Business Context and Reporting Period
Kaiser Aluminum Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2011. The company manufactures semi-fabricated specialty aluminum products for aerospace, general engineering, automotive, and other industrial markets. Fabricated Products is its sole reportable segment; the company also owns a 49% non-controlling interest in Anglesey Aluminium.
Effective January 1, 2011, Kaiser acquired Alexco’s Chandler, Arizona aerospace extrusion facility for $83.2 million net of cash acquired. The facility contributed $9.9 million in sales and $2.2 million in pretax income during the quarter.
Financial Performance and Position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net sales | $322.6 million | $267.5 million; up 21% |
| Shipments | 144.1 million pounds | 128.4 million pounds; up 12% overall (Fabricated Products up 13%) |
| Operating income | $20.5 million | $14.8 million |
| Net income | $11.3 million | $8.8 million |
| Diluted EPS | $0.59 | $0.44 |
| Operating margin | 6.4% | 5.5% |
| Net margin | 3.5% | 3.3% |
| Operating cash flow | $15.8 million | $22.5 million |
| Capital expenditures | $6.2 million | $13.9 million |
Fabricated Products segment operating income was $23.7 million versus $22.1 million. Excluding identified non-run-rate items, segment operating income was $25.2 million, down from $26.1 million. Cost of products sold excluding depreciation, amortization, and other items was 87% of sales in both periods. Reported results included a $4.3 million non-cash derivative mark-to-market gain; metal gains of $12.4 million were more than offset by $14.9 million in non-cash LIFO charges.
Cash and cash equivalents were $55.9 million at quarter-end, down from $135.6 million at December 31, 2010, primarily reflecting the Alexco acquisition. The $200 million revolving facility had no borrowings; $9.8 million supported letters of credit, leaving $190.2 million available. Total debt principal was $187.7 million, including $175 million face value of cash convertible senior notes and $12.7 million of other notes. The notes’ balance-sheet carrying amount was $143.0 million after unamortized discount. Total liabilities were $445.4 million and stockholders’ equity was $925.4 million.
Changes Versus the Prior Comparable Period
- Higher shipments and sales reflected stronger demand across end markets, contributions from the Chandler and Florence facilities, and higher metal prices. Fabricated Products sales increased 21%; its average realized sales price rose to $2.24 per pound from $2.09.
- Net income rose by $2.5 million, while operating income increased by $5.7 million. The prior period included a $0.6 million restructuring benefit; Q1 2011 restructuring expense was immaterial.
- Interest expense increased to $4.5 million from zero, primarily because of the convertible notes. The 2010 amount was affected by interest capitalization to construction in progress.
- Operating cash flow declined by $6.7 million, with working-capital demands including higher receivables. Investing cash outflow increased to $89.4 million, principally due to the acquisition.
- Reported Q1 2010 results exclude Alexco, which was acquired in 2011. Pro forma Q1 2010 results including Alexco were sales of $274.4 million, net income of $9.9 million, and EPS of $0.49.
Outlook, Risks, and Unusual Items
- Management expected Q2 2011 demand and shipments to be similar to Q1 and anticipated improved profitability excluding non-run-rate items, citing operating efficiencies and more proactive pricing to recover rising metal costs.
- Management anticipated strong aerospace demand outside aerospace plate, where excess supply-chain inventory continued to constrain shipments; it expected plate orders to begin recovering in the second half of 2011 and into 2012. General engineering and automotive demand was expected to improve gradually.
- Management projected 2011 Fabricated Products capital expenditures and investments of $35 million to $45 million. It also declared a $0.24 per-share quarterly dividend for payment in May 2011.
- Primary aluminum prices rose during Q1; the company said it could not immediately pass all increases through on some higher-value spot products. At April 21, 2011, the LME aluminum price was $1.24 per pound, versus a Q1 2011 average of $1.13.
- Environmental accruals were $20.0 million, representing the low end of estimated costs for Trentwood and other matters. Management said costs could reasonably exceed recorded accruals by up to $22.0 million over 30 years; the Trentwood remediation approach remained under regulatory review, with a consent decree expected in 2012.
- Other uncertainties include economic and end-market cyclicality, aluminum and energy prices, hedging and derivative valuation, customer price pass-through timing, and tax examinations. The company reported compliance with its credit-facility covenants and effective disclosure controls; it reported no material changes to risk factors or legal proceedings since year-end.
Important Facts for Investors to Verify
- Whether the Alexco acquisition delivers expected integration benefits and sustained returns relative to its $83.2 million net cash cost.
- Whether aerospace plate inventory clears and management’s shipment and profitability outlook is achieved, especially amid rising metal costs.
- How much of reported earnings reflects non-cash derivative gains, metal gains, and LIFO charges, and how these items affect underlying margins.
- Whether operating cash flow and liquidity remain adequate after acquisition spending, planned capital expenditures, dividends, and debt service.
- Whether environmental remediation estimates change as the Trentwood feasibility study and regulatory process advance; the filing identifies up to $22.0 million of potential costs above accruals.