the Convertible Notes and Senior Notes is based on their trading prices and is considered a Level 1 input in the fair value hierarchy (see Note 3 for the carrying values of the Convertible Notes and the Senior Notes). The following table presents the Company’s financial instruments, classified under the appropriate level of the fair value hierarchy, as of June 30, 2014:
| Level 1 |  | Level 2 |  | Level 3 |  | Total
FINANCIAL ASSETS: |  |  |  |  |  |  |
Derivative Instruments: |  |  |  |  |  |  |
Aluminum - |  |  |  |  |  |  |
Fixed price purchase contracts | $ | — |  |  | $ | 0.8 |  |  | $ | — |  |  | $ | 0.8 |
Midwest premium swap contracts | — |  |  | — |  |  | 1.4 |  |  | 1.4 |
Natural Gas - |  |  |  |  |  |  |
Fixed price purchase contracts | — |  |  | 0.9 |  |  | — |  |  | 0.9 |
Electricity - |  |  |  |  |  |  |
Fixed price purchase contracts | — |  |  | 1.0 |  |  | — |  |  | 1.0 |
Hedges Relating to the Convertible Notes - |  |  |  |  |  |  |
Call Options | — |  |  | 86.5 |  |  | — |  |  | 86.5 |
All Other Financial Assets: |  |  |  |  |  |  |
Cash and cash equivalents | 69.7 |  |  | 104.5 |  |  | — |  |  | 174.2 |
Short-term investments | — |  |  | 127.2 |  |  | — |  |  | 127.2 |
Deferred compensation plan asset | — |  |  | 7.4 |  |  | — |  |  | 7.4 |
Total assets | $ | 69.7 |  |  | $ | 328.3 |  |  | $ | 1.4 |  |  | $ | 399.4 |
FINANCIAL LIABILITIES: |  |  |  |  |  |  |
Derivative Instruments: |  |  |  |  |  |  |
Aluminum - |  |  |  |  |  |  |
Fixed price purchase contracts | $ | — |  |  | $ | (0.5 | ) |  | $ | — |  |  | $ | (0.5 | )
Natural Gas - |  |  |  |  |  |  |
Fixed price purchase contracts | — |  |  | (0.6 | ) |  | — |  |  | (0.6 | )
Electricity - |  |  |  |  |  |  |
Fixed price purchase contracts | — |  |  | (0.2 | ) |  | — |  |  | (0.2 | )
Hedges Relating to the Convertible Notes - |  |  |  |  |  |  |
Bifurcated Conversion Feature | — |  |  | (88.7 | ) |  | — |  |  | (88.7 | )
All Other Financial Liabilities: |  |  |  |  |  |  |
Senior Notes | (253.2 | ) |  | — |  |  | — |  |  | (253.2 | )
Convertible Notes | (269.7 | ) |  | — |  |  | — |  |  | (269.7 | )
Total liabilities | $ | (522.9 | ) |  | $ | (90.0 | ) |  | $ | — |  |  | $ | (612.9 | )
The following table presents the Company’s financial instruments, classified under the appropriate level of the fair value hierarchy, as of December 31, 2013:
| Level 1 |  | Level 2 |  | Level 3 |  | Total
FINANCIAL ASSETS: |  |  |  |  |  |  |
Derivative Instruments: |  |  |  |  |  |  |
Aluminum - |  |  |  |  |  |  |
Fixed price purchase contracts | $ | — |  |  | $ | 0.1 |  |  | $ | — |  |  | $ | 0.1 |
Midwest premium swap contracts | — |  |  | — |  |  | 1.1 |  |  | 1.1 |
Natural Gas - |  |  |  |  |  |  |
Fixed price purchase contracts | — |  |  | 0.5 |  |  | — |  |  | 0.5 |
Electricity - |  |  |  |  |  |  |
Fixed price purchase contracts | — |  |  | 0.5 |  |  | — |  |  | 0.5 |
Foreign Currency - |  |  |  |  |  |  |
Euro | — |  |  | 0.1 |  |  | — |  |  | 0.1 |
Hedges Relating to the Convertible Notes - |  |  |  |  |  |  |
Call Options | — |  |  | 79.5 |  |  | — |  |  | 79.5 |
All Other Financial Assets: |  |  |  |  |  |  |
Cash and cash equivalents | 57.7 |  |  | 111.8 |  |  | — |  |  | 169.5 |
Short-term investments | — |  |  | 129.5 |  |  | — |  |  | 129.5 |
Deferred compensation plan asset | — |  |  | 6.5 |  |  | — |  |  | 6.5 |
Total assets | $ | 57.7 |  |  | $ | 328.5 |  |  | $ | 1.1 |  |  | $ | 387.3 |
FINANCIAL LIABILITIES: |  |  |  |  |  |  |
Derivative Instruments: |  |  |  |  |  |  |
Aluminum - |  |  |  |  |  |  |
Fixed price purchase contracts | $ | — |  |  | $ | (1.8 | ) |  | $ | — |  |  | $ | (1.8 | )
Natural Gas - |  |  |  |  |  |  |
Fixed price purchase contracts | — |  |  | (0.8 | ) |  | — |  |  | (0.8 | )
Electricity - |  |  |  |  |  |  |
Fixed price purchase contracts | — |  |  | (0.4 | ) |  | — |  |  | (0.4 | )
Hedges Relating to the Convertible Notes - |  |  |  |  |  |  |
Bifurcated Conversion Feature | — |  |  | (83.1 | ) |  | — |  |  | (83.1 | )
All Other Financial Liabilities: |  |  |  |  |  |  |
Senior Notes | (255.4 | ) |  | — |  |  | — |  |  | (255.4 | )
Convertible Notes | (260.0 | ) |  | — |  |  | — |  |  | (260.0 | )
Total liabilities | $ | (515.4 | ) |  | $ | (86.1 | ) |  | $ | — |  |  | $ | (601.5 | )
Financial instruments classified as Level 3 in the fair value hierarchy represent Midwest premium swap contracts for which at least one significant unobservable input in the valuation model is a management estimate. This is necessary due to the lack of an exchange traded product with observable market pricing data. To estimate fair value, the Company uses a forward curve that represents the mid-point of the bid-ask spread based on trade activity and market information obtained through discussions with a variety of counterparties including traders, banks and producers. The following table presents a reconciliation of activity for the Midwest premium derivative contracts on a net basis:
| Level 3
Balance at December 31, 2013 | $ | 1.1 |
Total realized/unrealized gains included in: |
Cost of goods sold excluding depreciation and amortization and other items and Unrealized (gains) losses on derivative instruments | 4.1 |
Transactions involving Level 3 derivative contracts: |
Purchases | 0.6 |
Sales | — |
Issuances | — |
Settlements | (4.4 | )
Transactions involving Level 3 derivatives — net | (3.8 | )
Transfers in and (or) out of Level 3 valuation hierarchy | — |
Balance at June 30, 2014 | $ | 1.4 |
Total gains included in Unrealized (gains) losses on derivative instruments, attributable to the change in unrealized gains/losses relating to derivative contracts held at June 30, 2014: | $ | 1.1 |
Fair Values of Non-financial Assets and Liabilities See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information with respect to the fair value of the Company’s non-financial assets and liabilities.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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