Kaiser Aluminum Corporation — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter ended March 31, 2016, compared with Q1 2015. Kaiser manufactures semi-fabricated specialty aluminum products for aerospace/high-strength, automotive, general engineering and other industrial markets. It operates one reportable segment, Fabricated Products, with 11 U.S. facilities and one Canadian facility.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $343.2 million | $371.7 million |
| Operating income (loss) | $44.8 million | $(458.6) million |
| Net income (loss) | $26.3 million | $(292.2) million |
| Diluted EPS | $1.44 | $(16.85) |
| Operating cash flow | $21.3 million | $7.4 million |
| Capital expenditures | $25.9 million | $11.3 million |
- Net sales declined 8%; shipment volume rose slightly to 159.3 million pounds. Average realized price per pound fell 9%, reflecting a 25% decline in hedged metal cost, partly offset by a 6% increase in value added revenue per pound.
- Value added revenue was $210.7 million, up from $197.2 million. Fabricated Products operating income excluding identified non-run-rate items was $59.0 million versus $48.6 million.
- GAAP operating margin was approximately 13.1%; the prior-year loss included the substantial Union VEBA accounting charge described below. Q1 2016 included a $4.9 million inventory write-down and a $4.0 million unrealized derivative gain.
- Cash and cash equivalents were $70.7 million and short-term investments were $10.0 million at quarter-end. Net availability on the $300 million revolving facility was $291.8 million; there were no borrowings. Reported total liquidity was $372.5 million.
- Long-term debt carrying value was $194.8 million; $197.8 million principal of 8.25% senior notes was outstanding, due 2020. Total current assets were $447.8 million and current liabilities $160.7 million.
- Quarter-end stockholders’ equity was $787.8 million. The company paid $8.2 million in dividends and repurchased $6.3 million of stock during the quarter.
Material changes versus the prior comparable period
- Net sales fell $28.5 million, primarily because of lower metal prices; shipments were slightly higher and value added revenue increased.
- Automotive Extrusions shipments rose 11%, GE shipments 5%, and Aero/HS shipments 3%; Other-products shipments declined 41%. Management cited new automotive programs, aerospace plate strength and recovery in long products after customer destocking.
- Lower interest expense ($3.7 million versus $9.8 million) reflected the settlement of convertible notes in April 2015.
- Q1 2015 included a $492.2 million loss on removal of Union VEBA net assets, partly offset by a $175.8 million tax benefit. This unusual prior-period item drove much of the reported year-over-year improvement and limits direct comparison of GAAP results.
- Capital expenditures increased to $25.9 million from $11.3 million, including spending on Trentwood modernization and automotive capacity.
Outlook, commentary and risks
- Management reaffirmed 2016 guidance: total value added revenue growth of 3%–5%; aerospace/high-strength growth of about 5%; automotive extrusion growth of about 10%; and relatively flat general engineering and industrial demand. It expected year-over-year improvement in operating income excluding non-run-rate items, driven by volume, margins, operating leverage and manufacturing efficiencies.
- Management expected import pressure on general engineering plate to continue weighing on selling prices and margins through 2016. Planned 2016 capital spending was $60–$80 million; the multi-year Trentwood investment is approximately $150 million.
- Environmental accruals were $18.1 million. The company said reasonably possible undiscounted remediation costs could exceed recorded accruals by up to an estimated $24.7 million; costs and remediation plans remain uncertain, including at Trentwood and Newark.
- Metal, energy and foreign-exchange exposures are managed partly through hedging and customer pricing arrangements. Derivative liabilities can create collateral requirements if liquidity falls below specified thresholds. The company also flagged potential further inventory write-downs if net realizable values decline.
- Customer and supplier concentration is notable: two customers accounted for 35% of Q1 sales, and the top five primary-aluminum suppliers provided 83% of supply.
- Management said liquidity sources were expected to fund requirements and planned investment for at least 12 months, while noting dependence on operating performance and economic conditions. No material change in risk factors or legal proceedings was reported.
- Subsequent events: the board adopted a Tax Asset Protection Rights Plan on April 7, 2016, seeking to protect tax attributes as existing share-transfer restrictions approach expiration. A further $0.45-per-share dividend was declared in April for payment in May.
Important facts for investors to verify
- Whether reported earnings improvement is understood in the context of the large, unusual Q1 2015 Union VEBA charge and the 2016 inventory and derivative items.
- Progress toward the reaffirmed 2016 value added revenue and operating-income outlook, particularly aerospace and automotive demand and general engineering pricing pressure.
- Execution, cost and expected benefits of the Trentwood modernization and automotive capacity investments, alongside planned capital spending.
- Changes to environmental remediation estimates, especially the possible $24.7 million excess over recorded accruals.
- Customer and aluminum-supplier concentration, and any effect on sales, sourcing or working capital.
- Approval and implications of the Rights Plan and replacement share-transfer restrictions for preserving tax attributes.