UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-52105

KAISER ALUMINUM CORPORATION

Delaware (State of Incorporation)		94-3030279 (I.R.S. Employer Identification No.)
27422 PORTOLA PARKWAY, SUITE 200, FOOTHILL RANCH, CALIFORNIA		92610-2831
(Address of principal executive offices)		(Zip Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

     Indicate by check mark whether the registrant is a large accelerated filter, an accelerated filter, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ   No o

     As of April 23, 2010, there were 19,203,972 shares of the Common Stock of the registrant outstanding.

 

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2010				2009
		(Unaudited)
		(In millions of dollars, except share
		and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	135.5			$	30.3
Receivables:
Trade, less allowance for doubtful receivables of $.6 and $.8 at March 31, 2010 and December 31, 2009, respectively			96.0				83.7
Due from affiliate			—				.2
Other			4.0				2.2
Inventories			131.4				125.2
Prepaid expenses and other current assets			62.5				59.1
Total current assets			429.4				300.7
Property, plant, and equipment — net			350.3				338.9
Net asset in respect of VEBA			145.1				127.5
Deferred tax assets — net			265.6				277.2
Other assets			81.0				41.2
Total		$	1,271.4			$	1,085.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	58.1			$	49.0
Accrued salaries, wages, and related expenses			28.6				33.1
Other accrued liabilities			27.7				32.1
Payable to affiliate			16.7				9.0
Total current liabilities			131.1				123.2
Net liability in respect of VEBA			.6				.3
Long-term liabilities			108.2				53.7
Cash convertible senior notes			136.9				—
Other long-term debt			7.1				7.1
			383.9				184.3
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $.01, 90,000,000 shares authorized at March 31, 2010 and at December 31, 2009; 19,208,061 shares issued and outstanding at March 31, 2010 and 20,276,571 shares issued and outstanding at December 31, 2009			.2				.2
Additional capital			983.7				967.8
Retained earnings			88.9				85.0
Common stock owned by Union VEBA subject to transfer restrictions, at reorganization value, 4,392,265 shares at March 31, 2010 and 4,845,465 shares at December 31, 2009			(105.5	)			(116.4	)
Treasury stock, at cost, 1,724,606 shares at March 31, 2010 and 572,706 shares at December 31, 2009			(72.3	)			(28.1	)
Accumulated other comprehensive loss			(7.5	)			(7.3	)
Total stockholders’ equity			887.5				901.2
Total		$	1,271.4			$	1,085.5

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENTS OF CONSOLIDATED INCOME

		Quarter Ended March 31,
		2010				2009
		(Unaudited)
		(In millions of dollars, except share amounts)
Net sales		$	267.5			$	265.9
Costs and expenses:
Cost of products sold:
Cost of products sold, excluding depreciation, amortization and other items			232.0				225.6
Lower of cost or market inventory write-down			—				9.3
Impairment of investment in Anglesey			—				.6
Restructuring costs and other (benefits) charges			(.6	)			1.2
Depreciation and amortization			4.0				4.1
Selling, administrative, research and development, and general			17.3				17.9
Total costs and expenses			252.7				258.7
Operating income			14.8				7.2
Other income (expense):
Interest expense			—				(.2	)
Other income (expense), net			.2				(.1	)
Income before income taxes			15.0				6.9
Income tax provision			(6.2	)			(3.1	)
Net income		$	8.8			$	3.8
Earnings per share, Basic — Note 14
Net income per share		$	.44			$	.19
Earnings per share, Diluted — Note 14
Net income per share		$	.44			$	.19
Weighted-average number of common shares outstanding (000):
Basic			20,020				19,492
Diluted			20,020				19,492

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENT OF CONSOLIDATED STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)

																		Common
																		Stock
																		Owned by
																		Union
																		VEBA
																		Subject
		Common																to
		Shares				Common				Additional				Retained				Transfer				Treasury				Accumulated Other
		Outstanding				Stock				Capital				Earnings				Restriction				Stock				Comprehensive Income (Loss)				Total
		(Unaudited)
		(In millions of dollars, except for shares)
BALANCE, December 31, 2009			20,276,571			$	.2			$	967.8			$	85.0			$	(116.4	)		$	(28.1	)		$	(7.3	)		$	901.2
Net income			—				—				—				8.8				—				—				—				8.8
Unrealized gains on available for sale securities			—				—				—				—				—				—				.1				.1
Foreign currency translation adjustment, net of tax of $0			—				—				—				—				—				—				(.3	)			(.3	)
Comprehensive income			—				—				—				—				—												8.6
Sale of Union VEBA shares by the Union VEBA, net of tax of $6.5			—				—				(.1	)			—				10.9				—				—				10.8
Issuance of warrants			—				—				14.3				—				—				—				—				14.3
Issuance of non-vested shares to employees			82,867				—				—				—				—				—				—				—
Issuance of common shares to employees upon vesting of restricted stock units and performance shares			523				—				—				—				—				—				—				—
Repurchase of common stock			(1,151,900	)																			(44.2	)							(44.2	)
Cash dividends on common stock (.24 per share)			—				—				—				(4.9	)			—				—				—				(4.9	)
Excess tax benefit upon vesting of shares			—				—				.1				—				—				—				—				.1
Amortization of unearned equity compensation			—				—				1.6				—				—				—				—				1.6
BALANCE, March 31, 2010			19,208,061			$	.2			$	983.7			$	88.9			$	(105.5	)		$	(72.3	)		$	(7.5	)		$	887.5

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

		Quarter Ended
		March 31,
		2010				2009
		(Unaudited)
		(In millions of dollars)
Cash flows from operating activities:
Net income		$	8.8			$	3.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including deferred financing costs of zero and $.2 for the quarters ended March 31, 2010 and March 31, 2009, respectively)			4.0				4.3
Deferred income taxes			5.1				.7
Excess tax (benefit) deficiency upon vesting of non-vested shares and dividend payment on unvested shares expected to vest			(.1	)			.1
Non-cash equity compensation			1.6				2.5
Net non-cash LIFO charges (benefits) and lower of cost or market inventory write-down			9.2				(1.9	)
Non-cash unrealized (gains) losses on derivative positions			(.2	)			4.3
Amortization of option premiums			.2				—
Non-cash impairment charges			—				.6
Equity in income of unconsolidated affiliate, net of distributions			—				(.6	)
Loss on disposition of property, plant and equipment			.1				.1
Other non-cash changes in assets and liabilities			.5				1.2
Changes in assets and liabilities:
Trade and other receivables			(14.1	)			36.0
Receivable from affiliate			.2				11.8
Inventories (excluding LIFO charges and lower of cost or market write-down)			(15.4	)			39.2
Prepaid expenses and other current assets			(.6	)			1.8
Accounts payable			8.0				(16.1	)
Accrued liabilities			(9.0	)			(15.0	)
Payable to affiliate			7.7				(6.0	)
Accrued income taxes			—				.6
Long-term asset and liabilities, net			16.5				(1.4	)
Net cash provided by operating activities			22.5				66.0
Cash flows from investing activities:
Capital expenditures, net of change in accounts payable of $(1.1) and $4.0 for the quarters ended March 31, 2010 and March 31, 2009, respectively			(13.9	)			(22.2	)
Purchase of available for sale securities			(3.9	)			—
Change in restricted cash			—				1.3
Net cash used in investing activities			(17.8	)			(20.9	)
Cash flows from financing activities:
Proceeds from issuance of cash convertible senior notes			175.0				—
Cash paid for financing costs in connection with issuance of cash convertible senior notes			(5.8	)			—
Purchase of call option in connection with issuance of cash convertible senior notes			(31.4	)			—
Proceeds from issuance of warrants			14.3				—
Borrowings under the revolving credit facility			—				75.5
Repayment of borrowings under the revolving credit facility			—				(111.5	)
Cash paid for financing costs in connection with the revolving credit facility			(2.6	)			(1.2	)
Excess tax benefit (deficiency) upon vesting of non-vested shares and dividend payment on shares expected to vest			.1				(.1	)
Repurchase of common stock			(44.2	)			—
Cash dividend paid to stockholders			(4.9	)			(4.8	)
Net cash provided by (used in) financing activities			100.5				(42.1	)
Foreign currency impact on cash and cash equivalents			—				.1
Net increase in cash and cash equivalents during the period			105.2				3.1
Cash and cash equivalents at beginning of period			30.3				.2
Cash and cash equivalents at end of period		$	135.5			$	3.3

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

1. Summary of Significant Accounting Policies

     This Report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     Principles of Consolidation and Basis of Presentation. The consolidated financial statements include the statements of the Company and its wholly owned subsidiaries. Intercompany balances and transactions are eliminated. See Note 3 for a description of the Company’s accounting for its 49%, non-controlling ownership interest in Anglesey Aluminium Limited (“Anglesey”).

     In the fourth quarter of 2009, the Company reorganized its business segments as the result of changes in the operations of Anglesey. The segment data for periods prior to this change have been retrospectively adjusted for consistency with current period classification. See Note 15 for a description of the Company’s business segments.

     The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature unless otherwise noted, necessary for a fair statement of the results for the interim periods presented.

     Use of Estimates and Assumptions. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company’s consolidated financial position and results of operation.

     Operating results for the quarter ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

     Recognition of Sales. Sales are generally recognized on a gross basis, when title, ownership and risk of loss pass to the buyer and collectability is reasonably assured. In connection with Anglesey’s remelt operations, which commenced in the fourth quarter of 2009, the Company substantially reduced or eliminated its risks of inventory loss and metal price and foreign currency exchange rate fluctuation. As the Company is, in substance, acting as the agent in the sales arrangement of the secondary aluminum products from Anglesey, the sales are presented on a net of cost of sales basis.

