Kaiser Aluminum Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The company manufactures specialty semi-fabricated aluminum products for aerospace/high strength, automotive, general engineering, and other industrial applications. It operates one reportable segment, Fabricated Products.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $1,330.6 million | $1,391.9 million |
| Shipments | 614.3 million pounds | 615.4 million pounds |
| Operating income (loss) | $177.8 million | $(345.9) million |
| Net income (loss) | $91.7 million | $(236.6) million |
| Diluted earnings (loss) per share | $5.09 | $(13.76) |
| Cash provided by operating activities | $164.3 million | $158.8 million |
| Capital expenditures | $76.1 million | $63.1 million |
| Cash, short-term investments and net revolver availability | $561.5 million | $383.3 million |
- FY2016 revenue declined 4.4%, mainly because lower aluminum costs reduced average realized sales prices; shipments were nearly flat. Value-added revenue, which excludes hedged metal cost, increased to $813.0 million from $789.9 million.
- Fabricated Products operating income was $229.6 million; excluding disclosed non-run-rate items, it was $219.0 million, versus $191.8 million in 2015. Management cited improved manufacturing efficiency, recycled-scrap utilization, and pricing on certain aerospace products.
- Cash and short-term investments were $286.2 million, and the $300 million revolving facility had no borrowings and $275.3 million of net availability at year-end. Current liabilities were $165.0 million; current assets were $655.9 million.
- Long-term debt was $368.7 million carrying value, or $375 million face value, at year-end. The company issued $375 million of 5.875% senior notes due 2024 and redeemed the remaining 8.25% notes, paying $214.2 million including premium and accrued interest. Interest expense was $20.3 million, down from $24.1 million.
- Cash dividends paid were $1.80 per share in 2016; the board subsequently declared a $0.50 quarterly dividend. The company repurchased 443,838 shares for $34.9 million during the year.
Material changes and unusual items
- FY2015 reported results included a $493.4 million loss related to removal of Union VEBA net assets and obligations from the balance sheet. This substantially distorted the prior-year comparison; FY2015 net loss was $236.6 million.
- FY2016 reported operating income included a net $7.3 million benefit from non-run-rate items. Items included an $18.7 million unrealized derivative gain, a $4.9 million inventory write-down, and a $2.6 million intangible-asset impairment.
- FY2016 SG&A and R&D rose to $105.0 million from $88.1 million, primarily reflecting higher incentive compensation and related costs.
Outlook, risks and contingencies
- Management expected 2017 to be challenging: aerospace supply-chain destocking was forecast to reduce industry demand about 5%, North American automotive build rates about 1%–2% lower, and competitive pricing pressure and rising metal costs could compress margins.
- Management anticipated first-half 2017 value-added revenue down 1%–3% year over year and sales-margin compression of 150–250 basis points. Planned Trentwood construction and equipment outages were expected to reduce efficiency during the first nine months. Expected 2017 capital spending was approximately $80 million.
- Management expected aerospace/high-strength demand growth to resume strongly in 2018–2019 and automotive extrusion application demand to grow at a 6% compound annual rate, but these are forward-looking expectations, not guarantees.
- Key exposures include cyclicality in aerospace and automotive markets, customer concentration (Reliance Steel accounted for about 26% and Boeing about 10% of 2016 sales), competition and import pricing, production interruptions at Trentwood, labor relations, commodity and hedge-market volatility, and debt covenant and liquidity risks.
- Environmental accruals were $17.2 million; management said reasonably possible additional costs could reach approximately $12.3 million over the remediation period. Trentwood groundwater remediation and Newark site investigations remained in progress. The filing states that litigation matters were not expected to have a material impact.
- The company reported $414.1 million of U.S. net operating loss carryforwards, subject to expiration and ownership-change limitations. Transfer restrictions and a tax asset rights plan intended to protect these attributes may also constrain share trading or takeover activity.
- The auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2016.
Important facts for investors to verify
- Whether 2017 shipment levels and value-added margins withstand aerospace destocking, automotive program delays, and competitive pressure.
- Execution, cost, timing, and expected efficiency and capacity benefits of the $150 million Trentwood modernization project, including the impact of planned outages.
- Liquidity quality: $231 million of short-term investments and revolver availability are included in reported total liquidity; confirm restrictions, collateral needs, and borrowing-base sensitivity.
- Debt service and refinancing implications of the 5.875% notes, and compliance with credit-facility and indenture covenants.
- Actual Union VEBA contributions, environmental remediation costs, and any changes in assumptions or accruals.
- Customer and supplier concentration, including the top five customers’ approximately 51% share of 2016 sales and the top five primary-aluminum suppliers’ 84% share of supply.