Kaiser Aluminum Corporation — Q3 2011 Form 10-Q
Business context and reporting period
Quarter and nine months ended September 30, 2011. Kaiser manufactures semi-fabricated specialty aluminum products through its Fabricated Products segment, serving aerospace/high strength, general engineering, automotive and other markets. The company also holds a 49% interest in Anglesey Aluminium.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $322.3 million | $263.4 million | $983.7 million | $813.3 million |
| Operating income | $5.5 million | $13.2 million | $41.4 million | $32.0 million |
| Net income | $4.4 million | $5.5 million | $20.2 million | $14.4 million |
| Diluted EPS | $0.23 | $0.29 | $1.06 | $0.74 |
- Q3 sales rose 22%, reflecting a 4% increase in shipments and a 17% increase in average realized sales price. Shipments were 134.8 million pounds versus 129.3 million.
- Q3 operating and net margins were approximately 1.7% and 1.4%; nine-month margins were approximately 4.2% and 2.1%, respectively.
- Q3 cost of products sold, excluding depreciation, amortization and other items, increased to 92% of sales from 87%. Management reported $12.7 million of pre-tax, non-cash derivative mark-to-market losses for the quarter. All Other operating results included a $14.8 million non-cash aluminum hedge loss.
- Fabricated Products segment operating income was $25.8 million in Q3 versus $5.3 million a year earlier; consolidated operating income fell because All Other shifted from $7.9 million of income to a $20.3 million loss, principally reflecting hedge marks.
- Cash from operations was $20.8 million for the first nine months, down from $65.3 million. Investing cash outflow was $107.4 million, including $83.2 million for the Chandler, Arizona acquisition and $22.9 million of capital expenditures. Financing cash outflow was $25.4 million.
- Cash was $23.6 million at September 30, down from $135.6 million at year-end 2010. Working-capital needs increased with business activity. Current assets were $408.1 million and current liabilities $153.5 million.
- Debt included $175 million principal of cash convertible senior notes (carrying amount $146.3 million) and $5.0 million of other notes. No revolving-facility borrowings were outstanding. Net facility availability was $281.3 million after $8.5 million of letters of credit; the facility commitment had been increased to $300 million and extended to September 2016.
Changes versus prior comparable periods
- Nine-month sales increased 21%, with shipments up 9% and average realized price up 12%; nine-month net income rose to $20.2 million from $14.4 million.
- Despite higher Q3 sales and stronger Fabricated Products segment results, consolidated Q3 operating income and net income declined year over year, largely due to unfavorable non-cash hedge valuation changes and other items.
- Cash from operations declined, while the Chandler acquisition contributed to substantially higher investing outflows and lower cash balances.
- The January 2011 Chandler acquisition added aerospace hard-alloy extrusion capacity. It contributed $32.3 million of sales and $8.2 million of pre-tax income in the first nine months.
Outlook, risks and unusual items
- Management expected Q4 2011 value-added revenue and profitability to be similar to Q3, with aerospace strength offsetting typical year-end seasonal weakness in automotive and general engineering. The aerospace order book was described as strong for Q4 and expected to remain strong in 2012.
- Management remained optimistic about longer-term aerospace and automotive opportunities, anticipated 2011 North American automotive build rates to increase approximately 10% over 2010, and forecast 2011 Fabricated Products capital expenditures of $30–$40 million.
- Key exposures include cyclical demand in aerospace, automotive and industrial markets; aluminum, energy and foreign-currency movements; and potentially volatile non-cash derivative marks. Natural-gas price exposure was substantially hedged for approximately 96% of expected remaining-2011 purchases, 74% of 2012 purchases and 46% of 2013 purchases.
- Environmental accruals were $21.4 million, including Trentwood, Washington PCB remediation. The company estimated reasonably possible additional costs of up to $21.9 million over 30 years; a final remediation approach had not been agreed, and a consent decree was expected in 2012.
- The company stated that available cash, expected operating cash flow and facility availability should fund requirements for at least 12 months. It was in compliance with facility covenants at quarter-end.
- A $0.24-per-share dividend was declared after quarter-end for payment November 15, 2011. Future dividends remain at the board’s discretion.
Important facts for investors to verify
- Whether aerospace demand, automotive programs and management’s Q4 profitability expectations materialized.
- How much reported earnings and cash flow continue to be affected by derivative marks, metal-price movements and working-capital investment.
- Liquidity after acquisition and capital spending, including usable borrowing-base availability, restricted cash and compliance with credit-facility covenants.
- Final scope, timing and cost of Trentwood and other environmental remediation, including whether costs exceed the recorded accrual.
- Chandler acquisition performance and expected returns from planned aerospace capacity expansions.