     A provision for estimated sales returns from, and allowances to, customers is made in the same period as the related revenues are recognized, based on historical experience or the specific identification of an event necessitating a reserve.

     From time to time, in the ordinary course of business, the Company may enter into agreements with customers in which the Company, in return for a fee, agrees to reserve certain amounts of its existing production capacity for the customer, defer an existing customer purchase commitment into future periods and reserve certain amounts of its expected production capacity in those periods to the customer, or cancel or reduce existing commitments under existing contracts. These agreements may have terms or impact periods exceeding one year.

     Certain of the capacity reservation and commitment deferral agreements provide for periodic, such as quarterly or annual, billing for the duration of the contract. For capacity reservation agreements, the Company recognizes revenue ratably over the period of the capacity reservation. Accordingly, the Company may recognize revenue prior to billing reservation fees. At March 31, 2010 and December 31, 2009, the Company had $2.6 and $.3 of unbilled receivables, respectively, included within Trade receivables on the Company’s Consolidated Balance Sheets. For commitment deferral agreements, the Company recognizes revenue upon the earlier occurrence of the related sale of product or the end of the commitment period. In connection with other agreements, the Company may collect funds from customers in advance of the periods for which (i) the production capacity is reserved, (ii) commitments are deferred, (iii) commitments are reduced or (iv) performance is completed, in which event the recognition of revenue is deferred until such time as the fee is earned. At March 31, 2010 and December 31, 2009, the Company had total deferred revenues of $26.0 and $15.5, respectively, relating to these agreements. Such deferred revenue is included within Other accrued liabilities or Long-term liabilities, as appropriate, on the Company’s Consolidated Balance Sheets (Note 6).

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     Earnings per Share. Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share, defines unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities and requires inclusion of such securities in the computation of earnings per share pursuant to the two-class method.

     Basic earnings per share is computed by dividing distributed and undistributed earnings allocable to common shares by the weighted-average number of common shares outstanding during the applicable period. The shares owned by a voluntary employee beneficiary association (“VEBA”) for the benefit of certain union retirees, their surviving spouses and eligible dependents (the “Union VEBA”) that are subject to transfer restrictions, while treated in the Consolidated Balance Sheets as being similar to treasury stock (i.e., as a reduction in Stockholders’ equity), are included in the computation of basic shares outstanding in the Statements of Consolidated Income because such shares were irrevocably issued and have full dividend and voting rights. Diluted earnings per share is calculated as the more dilutive result of computing earnings per share under: (i) the treasury stock method or (ii) the two-class method (Note 14).

     Stock-Based Compensation. Stock based compensation is provided to certain employees, directors and a director emeritus, and is accounted for at fair value, pursuant to the requirements of ASC Topic 718, Compensation — Stock Compensation. The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award and the number of awards expected to ultimately vest. The fair value of awards provided to the director emeritus is not material. The cost of an award is recognized as an expense over the requisite service period of the award on a ratable basis. The Company has elected to amortize compensation expense for equity awards with graded vesting using the straight line method. The Company recognized compensation expense for the quarters ended March 31, 2010 and March 31, 2009 of $1.1 and $2.4 respectively, in connection with vested awards and non-vested stock, restricted stock units and stock options (Note 11).

     The Company grants performance shares to executive officers and other key employees. These awards are subject to performance requirements pertaining to the Company’s economic value added (“EVA”) performance, measured over a three year performance period. The EVA is a measure of the excess of the Company’s pretax operating income for a particular year over a pre-determined percentage of the net assets of the immediately preceding year, as defined in the 2008-2010, 2009-2011 and 2010-2012 Long-Term Incentive (“LTI”) programs. The number of performance shares, if any, that will ultimately vest and result in the issuance of common shares depends on the average annual EVA achieved for the specified three year performance periods. The fair value of performance-based awards is measured based on the most probable outcome of the performance condition, which is estimated quarterly using the Company’s forecast and actual results. The Company expenses the fair value, after assuming an estimated forfeiture rate, over the specified three year performance periods on a ratable basis. The Company recognized compensation expense for the quarters ended March 31, 2010 and March 31, 2009 of $.5 and $.1, respectively, in connection with the performance shares.

     Restructuring Costs and Other Charges. Restructuring costs and other charges include employee severance and benefit costs, impairment of owned equipment to be disposed of, and other costs associated with exit and disposal activities. The Company applies the provisions of ASC Topic 420, Exit or Disposal Cost Obligations, to account for obligations arising from such activities. Severance and benefit costs incurred in connection with exit activities are recognized when the Company’s management with the proper level of authority has committed to a restructuring plan and communicated those actions to employees. For owned facilities and equipment, impairment losses recognized are based on the fair value less costs to sell, with fair value estimated based on existing market prices for similar assets. Other exit costs include costs to consolidate facilities or close facilities, terminate contractual commitments and relocate employees. A liability for such costs is recorded at its fair value in the period in which the liability is incurred. At each reporting date, the Company evaluates its accruals for exit costs and employee separation costs to ensure the accruals are still appropriate (see Note 16 for further information regarding the Company’s restructuring initiatives).

     Restricted Cash. The Company is required to keep certain amounts on deposit relating to workers’ compensation, derivative contracts, letters of credit and other agreements. Such amounts totaled $18.3 at both March 31, 2010 and December 31, 2009. Of the restricted cash balance, $.9 were considered short term and included in Prepaid expenses and other current assets on the Consolidated Balance Sheets at both March 31, 2010 and December 31, 2009, and $17.4 were considered long term and included in Other assets on the Consolidated Balance Sheets at both March 31, 2010 and December 31, 2009. As of March 31, 2010 and December 31, 2009, there were no amounts included in long-term restricted cash associated with margin call deposits with the Company’s derivative counterparties (Note 6).

     Trade Receivables and Allowance for Doubtful Accounts. Trade receivables primarily consist of amounts billed to customers for products sold. Accounts receivable are generally due within 30 days. For the majority of its receivables, the Company establishes an allowance for doubtful accounts based upon collection experience and other factors. On certain other receivables where the Company

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

is aware of a specific customer’s inability or reluctance to pay, an allowance for doubtful accounts is established against amounts due, to reduce the net receivable balance to the amount the Company reasonably expects to collect. However, if circumstances change, the Company’s estimate of the recoverability of accounts receivable could be different. Circumstances that could affect the Company’s estimates include, but are not limited to, customer credit issues and general economic conditions. Accounts are written off once deemed to be uncollectible. Any subsequent cash collections relating to accounts that have been previously written off are typically recorded as a reduction to total bad debt expense in the period of payment.

     Inventories. Inventories are stated at the lower of cost or market value. Finished products, work in process and raw material inventories are stated on the last-in, first-out (“LIFO”) basis. Other inventories, principally operating supplies and repair and maintenance parts, are stated at average cost. Inventory costs consist of material, labor and manufacturing overhead, including depreciation. Abnormal costs, such as idle facility expenses, freight, handling costs and spoilage, are accounted for as current period charges.

     Derivative Financial Instruments. Hedging transactions using derivative financial instruments are primarily designed to mitigate the Company’s exposure to changes in prices for certain of the products which the Company sells and consumes and, to a lesser extent, to mitigate the Company’s exposure to changes in foreign currency exchange rates and energy prices. From time to time, the Company also enters into hedging arrangements in connection with financing transactions, to mitigate financial risks.

     The Company does not utilize derivative financial instruments for trading or other speculative purposes. The Company’s derivative activities are initiated within guidelines established by management and approved by the Company’s Board of Directors. Hedging transactions are executed centrally on behalf of all of the Company’s business units to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors.

     On March 29, 2010, the Company issued $175.0 aggregate principal amount of 4.5% cash convertible senior notes due 2015 (the “Notes”). The Notes may be settled only in cash. The cash conversion feature of the Notes requires bifurcation from the Notes according to ASC Topic 815, Derivatives and Hedging (“ASC 815”). The Company accounts for such cash conversion feature (“Bifurcated Conversion Feature”) as a derivative liability. In connection with the issuance of the Notes, the Company purchased cash-settled call options relating to its common stock (the “Call Options”) to hedge against potential cash payments that could result from the conversion of the Notes. The Call Options are accounted as derivative assets, as they meet the definition of a derivative under ASC 815 (Notes 7 and 13).

     The Company recognizes all derivative instruments as assets or liabilities in its balance sheet and measures these instruments at fair value by “marking-to-market” all of its hedging positions at each period-end (Note 13). The Company does not meet the documentation requirements for hedge (deferral) accounting under ASC 815. Unrealized and realized gains and losses associated with hedges of operational risks are reflected as a reduction or increase in Cost of products sold, excluding depreciation, amortization and other items. Unrealized and realized gains and losses relating to hedges of financing transactions are reflected as a component of Other income (expense). No unrealized gains or losses were recorded as a component of Other income (expense) during the quarter ended March 31, 2010.

     Concentration of credit risk. Financial arrangements which potentially subject the Company to concentrations of credit risk consist of metal, currency, and natural gas derivative contracts, the Call Options, and arrangements related to its cash equivalents. If the market value of the Company’s net commodity and currency derivative positions with certain counterparties exceeds a specified threshold, if any, the counterparty is required to transfer cash collateral in excess of the threshold to the Company. Conversely, if the market value of these net derivative positions falls below a specified threshold, the Company is required to transfer cash collateral below the threshold to certain counterparties. The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative contracts used in hedging activities as well as failure of counterparties to return cash collateral previously transferred to the counterparties. The counterparties to the Company’s derivative contracts are major financial institutions and the Company does not expect to experience nonperformance by any of its counterparties.

