Kaiser Aluminum Corporation — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the quarter ended March 31, 2019, compared with Q1 2018. Kaiser produces specialty semi-fabricated aluminum products for aerospace and high strength, automotive, general engineering, and other industrial markets. It operates as one segment.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $395.2 million | $388.0 million |
| Operating income | $43.0 million | $37.1 million |
| Net income | $28.0 million | $25.7 million |
| Diluted EPS | $1.71 | $1.51 |
| Operating cash flow | $22.8 million | $26.1 million |
| Capital expenditures | $13.6 million | $19.7 million |
- Adjusted EBITDA, a non-GAAP measure, was $56.2 million versus $48.2 million; VAR was $218.4 million versus $202.6 million. Adjusted EBITDA was about 25.7% of VAR, compared with 23.8% in Q1 2018.
- Shipments fell 2% to 162.6 million pounds. Average realized sales price rose 4%, mainly reflecting stronger value-added pricing; net sales increased 2%.
- Cash and cash equivalents were $115.3 million, short-term investments $22.3 million, and net revolver availability $292.0 million, for total liquidity of $429.6 million at quarter-end. Restricted cash was $14.1 million.
- Long-term debt was $370.6 million, representing $375 million principal of 5.875% senior notes due in 2024, net of issuance costs. No revolver borrowings were outstanding.
- Current assets were $671.1 million and current liabilities $204.2 million. Stockholders’ equity was $747.9 million.
- The company paid $10.2 million in dividends and repurchased 175,977 shares for $17.4 million. The quarterly dividend declared was $0.60 per share.
Material changes versus Q1 2018
- Aero/HS sales rose to $198.5 million from $170.2 million; shipments increased 17% to 67.0 million pounds. GE sales declined to $130.0 million from $143.3 million as capacity was shifted toward aerospace products.
- Automotive Extrusions sales fell to $53.0 million from $60.5 million; shipments declined 4%. Value-added revenue per pound improved in GE and Other products, while it declined in Automotive Extrusions and was flat in Aero/HS.
- Management attributed higher Adjusted EBITDA primarily to a $15.8 million increase in VAR, partly offset by Trentwood downtime and costs for purchased rolling ingot. SG&A and R&D expense increased to $25.2 million from $23.6 million.
- Operating cash flow decreased by $3.3 million, with working-capital use including an $18.8 million inventory increase and a $12.8 million increase in receivables. Q1 2018 investing cash flow benefited from larger proceeds from securities sales.
- The effective tax rate increased to 26% from 19%, primarily due to non-deductible compensation and state tax valuation allowance effects, partly offset by stock-compensation tax benefits.
Outlook, risks, contingencies, and unusual items
- Management maintained its 2019 outlook for Adjusted EBITDA margin above 25% of VAR and low- to mid-single-digit year-over-year growth in both shipments and VAR. This is management guidance, not a guarantee.
- Management estimated scheduled Q2 2019 Trentwood maintenance and downtime would reduce Adjusted EBITDA by approximately $15 million versus steady-state operations. It cited uncertainty around Boeing 737 MAX production reductions and potential aerospace supply-chain destocking; military aircraft demand was described as increasing. The company also expected strong Automotive Extrusions shipment growth in 2020 and 2021.
- Expected 2019 capital spending was approximately $80–$90 million, including Trentwood modernization and other efficiency and security projects. Management believed available liquidity and operating funds would cover requirements for at least 12 months, subject to operating performance and other factors.
- Environmental accruals were $17.1 million. The company stated that reasonably possible additional undiscounted costs could reach $11.6 million over the remediation period; actual costs and timing remain uncertain. Trentwood remediation may continue for 30 or more years, and Newark estimates await regulatory review and further studies.
- After quarter-end, the company reported that two of three requests seeking recovery of approximately $3.1 million in Section 232 tariff duties were denied; it considered recovery under the third request not probable. No recovery was included in Q1 results.
- The company adopted lease accounting Topic 842 in Q1, recording operating lease assets and liabilities; it reported no material effect on net earnings or cash flows. The tax asset protection rights plan expired April 7, 2019; stock transfer restrictions were scheduled to expire May 26, 2019.
- Customer concentration is significant: two customers accounted for 24% and 14% of Q1 sales. Two customers represented 29% and 13% of receivables at quarter-end. The top five suppliers provided 71% of primary aluminum supply.
- Commodity prices, customer demand, aerospace and automotive production, supply-chain inventory movements, customer and supplier concentration, and environmental remediation are material exposures. The filing reported no material changes in risk factors or legal proceedings since the 2018 Form 10-K.
Important facts for investors to verify
- Whether 737 MAX-related production changes lead to aerospace destocking, and the resulting effect on orders and shipments.
- Actual Q2 Trentwood downtime, costs, and production recovery relative to the estimated $15 million Adjusted EBITDA impact.
- Progress against 2019 shipment, VAR, and Adjusted EBITDA margin guidance, alongside the planned $80–$90 million capital program.
- Environmental remediation developments, especially Trentwood groundwater treatment and Newark regulatory review, and whether accruals require revision.
- Customer concentration, working-capital trends, and continued liquidity after dividends, share repurchases, and investment spending.
- Any further developments on the Section 232 tariff exclusion requests and potential refunds.