     The Company places its cash in money market funds with high credit quality financial institutions which invest primarily in commercial paper and time deposits of prime quality, short term repurchase agreements, and U.S. government agency notes. The Company has not experienced losses on its temporary cash investments.

     Fair Value Measurement. The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, in measuring the fair value of its derivative contracts (Note 13), plan assets invested by certain of the Company’s employee benefit plans (Note 10) and its Notes (Note 13).

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

	•		Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
	•		Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
	•		Level 3 — Inputs that are both significant to the fair value measurement and unobservable.

     New Accounting Pronouncements.

     Recently adopted accounting pronouncements:

     Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements (“ASU 2010-06”) was issued in January 2010. ASU 2010-06 amends ASC Subtopic 820-10, Fair Value Measurements and Disclosures—Overall, to require new disclosures regarding transfers in and out of Level 1 and Level 2, as well as activity in Level 3 fair value measurements. This ASU also clarifies existing disclosures over the level of disaggregation in which a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. ASU 2010-06 further requires additional disclosures about valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 became effective for financial statements issued by the Company for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The Company adopted the required provisions of ASU 2010-06 for the quarter ending March 31, 2010, and the adoption of ASU 2010-06 did not have a material impact on the consolidated financial statements.

     ASU No. 2010-09, Subsequent Events (Topic 855) — Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”), was issued in February 2010. ASU 2010-09 removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. The Financial Accounting Standard Board (the “FASB”) also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. In addition, ASU 2010-09 requires an entity that is a conduit bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of issuance of its financial statements and to disclose such date. All of the amendments under ASU 2010-09 became effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors, which does not apply to the Company. The Company adopted the applicable provisions of ASU 2010-09 for the quarter ending March 31, 2010, and the adoption of ASU 2010-09 did not have a material impact on the consolidated financial statements.

     Recently issued accounting pronouncements not yet adopted:

     The Company has not yet adopted the provisions of ASU 2010-06 that mandate increased disclosure of activity in Level 3 fair value measurements, such provisions are applicable to financial statements issued by the Company for annual periods beginning after December 15, 2010. The Company expects that the adoption of such disclosure requirements will not have a material impact on its consolidated financial statement footnote disclosure.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

2. Inventories

     Inventories consist of the following:

		March 31,				December 31,
		2010				2009
Fabricated Products segment —
Finished products		$	36.6			$	40.4
Work in process			47.7				44.9
Raw materials			34.7				27.1
Operating supplies and repairs and maintenance parts			12.4				12.8
		$	131.4			$	125.2

     The Company recorded net non-cash LIFO (charges) benefits of approximately $(9.2) and $11.2 during the quarters ended March 31, 2010 and March 31, 2009, respectively. These amounts are primarily a result of changes in metal prices and changes in inventory volumes.

     With the inevitable ebb and flow of business cycles, non-cash LIFO (charges) benefits will result when inventory levels and metal prices fluctuate. Further, potential lower of cost and market adjustments can occur when metal prices decline and margins compress. During the first quarter of 2009, due to a decline in the London Metal Exchange (“LME”) price of primary aluminum, the Company recorded a $9.3 lower of cost or market inventory write-down, pursuant to ASC Topic 330, Inventory, under which the market value of inventory is determined based on the current replacement cost, by purchase or by reproduction, except that it does not exceed the net realizable value and it is not less than net realizable value reduced by an approximate normal profit margin. There was no lower of cost or market inventory write-down during the quarter ended March 31, 2010.

3. Investment In and Advances To Unconsolidated Affiliate

     The Company has a 49%, non-controlling ownership interest in Anglesey, which operated as an aluminum smelter until September 30, 2009. In the fourth quarter of 2009, Anglesey commenced a remelt and casting operation to produce secondary aluminum. Anglesey purchases its own material for the remelt and casting operations and sells 49% of its output to the Company in transactions structured to largely eliminate metal price and currency exchange rate risks with respect to income and cash flow.

     At December 31, 2008, the Company fully impaired its investment in Anglesey. For the quarter ended March 31, 2009, the Company recorded $.6 in equity in income of Anglesey, which was subsequently impaired to maintain the Company’s investment balance at zero. For the quarter ended September 30, 2009, Anglesey incurred a significant net loss, primarily as the result of employee redundancy costs incurred in connection with the cessation of its smelting operations. As a result of such loss, and as the Company did not, and was not obligated to, (i) advance any funds to Anglesey, (ii) guarantee any obligations of Anglesey, or (iii) make any commitments to provide any financial support for Anglesey, the Company suspended the use of the equity method of accounting with respect to its ownership in Anglesey, commencing in the quarter ended September 30, 2009, and continuing through the quarter ended March 31, 2010. Accordingly, the Company did not recognize its share of Anglesey’s operating results for such periods, pursuant to ASC Topic 323, Investments — Equity Method and Joint Ventures. The Company does not anticipate resuming the use of the equity method of accounting with respect to its investment in Anglesey unless and until (i) its share of any future net income of Anglesey equals or is greater than the Company’s share of net losses not recognized during periods for which the equity method was suspended and (ii) future dividends can be expected. The Company does not anticipate the occurrence of such events during the next 12 months.

     At December 31, 2009, receivables from Anglesey were $.2, all of which were received during the first quarter of 2010. No amounts were due from Anglesey at March 31, 2010. At March 31, 2010 and December 31, 2009, payables to Anglesey were $16.7 and $9.0, respectively.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

4. Conditional Asset Retirement Obligations

     The Company has conditional asset retirement obligations (“CARO”) at several of its fabricated products facilities. The vast majority of such CAROs consist of incremental costs that would be associated with the removal and disposal of asbestos (all of which is believed to be fully contained and encapsulated within walls, floors, roofs, ceilings or piping) at certain of the older facilities if such facilities were to undergo major renovation or be demolished. There are currently plans for such renovation or demolition at certain facilities and management’s current assessment is that certain immaterial CARO may be triggered during the next seven years. For locations where there are no current plans for renovations or demolitions, the most probable scenario is that such CARO would not be triggered for 20 or more years, if at all.

     The Company’s estimates and judgments that affect the probability weighted estimated future contingent cost amounts did not materially change during the quarter ended March 31, 2010. The Company’s results for the periods ended March 31, 2010 and March 31, 2009 included an immaterial amount of depreciation expense associated with CARO-related costs. For both quarters ended March 31, 2010 and March 31, 2009, accretion of CARO liabilities (recorded in Cost of products sold) was $.1. The estimated fair value of CARO liabilities at March 31, 2010 and December 31, 2009 was $3.6 and $3.5, respectively.

     For purposes of the Company’s fair value estimates with respect to the CARO liabilities, a credit adjusted risk free rate of 7.5% was used.

5. Property, Plant and Equipment

     Property, plant and equipment are recorded at cost. The major classes of property, plant, and equipment are as follows:

		March 31,				December 31,
		2010				2009
Land and improvements		$	23.6			$	23.6
Buildings			31.6				31.9
Machinery and equipment			248.1				246.2
Construction in progress			97.2				83.4
			400.5				385.1
Accumulated depreciation			(50.2	)			(46.2	)
Property, plant, and equipment, net		$	350.3			$	338.9

     The major components of Construction in progress were as follows:

		March 31,				December 31,
		2010				2009
Kalamazoo, Michigan facility 1		$	82.8			$	70.0
Other2			14.4				13.4
Total Construction in progress		$	97.2			$	83.4

     The amount of interest expense capitalized as construction in progress was $.9 and $.5 during the quarters ended March 31, 2010 and March 31, 2009, respectively.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     For the three month periods ended March 31, 2010 and March 31, 2009, the Company recorded depreciation expense of $4.0, and $4.1, respectively, relating to the Company’s operating facilities in its Fabricated Products segment. An immaterial amount of depreciation expense was also recorded in All Other for all periods.

6. Supplemental Balance Sheet Information

     Trade Receivables. Trade receivables (Note 1) were comprised of the following:

		March 31,				December 31,
		2010				2009
Billed trade receivables		$	94.0			$	84.2
Unbilled trade receivables			2.6				.3
			96.6				84.5
Allowance for doubtful receivables			(.6	)			(.8	)
		$	96.0			$	83.7

     Prepaid Expenses and Other Current Assets. Prepaid expenses and other current assets were comprised of the following:

		March 31,				December 31,
		2010				2009
Current derivative assets — Note 13		$	10.5			$	7.2
Current deferred tax assets			40.6				40.6
Option premiums paid			2.8				3.1
Short term restricted cash			.9				.9
Income tax receivable			3.8				4.2
Prepaid expenses			3.9				3.1
Total		$	62.5			$	59.1

     Other Assets. Other assets were comprised of the following:

		March 31,				December 31,
		2010				2009
Derivative assets — Note 13		$	46.3			$	18.2
Option premiums paid			1.2				1.6
Restricted cash			17.4				17.4
Long term income tax receivable			2.9				2.8
Deferred financing costs			9.1				1.1
Available for sale securities			4.0				—
Other			.1				.1
Total		$	81.0			$	41.2

     Other Accrued Liabilities. Other accrued liabilities were comprised of the following:

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

		March 31,				December 31,
		2010				2009
Current derivative liabilities — Note 13		$	5.2			$	5.1
Option premiums received			1.6				1.6
Current portion of contingent income tax liabilities			1.1				1.1
Income taxes payable			3.7				2.0
Accrued book overdraft (uncleared cash disbursements)			1.5				3.4
Accrued annual VEBA contribution			—				2.4
Accrued freight			2.1				2.1
Environmental accrual			2.2				3.9
Deferred revenue			6.8				6.8
Other			3.5				3.7
Total		$	27.7			$	32.1

     Long-term Liabilities. Long-term liabilities were comprised of the following:

		March 31,				December 31,
		2010				2009
Derivative liabilities — Note 13		$	42.9			$	5.3
Option premiums received			1.2				1.6
Contingent income tax liabilities			14.3				13.4
Workers’ compensation accruals			15.7				14.1
Environmental accruals			6.0				5.8
Asset retirement obligations			3.6				3.5
Deferred revenue			19.2				8.7
Deferred compensation liability			4.0				—
Other long term liabilities			1.3				1.3
Total		$	108.2			$	53.7

7. Cash Convertible Senior Notes and Related Transactions

Indenture

     On March 29, 2010, the Company issued $175.0 aggregate principal amount of the Notes pursuant to an Indenture by and between the Company and Wells Fargo Bank, National Association, as trustee (the “Indenture”). Net proceeds from this transaction were approximately $169.2, after deducting the initial purchasers’ discounts and transaction fees and expenses. The Notes bear stated interest at a rate of 4.50% per year. As described in Note 1, the Company accounted for the Bifurcated Conversion Feature of the Notes as a derivative instrument. The fair value of the Bifurcated Conversion Feature on the issuance date of the Notes was recorded as the original issue discount for purposes of accounting for the debt component of the Notes. Therefore, interest expense greater than the coupon rate of 4.50% will be recognized over the term of the Notes, primarily due to the accretion of the discounted carrying value of the Notes to their face amount. The initial purchasers’ discounts and transaction fees and expenses totaling $5.8 were capitalized as deferred financing costs and will be amortized over the term of the Notes using the effective interest method. The effective interest rate of the Notes is approximately 11% per annum. Interest is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2010. The Notes will mature on April 1, 2015, subject to earlier repurchase or conversion upon the occurrence of certain events. Holders may convert their Notes before January 1, 2015, in certain circumstances determined by (i) the market price of the Company’s common stock, (ii) the trading price of the Notes or (iii) the occurrence of specified corporate events. The Notes can be converted by the holders at any time on or after January 1, 2015 until the close of business on the second scheduled trading date immediately preceding the maturity date of the Notes. The Notes are subject to repurchase by the Company at the option of the holders following a fundamental change, as defined in the Indenture, at a price equal to 100% of the principal amount of the

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

Notes plus accrued and unpaid interest up to the fundamental change repurchase date. The Notes have an initial conversion rate of 20.6949 shares of common stock per $1,000 principal amount of the Notes (equivalent to an initial conversion price of $48.32 per share, representing a 26% conversion premium over the closing price of $38.35 per share of the Company’s common stock on March 23, 2010), subject to adjustment, with the amount due on conversion payable in cash. The Notes are not convertible into the Company’s common stock or any other securities under any circumstances.

Convertible Note Hedge Transactions

     On March 23 and March 26, 2010, the Company purchased the Call Options from several financial institutions (the “Option Counterparties”). The Call Options have an exercise price equal to the conversion price of the Notes, subject to anti-dilution adjustments substantially similar to the anti-dilution adjustments for the Notes. The Call Options will expire upon the maturity of the Notes. The Company paid an aggregate amount of approximately $31.4 to the Option Counterparties for the Call Options.

     The Call Options are expected to generally reduce the Company’s exposure to potential cash payments in excess of the principal amount of the Notes that it may be required to make upon the conversion of the Notes. If the market price per share of the Company’s common stock at the time of cash conversion of any Notes is above the strike price of the Call Options (which strike price is initially equal to the initial conversion price of the Notes of approximately $48.32 per share of the Company’s common stock), the Call Options will entitle the Company to receive from the Option Counterparties in the aggregate the same amount of cash as it would be required to deliver to the holder of the converted Notes in excess of the principal amount thereof.

Warrant Transactions

     On March 23 and March 26, 2010, the Company also entered into warrant transactions pursuant to which the Company sold to the Option Counterparties net-share-settled warrants (the “Warrants”) to purchase approximately 3.6 million shares of the Company’s common stock. The warrants expire on July 1, 2015. The Option Counterparties paid an aggregate amount of approximately $14.3 to the Company for the Warrants.

     If the market price per share of the Company’s common stock, as measured under the terms of the Warrants, exceeds the strike price of the Warrants, which is initially equal to $61.36 per share (representing a 60% premium over the closing price of $38.35 per share of the Company’s common stock on March 23, 2010), the Company will issue to the Option Counterparties shares of the Company’s common stock having a value equal to such excess, as measured under the terms of the Warrants. The Warrants may not be exercised prior to the expiration date.

Other

     The Call Options and Warrant transactions are separate transactions entered into by the Company with the Option Counterparties, and are not part of the Notes and do not affect the rights of holders under the Notes.

     As described in Note 1, the cash conversion feature of the Notes meets the definition of a derivative under ASC 815 and requires bifurcation from the Notes for accounting purposes. The Call Options also meet the definition of derivatives under ASC 815. As such, the Company accounts for both instruments as derivatives and marks to market both instruments each reporting period. At March 31, 2010, the Bifurcated Conversion Feature had a fair value of $38.1 and was recorded as a long term derivative liability, and the Call Options had a fair value of $31.4 and were recorded as long term derivative assets (Note 6).

     The Warrants meet the definition of derivatives under ASC 815; however, because these instruments have been determined to be indexed to the Company’s common stock and to have met the requirement to be classified as equity instruments, the instruments are not subject to the fair value provisions of ASC 815 (Note 13).

     At March 31, 2010, the carrying value of the Notes was $136.9 which consists of $175.0 face amount net of $38.1 of debt discount. The fair value of the Notes was $189.4 which includes $38.1 representing the fair value of the Bifurcated Conversion Feature. The fair value of the Notes was determined using a binomial lattice valuation model (Note 13). Included in interest expense for the quarter ended March 31, 2010 was an immaterial amount of cash interest accrual on the Notes.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

8. Secured Debt and Credit Facilities

Secured debt consisted of the following:

		March 31,				December 31,
		2010				2009
Revolving Credit Facility		$	—			$	—
Other			7.1				7.1
Total			7.1				7.1
Less — Current portion			—				—
Long-term secured debt		$	7.1			$	7.1

     On March 23, 2010, the Company and certain of its subsidiaries entered into a $200.0 revolving credit facility with a group of lenders (“the Revolving Credit Facility”), of which up to a maximum of $60.0 million may be utilized for letters of credit. The Revolving Credit Facility amended and restated the Senior Secured Revolving Credit Agreement, dated as of July 6, 2006 which provided for the Company’s $265.0 revolving credit facility. In connection with the amendment, the Company expensed $.4 of unamortized deferred financing costs relating to the Senior Secured Revolving Credit Agreement and incurred $2.6 of additional financing costs which have been capitalized at March 31, 2010. The deferred financing costs will be amortized over the term of the Revolving Credit Facility on a Straight-line basis.

     Under the Revolving Credit Facility, the Company is able to borrow from time to time an aggregate amount equal to the lesser of $200.0 or a borrowing base comprised of certain percentages of eligible accounts receivable and eligible inventory, reduced by certain reserves, all as specified in the Revolving Credit Facility. The Revolving Credit Facility matures in March 2014, at which time all amounts outstanding under the Revolving Credit Facility will be due and payable. Borrowings under the Revolving Credit Facility bear interest at a rate equal to either a base prime rate or LIBOR, at the Company’s option, plus, in each case, a specified variable percentage determined by reference to the then-remaining borrowing availability under Revolving Credit Facility. The Revolving Credit Facility may, subject to certain conditions and the agreement of lenders thereunder, be increased up to $250.0.

     Amounts owed under the Revolving Credit Facility may be accelerated upon the occurrence of various events of default including, without limitation, the failure to make principal or interest payments when due and breaches of covenants, representations and warranties set forth in the Revolving Credit Facility. The Revolving Credit Facility places limitations on the ability of the Company and certain of its subsidiaries to, among other things, grant liens, engage in mergers, sell assets, incur debt, make investments, undertake transactions with affiliates, pay dividends and repurchase shares.

     The Revolving Credit Facility is secured by a first priority lien on substantially all of the accounts receivable, inventory and certain other related assets and proceeds relating thereto of the Company and its domestic operating subsidiaries. At March 31, 2010, the Company was in compliance with all covenants contained in the Revolving Credit Facility.

     At March 31, 2010, based on the borrowing base determination in effect as of that date, the Company had $173.3 available under the Revolving Credit Facility, of which $9.9 was being used to support outstanding letters of credit, leaving $163.4 of availability. There were no borrowings under the Revolving Credit Facility at March 31, 2010, but the interest rate applicable to any borrowings under Revolving Credit Facility would have been 5.25% at March 31, 2010 for overnight borrowings.

     Other. As of March 31, 2010, the Company had a promissory note (the “Promissory Note”) in the amount of $7.0 in connection with the Company’s purchase of the previously leased land and buildings associated with its Los Angeles, California facility in December 2008. Interest is payable on the unpaid principal balance of the Promissory Note monthly in arrears at the prime rate, as defined in the Note, plus 1.5%, in no event exceeding 10% per annum. A principal payment of $3.5 will be due on February 1, 2012 and the remaining $3.5 will be due on February 1, 2013. The Promissory Note is secured by a deed of trust on the property. For both three month periods ended March 31, 2010 and March 31, 2009, the Company incurred $.1 of interest expense relating to the Promissory Note. The interest rate applicable to the Promissory Note was 4.75% at March 31, 2010.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

9. Income Tax Matters

Tax Provision. The provision for income taxes for the quarters ended March 31, 2010 and March 31, 2009 consisted of:

		Quarter Ended
		March 31,
		2010				2009
Domestic		$	5.2			$	1.8
Foreign			1.0				1.3
Total		$	6.2			$	3.1

     The income tax provision for the quarter ended March 31, 2010 was $6.2, or an effective tax rate of 41.4%. The difference between the effective tax rate and the projected blended statutory tax rate was primarily related to unrecognized tax benefits, including interest and penalties of $.5 resulting in a 3.6% increase in the effective tax rate.

     The foreign currency impact on unrecognized tax benefits, interest and penalties resulted in a $.4 currency translation adjustment that was recorded in Accumulated other comprehensive income (loss).

     Deferred Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

     At December 31, 2009, the Company had $858.2 of net operating loss (“NOL”) carryforwards available to reduce future cash payments for income taxes in the United States. Of the NOL carryforwards at December 31, 2009, $1.2 relate to the excess tax benefits from employee restricted stock. Equity will be increased by $1.2 if and when such excess tax benefits are ultimately realized. Such NOL carryforwards expire periodically through 2027. The Company also had $31.1 of alternative minimum tax credit carryforwards with an indefinite life, available to offset regular federal income tax requirements.

     To preserve the NOL carryforwards that may be available to the Company, the Company’s certificate of incorporation was amended and restated in July 2006 to, among other things, include certain restrictions on the transfer of the Company’s common stock. In connection with the amendment and restatement, the Company and the Union VEBA, the Company’s largest stockholder, entered into a stock transfer restriction agreement.

     In assessing the realizability of deferred tax assets, management considers whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. As of December 31, 2009, due to uncertainties surrounding the realization of some of the Company’s deferred tax assets including state NOLs sustained during the prior years and expiring tax benefits, the Company has a valuation allowance of $18.0 against its deferred tax assets. When recognized, the tax benefits relating to any reversal of the valuation allowance will be recorded as a reduction of income tax expense pursuant to ASC Topic 805.

     Other. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Canada Revenue Agency audited and issued assessment notices for 1998 through 2001 for which Notices of Objection have been filed. In addition, the Canada Revenue Agency has audited and issued assessment notices for 2002 through 2004, of which $7.9 has been paid to the Canada Revenue Agency against previously accrued tax reserves in the third quarter of 2009. There is an additional Canadian Provincial income tax assessment of $1.1, including interest, for the 2002 through 2004 income tax audit that is anticipated to be paid against previously accrued tax reserves within the next twelve months. Certain past years are still subject to examination by taxing authorities, and the use of NOL carryforwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.

     No U.S. federal or state liability has been recorded for the undistributed earnings of the Company’s Canadian subsidiary at December 31, 2009. These undistributed earnings are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     The Company had gross unrecognized tax benefits of $16.3 and $15.6 at March 31, 2010 and December 31, 2009, respectively. The change during the quarter ended March 31, 2010 was primarily due to currency fluctuations and a change in tax position. The Company recognizes interest and penalties related to these unrecognized tax benefits in the income tax provision. The Company had approximately $6.5 and $6.2 accrued at March 31, 2010 and December 31, 2009, respectively, for interest and penalties. Of the $6.5 of total interest and penalties at March 31, 2010, $.4 is included in current liabilities and $6.1 is included in Long-term liabilities in the Consolidated Balance Sheets. Of the $6.2 of total interest and penalties at December 31, 2009, $.3 is included in current liabilities and $5.9 is included in Long-term liabilities in the Consolidated Balance Sheets. During the quarter ended March 31, 2010, the Company recognized approximately $.4 in interest and penalties. During the quarter ended March 31, 2010, the foreign currency impact on gross unrecognized tax benefits, interest and penalties resulted in a $.4 currency translation adjustment that was recorded in Accumulated other comprehensive income (loss). The Company expects its gross unrecognized tax benefits to be reduced by $.7 within the next twelve months related to a Canadian income tax audit.

10. Employee Benefits

     Pension and Similar Plans. Pensions and similar plans include:

	•		Monthly contributions of (in whole dollars) $1.00 per hour worked for each bargaining unit employee to the appropriate multi-employer pension plans sponsored by the United Steel, Paper and Foresting, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL — CIO, CLC (the “USW”) and International Association of Machinists and certain other unions at certain of the Company’s production facilities, except that the monthly contributions per hour worked by each bargaining unit employee to a pension plan sponsored by the USW at the Company’s Newark, Ohio and Spokane, Washington facilities will increase to $1.25 starting July 2010 and to $1.50 in July 2014. The Company currently estimates that contributions will range from $2 to $4 per year through 2013.
	•		A defined contribution 401(k) savings plan for hourly bargaining unit employees at five of the Company’s production facilities. The Company is required to make contributions to this plan for active bargaining unit employees at four of these production facilities ranging from (in whole dollars) $800 to $2,400 per employee per year, depending on the employee’s age. The Company currently estimates that contributions to such plans will range from $1 to $3 per year.
	•		A defined benefit plan for salaried employees at the Company’s facility in London, Ontario with annual contributions based on each salaried employee’s age and years of service. At December 31, 2009, approximately 55% of the plan assets were invested in equity securities, 40% of plan assets were invested in debt securities and the remaining plan assets were invested in short term securities. The Company’s investment committee reviews and evaluates the investments portfolio. The asset mix target allocation on the long term investments is approximately 60% in equity securities and 36% in debt securities with the remaining assets in short term securities.
	•		A defined contribution 401(k) savings plan for salaried and certain hourly employees providing for a concurrent match of up to 4% of certain contributions made by employees plus an annual contribution of between 2% and 10% of their compensation depending on their age and years of service as of January 1, 2004. All new hires after January 1, 2004 receive a fixed 2% contribution annually. The Company currently estimates that contributions to such plan will range from $4 to $6 per year.
	•		A non-qualified, unfunded, unsecured plan of deferred compensation for key employees who would otherwise suffer a loss of benefits under the Company’s defined contribution plan, as a result of the limitations imposed by the Internal Revenue Code. Despite the plan being an unfunded plan, the Company makes an annual contribution to a Rabbi Trust to fulfill future funding obligations, as contemplated by the terms of the plan. The assets in the trust are at all times subject to the claims of the Company’s general creditors, and no participant has a claim to any assets of the trust. Plan participants are eligible to receive distributions from the trust subject to vesting and other eligibility requirements. Assets in the Rabbi Trust relating to the deferred compensation plan are accounted for as available for sale securities and are included as Other assets on the Consolidated Balance Sheets (Note 6). Liabilities relating to the deferred compensation plan are included on the Consolidated Balance Sheets as Long-term liabilities (Note 6).

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     Postretirement Medical Obligations. As a part of the Company’s reorganization, the Company’s postretirement medical plan was terminated in 2004. Participants were given the option of coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), with the Company’s filing of its plan of reorganization as the qualifying event, or participation in the applicable VEBA (the Union VEBA or the VEBA that provides benefits for certain other eligible retirees and their surviving spouse and eligible dependents (the “Salaried VEBA”)). Qualifying bargaining unit employees who do not, or are not eligible to, elect COBRA coverage are covered by the Union VEBA. The Salaried VEBA covers all other retirees including employees who retired prior to the 2004 termination of the prior plan or who retire with the required age and service requirements so long as their employment commenced prior to February 2002. The benefits paid by the VEBAs are at the sole discretion of the respective VEBA trustees and are outside the Company’s control.

     As of March 31, 2010, the Union VEBA owned 4,392,265 shares of the Company’s common stock. A stock transfer restriction agreement between the Union VEBA and the Company places certain restrictions on the Union VEBA relating to the sale of shares of the Company’s common stock owned by the Union VEBA (see Note 9 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009). The number of shares of the Company’s common stock that generally may be sold by the Union VEBA during any 12-month period without further approval of our Board of Directors is 1,321,485. On April 2, 2010, the Company filed a registration statement on Form S-3 for the resale of the shares of the Company’s common stock held by the Union VEBA in response to a demand by the Union VEBA under a registration rights agreement entered into by the Company and the VEBA Trust on July 6, 2006. While the registration statement provides for registration of all shares of our common stock owned by the Union VEBA, the Union VEBA will continue to be prohibited from selling more than 1,321,485 shares of our common stock during any 12-month period without the approval of the our Board of Directors. The Union VEBA is also permitted to sell all or some portion of these shares in transactions exempt from the registration requirements of applicable securities laws, including Rule 144 of the Securities Act.

     During the first quarter of 2010, the Union VEBA sold 453,200 shares. The 453,200 shares sold resulted in (i) an increase of $17.3 in VEBA assets at an approximately $38.25 weighted average per share price realized by the Union VEBA, (ii) a reduction of $10.9 in common stock owned by Union VEBA (at $24.02 per share reorganization value), and (iii) the difference between the two amounts, net of tax adjustment, was credited to Additional capital. As of March 31, 2010, the Union VEBA owned approximately 23% of the Company’s outstanding common stock.

     The Company’s only obligation to the Union VEBA and the Salaried VEBA is an annual variable cash contribution. In connection with the renewal and ratification of a labor agreement with the members of the USW at the Company’s Newark, Ohio and Spokane, Washington facilities on January 20, 2010, the Company agreed to extend its obligation to make an annual variable cash contribution to the Union VEBA to September 30, 2017. Under this obligation, the amount to be contributed to the VEBAs through September 2017 is 10% of the first $20.0 of annual cash flow (as defined; in general terms, the principal elements of cash flow are earnings before interest expense, provision for income taxes, and depreciation and amortization less cash payments for, among other things, interest, income taxes and capital expenditures), plus 20% of annual cash flow, as defined, in excess of $20.0. Such annual payments may not exceed $20.0 and are also limited (with no carryover to future years) to the extent that the payments would cause the Company’s liquidity to be less than $50.0. Such amounts are determined on an annual basis and payable within 120 days following the end of fiscal year, or within 15 days following the date on which the Company files its Annual Report on Form 10-K with SEC (or, if no such report is required to be filed, within 15 days of the delivery of the independent auditor’s opinion of the Company’s annual financial statements), whichever is earlier. The Union VEBA is managed by four trustees (two appointed by the Company and two appointed by the USW) and the assets are managed by an independent fiduciary.

     Amounts owing by the Company to the VEBAs are recorded in the Company’s Consolidated Balance Sheets under Other accrued liabilities, with a corresponding increase in Net assets in respect of VEBAs. At December 31, 2009, the Company had preliminarily determined that $2.4 was owed to the VEBAs (comprised of $2.0 to the Union VEBA and $.4 to the Salaried VEBA). During the first quarter of 2010, actual payments to the Union VEBA and Salaried VEBA were $2.4 and $.4, respectively. In addition to contribution obligations, the Company is obligated to pay one-half of the administrative expenses of the Union VEBA, up to $.3 in each successive year, which cap became effective in 2008. During 2009, the Company paid $.3 in administrative expenses of the Union VEBA.

     For accounting purposes, after discussions with the staff of the SEC, the Company treats the postretirement medical benefits to be paid by the VEBAs and the Company’s related annual variable contribution obligations as defined benefit postretirement plans with the current VEBA assets and future variable contributions described above, and earnings thereon, operating as a cap on the benefits to be paid. While the Company’s only obligation to the VEBAs is to pay the annual variable contribution amount and the Company has no control over the plan assets, the Company nonetheless accounts for net periodic postretirement benefit costs in accordance with

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

ASC Topic 715, Compensation — Retirement Benefits, and records any difference between the assets of each VEBA and its accumulated postretirement benefit obligation in the Company’s financial statements. Such information must be obtained from the Salaried VEBA and Union VEBA on a periodic basis. In general, as more fully described below, given the significance of the assets currently available and expected to be available to the VEBAs in the future and the current level of benefits, the cap does not impact the computation of the accumulated postretirement benefit obligation. However, should the benefit formulas being used by the VEBAs increase and/or if the assets were to substantially decrease, it is possible that existing assets may be insufficient alone to fund such benefits and that the benefits to be paid in future periods could be reduced to the amount of annual variable contributions reasonably expected to be paid by the Company in those years. Any such limitations would also have to consider any remaining amount of excess pre-emergence VEBA contributions made.

     Components of Net Periodic Benefit Cost and Cash Flow and Charges. The following tables present the components of net periodic benefit cost for the quarters ended March 31, 2010 and March 31, 2009:

		Quarter Ended
		March 31,
		2010				2009
VEBAs:
Service cost		$	.7			$	.5
Interest cost			4.0				4.7
Expected return on plan assets			(5.2	)			(5.2	)
Amortization of prior service cost			1.0				.4
Amortization of net loss			(.1	)			.9
			.4				1.3
Deferred compensation plan			.7				—
Defined contributions plans			3.9				3.0
		$	5.0			$	4.3

The following tables present the allocation of these charges:

		Quarter Ended
		March 31,
		2010				2009
Fabricated Products segment		$	3.4			$	2.5
Corporate and Other segment			1.6				1.8
		$	5.0			$	4.3

     For all periods presented, substantially all of the Fabricated Products segment’s related charges are in Cost of products sold, excluding depreciation, amortization and other items, with the balance being in Selling, administrative, research and development and general expense.

     See Note 9 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for key assumptions used with respect to the Company’s pension plans and key assumptions made in computing the net obligation of each VEBA.

11. Employee Incentive Plans

Short term incentive plans

     The Company has a short term incentive compensation plan for senior management and certain salaried employees payable at the Company’s election in cash, shares of common stock, or a combination of cash and shares of common stock. Amounts earned under

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

the plan are based primarily on EVA of the Company’s Fabricated Products segment, adjusted for certain safety and performance factors. Most of the Company’s production facilities have similar programs for both hourly and salaried employees.

     Long term incentive plans

     General. On July 6, 2006, the 2006 Equity and Performance Incentive Plan (as amended, the “Equity Incentive Plan”) became effective. Officers and other key employees of the Company or one or more of its subsidiaries, as well as directors and directors emeritus of the Company, are eligible to participate in the Equity Incentive Plan. The Equity Incentive Plan permits the granting of awards in the form of options to purchase common shares, stock appreciation rights, shares of non-vested and vested stock, restricted stock units, performance shares, performance units and other awards. The Equity Incentive Plan will expire on July 6, 2016. No grants will be made after that date, but all grants made on or prior to that date will continue in effect thereafter subject to the terms thereof and of the Equity Incentive Plan. The Company’s Board of Directors may, in its discretion, terminate the Equity Incentive Plan at any time. The termination of the Equity Incentive Plan will not affect the rights of participants or their successors under any awards outstanding and not exercised in full on the date of termination. In December 2008, the Company amended the Equity Incentive Plan to include a new French sub-plan in order to issue restricted stock units to eligible employees of the Company’s French subsidiary. Under the French sub-plan, the restriction period on the restricted stock units cannot be shorter than two years from the date of grant and the holder of such restricted stock units is not entitled to dividend equivalent payments in the event that the Company declares dividends on shares of its common stock. In June 2009, the Company amended the Equity Incentive Plan to clarify and confirm that directors emeritus are permitted to participate in the Equity Incentive Plan. In February 2010, the Company amended the Equity Incentive Plan to clarify and confirm the compensation committee’s authority in connection with the establishment of performance goals.

     Subject to certain adjustments that may be required from time to time to prevent dilution or enlargement of the rights of participants under the Equity Incentive Plan, upon its effectiveness 2,222,222 common shares were reserved for issuance under the Equity Incentive Plan. At March 31, 2010, 524,339 common shares were available for additional awards under the Equity Incentive Plan.

     Compensation charges, all of which are included in Selling, administrative, research and development and general expenses, related to the Equity Incentive Plan for the quarters ended March 31, 2010 and March 31, 2009 were as follows:

		Quarter Ended
		March 31,
		2010				2009
Service-based vested and non-vested common shares and restricted stock units		$	1.0			$	2.3
Performance shares			.5				.1
Service-based stock options			.1				.1
Total compensation charge		$	1.6			$	2.5

     Non-vested Common Shares, Restricted Stock Units, and Performance Shares. The Company grants non-vested common shares to its non-employee directors, directors emeritus, executives officers and other key employees. The non-vested common shares granted to non-employee directors and a director emeritus are generally subject to a one year vesting requirement. The non-vested common shares granted to executive officers and senior management are generally subject to a three year cliff vesting requirement. The non-vested common shares granted to other key employees are generally subject to a three year graded vesting requirement. In addition to non-vested common shares, the Company also grants restricted stock units to certain employees. The restricted stock units have rights similar to the rights of non-vested common shares and the employee will receive one common share for each restricted stock unit upon the vesting of the restricted stock unit. With the exception of restricted stock units granted under the French sub-plan, restricted stock units vest one third on the first anniversary of the grant date and one third on each of the second and third anniversaries of the date of issuance. Restricted stock units granted under the French sub-plan vest two-thirds on the second anniversary of the grant date and one-third on the third anniversary of the grant date.

     The fair value of the non-vested common shares and restricted stock units are based on the grant date market value of the common shares and amortized over the requisite service period on a ratable basis, after assuming an estimated forfeiture rate. From time to

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

time, the Company issues common shares to non-employee directors electing to receive common shares in lieu of all or a portion of their annual retainer fees. The fair value of these common shares is also based on the fair value of the shares at the date of issuance and is immediately recognized in earnings as a period expense.

     The Company grants performance shares to executive officers and other key employees under the Company’s LTI programs. Awards under existing programs are subject to performance requirements pertaining to the Company’s EVA performance, measured over a three year performance period. EVA is a measure of the excess of the Company’s pretax operating income for a particular year over a pre-determined percentage of the net assets of the immediately preceding year. The number of performance shares, if any, that will ultimately vest and result in the issuance of common shares depends on the average annual EVA achieved for the specified three year performance periods. The vesting of performance shares and related issuance and delivery of common shares earned, if any, under the 2008-2010 LTI program, 2009-2011 LTI program and 2010-2012 LTI program will occur in 2011, 2012 and 2013, respectively. Performance shares holders are entitled to receive dividend equivalent payments on the target number of performance shares upon declaration of dividends by the Company’s Board of Directors. Performance share holders do not receive voting rights through the ownership of such performance shares.

     The fair value of performance-based awards is measured based on the most probable outcome of the performance condition, which is estimated quarterly using the Company’s forecast and actual results. The Company expenses the fair value, after assuming an estimated forfeiture rate, over the specified three year performance periods on a ratable basis.

     The fair value of the non-vested common shares, restricted stock units, and performance shares was determined based on the closing trading price of the common shares on the grant date. A summary of the activity with respect to non-vested common shares and restricted stock units for the quarter ended March 31, 2010 is as follows:

		Non-Vested								Restricted
		Common Shares								Stock Units
						Weighted-								Weighed-
						Average								Average
						Grant-Date								Grant- Date
		Shares				Fair Value				Units				Fair Value
Non-vested shares and restricted stock units at January 1, 2010			254,152			$	32.74				7,528			$	18.13
Granted			82,867				34.13				2,362				36.23
Vested			(13,050	)			22.39				(523	)			24.63
Forfeited			—				—				—				—
Non-vested shares and restricted stock units at March 31, 2010			323,969			$	33.51				9,367			$	22.33

A summary of the activity with respect to the performance shares for the quarter ended March 31, 2010 is as follows:

		Performance Shares
						Weighted-
						Average
						Grant-Date
						Fair Value
		Shares				per Share
Outstanding at January 1, 2010			508,214			$	23.75
Granted			205,789				34.13
Vested			—				—
Forfeited			—				—
Outstanding at March 31, 2010			714,003			$	26.74

     For the quarter ended March 31, 2009, 180,696 non-vested common shares, 5,181 shares of restricted stock units and 455,880 performance shares were granted to employees. Each of the foregoing grants has a weighted-average grant date fair value per share of $16.74. During the quarter ended March 31, 2009, 2,542 non-vested shares and 91 restricted stock units vested. The weighted-average

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

grant date fair value per share of the non-vested shares and restricted stock units that vested during such period was $75.67 and $74.82, respectively.

     As of March 31, 2010, there was $5.6 of unrecognized gross compensation cost related to the non-vested common shares and the restricted stock units and $4.5 of unrecognized gross compensation cost related to the performance shares. The cost related to the non-vested common shares and the restricted stock units is expected to be recognized over a weighted-average period of 2.2 years and the cost related to the performance shares is expected to be recognized over a weighted-average period of 2.6 years.

     Stock Options. As of March 31, 2010, the Company had 22,077 outstanding options for executives and other key employees to purchase its common shares. The options were granted on April 3, 2007 and have a contractual life of ten years. One third of options vested on each of April 3, 2008, April 3, 2009, and April 3, 2010. The weighted-average fair value of the options granted was $39.90 (see Note 10 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for key assumptions used in the Black Scholes valuation model). No new options were granted during the quarter ended March 31, 2010.

     A summary of the Company’s stock option activity for the quarter ended March 31, 2010 is as follows:

						Weighted-				Weighted-
						Average				Average
						Exercise				Remaining				Aggregate
		Number of				Price per				Contractual				Intrinsic
		Options				Share				Life				Value
										(In years)				(In millions)
Outstanding at January 1, 2010			22,077			$	80.01
Grants			—				—
Forfeited			—				—
Exercise			—				—
Outstanding at March 31, 2010			22,077			$	80.01				7.00			$	—
Fully vested and expected to vest at March 31, 2010			22,077			$	80.01				7.00			$	—
Exercisable at March 31, 2010			15,143			$	80.01				7.00			$	—

     At March 31, 2010, there was no significant unrecognized gross compensation expense related to stock options, as all unvested options became fully vested on April 3, 2010.

12. Commitments and Contingencies

     Commitments. The Company and its subsidiaries have a variety of financial commitments, including purchase agreements, forward foreign exchange and forward sales contracts, indebtedness (and related Call Options and Warrants) and letters of credit (Notes 7, 8 and 13).

     Refer to Note 11 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for information relating to minimum rental commitments under operating leases. There have been no material changes to such scheduled rental commitments as of the filing of this Report.

     Environmental Contingencies. The Company and its subsidiaries are subject to a number of environmental laws, fines or penalties assessed for alleged breaches of the environmental laws, and to claims based upon such laws.

     Based on the Company’s evaluation of the existing environmental matters, the Company had environmental accruals totaling $8.2 at March 31, 2010. Such amounts are primarily related to potential solid waste disposal and soil and groundwater remediation matters. These environmental accruals represent the Company’s undiscounted estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company’s assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over the next several years and

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

estimates that expenditures to be charged to these environmental accruals will be approximately $1.8 in 2010, $2.6 in 2011, $1.0 in 2012, $.9 in 2013, and $1.9 in 2014 and years thereafter.

     As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that undiscounted costs associated with these environmental matters may exceed current accruals by amounts that could be, in the aggregate, up to an estimated $16.9. As the resolution of these matters is subject to further regulatory review and approval, no specific assurance can be given as to when the factors upon which a substantial portion of this estimate is based can be expected to be resolved. However, the Company is currently working to resolve certain of these matters.

     Other Contingencies. The Company and its subsidiaries are party to various lawsuits, claims, investigations, and administrative proceedings that arise in connection with its past and current operations. The Company evaluates such matters on a case by case basis, and its policy is to vigorously contest any such claims it believes are without merit. In accordance with ASC Topic 450, Contingencies, the Company reserves for a legal liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Quarterly, in addition to when changes in facts and circumstances require it, the Company reviews and adjusts these reserves to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information, and events pertaining to a particular case. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual cost that may ultimately be incurred, management believes that it has sufficiently reserved for such matters and that the ultimate resolution of pending matters will not have a material adverse impact on its consolidated financial position, operating results, or liquidity.

13. Derivative Financial Instruments and Related Hedging Programs

Overview

     In conducting its business, the Company, from time-to-time, enters into derivative transactions, including forward contracts and options, to limit its economic (i.e., cash) exposure resulting from (i) metal price risk related to the sale of fabricated aluminum products and the purchase of metal used as raw materials for its fabrication operations, (ii) the energy price risk from fluctuating prices for natural gas used in its production process, and (iii) foreign currency requirements with respect to its cash commitments for equipment purchases and with respect to its foreign subsidiaries and affiliate, and in March 2010, the Company entered into the Call Options to limit its exposure to the cash conversion feature of the Notes (Note 7). From time-to-time, the Company may modify the terms of its derivative contracts based on operational needs or financing objectives. As the Company’s operational hedging activities are generally designed to lock-in a specified price or range of prices, realized gains or losses on the derivative contracts utilized in the hedging activities generally offset at least a portion of any losses or gains, respectively, on the transactions being hedged at the time the transaction occurs. However, due to mark-to-market accounting during the life of the derivative contract, significant unrealized, non-cash gains and losses are recorded in the income statement. The Company may also be exposed to margin calls, which the Company tries to minimize or offset through counterparty credit lines and/or the use of options. The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur a significant loss from the failure of any counterparties to perform under any agreements.

Hedges of Operational Risks

     The Company’s pricing of fabricated aluminum products is generally intended to lock-in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price risk on to its customers. However, in certain instances the Company does enter into firm price arrangements. In such instances, the Company has price risk on its anticipated primary aluminum purchases in respect of the customers’ orders. The Company uses third party hedging instruments to limit exposure to primary aluminum price risks related to substantially all fabricated products firm price arrangements. Unrealized and realized gains and losses associated with hedges of operational risks are reflected as a reduction or increase in Cost of products sold, excluding depreciation, amortization and other items.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     During the quarters ended March 31, 2010 and March 31, 2009, total fabricated products shipments that contained fixed price terms were (in millions of pounds) 22.4 and 47.4, respectively. At March 31, 2010, the Fabricated Products segment held contracts for the delivery of fabricated aluminum products that have the effect of creating price risk on anticipated purchases of primary aluminum for the remainder of 2010, 2011 and 2012 totaling approximately (in millions of pounds): 71.1, 78.9 and 13.4, respectively.

Hedges Relating to the Notes

     In March 2010, the Company issued $175.0 aggregate principal amount of the Notes. Holders may convert their Notes into cash before January 15, 2015, in certain circumstances determined by (i) the market price of the Company’s common stock, (ii) the trading price of the Notes, or (iii) the occurrence of specified corporate events. The Notes can be converted by the holders at any time on and after January 1, 2015 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes. The conversion feature can only be settled in cash and is required to be bifurcated from the Notes and treated as a separate derivative instrument under ASC 815 (Note 1). In order to offset the cash flow risk associated with the Bifurcated Conversion Feature, the Company purchased the Call Options. Both the Bifurcated Conversion Feature and the Call Options are measured at fair value with unrealized gains and losses recorded in Other income (expense) within the Company’s Statements of Consolidated Income. The Company expects the gain or loss from the Call Options to substantially offset the gain or loss associated with changes to the valuation of the Bifurcated Conversion Feature. Accordingly, the Company does not expect there to be a material net impact to the Consolidated Statement of Income associated with the Bifurcated Conversion Feature and the Call Options. In connection with the issuance of the Notes, the Company also entered into warrant transactions pursuant to which the Company sold to the Option Counterparties the Warrants (Note 7). The Warrants meet the definition of derivatives under ASC 815; however, because these instruments have been determined to be indexed to the Company’s own stock and to have met the requirement to be classified as equity instruments, the instruments are not subject to the fair value provisions of ASC 815.

     The following table summarizes the Company’s material derivative positions at March 31, 2010:

						Notional
						Amount of
						Contracts
Commodity		Period				(mmlbs)				Market Value
Aluminum —
Option purchase contracts		4/10 through 12/11					89.6			$	9.6
Fixed priced purchase contracts		4/10 through 12/12					128.0			$	14.3
Fixed priced sales contracts		4/10 through 12/11					23.3			$	(4.1	)
Regional premium swap contracts1		4/10 through 12/11					132.3			$	.2
						Notional
						Amount of
						Contracts
Energy		Period				(mmbtu)				Market Value
Natural gas —
Option purchase contracts		8/10 through 12/12					10,400,000			$	(3.0	)
Fixed priced purchase contracts2		4/10 through 2/11					430,000			$	(.4	)
						Notional
						Amount of
						Contracts
Hedges Relating to the Notes		Period				(Common Shares)				Market Value
Bifurcated Conversion Feature3		3/10 through 3/15					3,621,608			$	(38.1	)
Call Options3		3/10 through 3/15					3,621,608			$	31.4

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     The Company reflects the fair value of its derivative contracts on a gross basis in the Consolidated Balance Sheets. (Note 6). The Company’s derivative contracts are valued at fair value using significant observable and unobservable inputs.

     Commodity, Foreign Currency and Energy Hedges — 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 Company has some derivative contracts, however, that do not have observable market quotes. For these financial instruments, management uses significant other observable inputs (i.e., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors, such as bid/offer spreads.

     Bifurcated Conversion Feature and Call Options — The value of the Bifurcated Conversion Feature was the difference in the estimated fair value of the Notes and the estimated fair value of the Notes without the cash conversion feature. The Notes were valued using a binomial lattice valuation model. Significant inputs to these models are the Company’s stock price, risk-free rate, credit spread, dividend yield, expected volatility of the Company’s stock price, and probability of certain corporate events, all of which are observable inputs by market participants.

The significant assumptions used in the determining the fair value of the Notes were as follows:

Dividend yield (per share)1		$	.24
Risk-free interest rate2			2.60	%
Credit spread (basis points) 3			516
Expected volatility rate4			32	%

     The fair value of the Notes without the cash conversion feature is the present value of the series of fixed income cash flows with a mandatory redemption in 2015. The fair value of the Call Options represents the price paid for such Call Options on the purchase date, which approximates market value. The Call Options are expected to substantially eliminate the Company’s exposure to potential cash payments in excess of the principal amount of the Notes that it may be required to make upon the conversion of the Notes.

     The following table presents the Company’s assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of March 31, 2010:

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

		Level 1				Level 2				Level 3				Total
Derivative assets:
Aluminum swap contracts		$	—			$	16.0			$	—			$	16.0
Aluminum option contracts			—				12.3				—				12.3
Natural gas option contracts							.7								.7
Call Options			—				31.4				—				31.4
Midwest premium swap contracts			—				—				.4				.4
Total		$	—			$	60.4			$	.4			$	60.8
Derivative liabilities:
Aluminum swap contracts		$	—			$	(5.8	)		$	—			$	(5.8	)
Aluminum option contracts			—				(2.7	)			—				(2.7	)
Natural gas swap contracts			—				(.4	)			—				(.4	)
Natural gas option contracts			—				(3.7	)			—				(3.7	)
Bifurcated Conversion Feature			—				(38.1	)			—				(38.1	)
Midwest premium swap contracts			—				—				(.2	)			(.2	)
Total		$	—			$	(50.7	)		$	(.2	)		$	(50.9	)

     Financial instruments classified as Level 3 in the fair value hierarchy represent derivative contracts in which management has used at least one significant unobservable input in the valuation model. The following table presents a reconciliation of activity for such derivative contracts on a net basis:

		Level 3
Balance at January 1, 2010		$	—
Total realized/unrealized losses included in:
Cost of goods sold excluding depreciation expense			.3
Purchases, sales, issuances and settlements			(.1	)
Transfers in and (or) out of Level 3			—
Balance at March 31, 2010		$	.2
Total gains included in earnings attributable to the change in unrealized losses relating to derivative contracts still held at March 31, 2010		$	.2

     The realized and unrealized gains (losses) for the quarters ended March 31, 2010 and March 31, 2009 were as follows:

		Quarter Ended
		March 31,
		2010				2009
Realized losses:
Aluminum		$	(.7	)		$	(5.6	)
Foreign Currency			—				(6.5	)
Natural Gas			(.1	)			(4.3	)
Total realized losses		$	(.8	)		$	(16.4	)
Unrealized gains (losses):
Aluminum		$	3.4			$	(9.0	)
Foreign Currency			—				4.3
Natural Gas			(3.2	)			.4
Total unrealized gains (losses)		$	.2			$	(4.3	)

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     All of the Company’s commodity and foreign currency derivative contracts contain credit-risk related contingencies. If the fair value of the Company’s net commodity and currency derivative positions with certain counterparties exceeds a specified threshold, if any, the counterparty is required to transfer cash collateral in excess of the threshold to the Company. Conversely, if the fair value of these net derivative positions falls below a specified threshold, the Company is required to transfer cash collateral below the threshold to certain counterparties. At both March 31, 2010 and December 31, 2009, the Company had no margin deposits with or held from its counterparties.

14. Earnings Per Share

     Basic and diluted earnings per share for the quarters ended March 31, 2010 and March 31, 2009 were calculated as follows:

		Quarter Ended
		March 31,
		2010				2009
Numerator:
Net Income		$	8.8			$	3.8
Less: net income attributable to participating securities1			(.1	)			(.1	)
Net income available to common stockholders		$	8.7			$	3.7
Denominator:
Weighted-average number of common shares outstanding — Basic			20,020,309				19,492,215
Weighted-average number of common shares outstanding — Diluted			20,020,309				19,492,215
Income per common share:
Basic		$	.44			$	.19
Diluted		$	.44			$	.19

The following table provides a detail of net income attributable to participating securities for quarter ended March 31, 2010 and March 31, 2009:

		Quarter Ended
		March 31,
		2010				2009
Net income attributable to participating securities:1
Distributed income		$	.1			$	.1
Undistributed income			—				—
Total net income attributable to participating securities		$	.1			$	.1
Percentage of undistributed net income apportioned to participating securities			1	%			1	%

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

     In computing the diluted weighted average common shares outstanding for the quarters ended March 31, 2010 and March 31, 2009, the Company used the two-class method, assuming that participating securities are not exercised, vested or converted. The Company included the dilutive effect of stock options in calculating the diluted weighted average common shares. Options to purchase 22,077 common shares at an average exercise price of $80.01 per share were outstanding at both March 31, 2010 and March 31, 2009. The potential dilutive effect of such shares was zero for each of the quarters ended March 31, 2010 and March 31, 2009. Warrants to purchase approximately 3.6 million common shares at an average exercise price of approximately $61.36 per share, which were issued in March 2010, were outstanding at March 31, 2010. The potential dilutive effect of shares underlying the Warrants was zero for the quarter ended March 31, 2010.

     The Company paid a total of approximately $4.9 (or $.24 per common share) and $4.8 ($.24 per common share) in cash dividends to stockholders, including the holders of restricted stock, and dividend equivalents to the holders of restricted stock units and to the holders of any performance shares with respect to one half of the performance shares, in each of the quarter ended March 31, 2010 and March 31, 2009, respectively.

     On March 29, 2010, the Company used $44.2 of the proceeds from the issuance of the Notes to repurchase 1,151,900 shares of its common stock at a price of $38.35 per share. The cost of shares repurchased was recorded as Treasury stock.

15. Segment and Geographical Area Information

     The Company’s primary line of business is the production of semi-fabricated specialty aluminum products. In addition, the Company also owns a 49% interest in Anglesey, which operated an aluminum smelter in Holyhead, Wales until September 2009, when the contract for power supply that enabled smelting operations expired, and thereafter has operated as a secondary aluminum remelt and casting operation.

     The Company has one reportable segment, Fabricated Products. The Fabricated Products segment sells value-added products such as aluminum sheet and plate, extruded and drawn products, and forgings which are used in a wide range of industrial applications, including automotive, aerospace and general engineering end-use applications. Prior to September 30, 2009, the Company also had a Primary Aluminum segment, which produced, through the Company’s interest in Anglesey, and sold commodity grade products as well as value-added products such as ingot and billet for which the Company received a premium over fluctuating commodity market prices, and conducted hedging activities with respect to the Company’s exposure to primary aluminum price risk and British Pound Sterling exchange rate risk relating to Anglesey’s smelting operations.

     Following the cessation of the smelting operations at Anglesey on September 30, 2009, the Company’s operations consist of the Fabricated Products segment, and three business units which consist of Secondary Aluminum, Hedging, and Corporate and Other. The Secondary Aluminum business unit sells value added products such as ingot and billet, produced from Anglesey, for which the Company receives a portion of a premium over normal commodity market prices. The Hedging business unit conducts hedging activities with respect to the Company’s exposure to primary aluminum prices and conducted hedging activities with respect to British Pound Sterling exchange rate risks relating to Anglesey’s smelting operations through September 30, 2009. The Corporate and Other business unit provides general and administrative support for the Company’s operations. For purposes of segment reporting under GAAP, the Company treats the Fabricated Products segment as a reportable segment and combines the three other business units, Secondary Aluminum, Hedging and the Corporate and Other into one category, which is referred to as All Other. All Other is not considered a reportable segment.

     The accounting policies of the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and as further described in Note 1 of this Report. Segment results are evaluated internally by management before any allocation of corporate overhead and without any charge for income taxes, interest expense, or other operating charges, net.

Financial information of the Fabricated Products segment and All Other for the quarters ended March 31, 2010 and March 31, 2009 is as follows:

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

		Quarter Ended
		March 31,
		2010				2009
Net sales:
Fabricated Products		$	267.2			$	240.8
All Other1			.3				25.1
		$	267.5			$	265.9

		Quarter Ended
		March 31,
		2010				2009
Operating income:
Fabricated Products 1 3		$	23.0			$	14.0
All Other2 3			(8.2	)			(6.8	)
Total operating income		$	14.8			$	7.2
Interest expense			—				(.2	)
Other income (expense), net			.2				(.1	)
Income before income taxes		$	15.0			$	6.9

		Quarter Ended
		March 31,
		2010				2009
Depreciation and amortization:
Fabricated Products		$	4.0			$	4.1
All Other			—				—
		$	4.0			$	4.1
Capital expenditures, net of change in accounts payable:
Fabricated Products		$	(13.5	)		$	(22.2	)
All Other			(.4	)			—
		$	(13.9	)		$	(22.2	)

		March 31,				December 31,
		2010				2009
Assets:
Fabricated Products		$	476.8			$	457.6
All Other1			794.6				627.9
		$	1,271.4			$	1,085.5

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

		Quarter Ended
		March 31,
		2010				2009
Income taxes paid:
Fabricated Products —
United States		$	—			$	—
Canada			.1				.3
		$	.1			$	.3