Kaiser Aluminum Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
Kaiser manufactures specialty semi-fabricated aluminum products through its Fabricated Products business, serving aerospace/high strength, general engineering, automotive and other industrial markets. It operated 12 North American facilities and shipped 585.9 million pounds in 2012. Fabricated Products accounts for substantially all consolidated sales.
Key financial and operating metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $1,360.1 | $1,301.3 |
| Operating income | $165.9 | $55.0 |
| Net income | $85.8 | $25.1 |
| Diluted EPS | $4.45 | $1.32 |
| Operating cash flow | $152.4 | $62.8 |
| Capital expenditures | $44.1 | $32.5 |
| Cash and short-term investments at year-end | $358.4 | $49.8 |
| Long-term debt at face value | $400.0 | $179.7 |
Operating margin was approximately 12.2% (4.2% in 2011); net margin was approximately 6.3% (1.9% in 2011). Operating cash flow less capital expenditures was approximately $108.3 million. The effective income tax rate was 38.5%.
Fourth-quarter 2012 sales were $314.0 million, operating income $23.9 million and net income $9.1 million, compared with $317.6 million, $15.6 million and $6.1 million, respectively, in fourth-quarter 2011.
Material changes versus 2011
- Shipments rose 4% to 585.9 million pounds. Aero/HS shipments increased 17% and general engineering shipments increased 6%; shipments of Other products fell 23%.
- Sales increased 5%. Average realized sales price remained $2.32 per pound, while value-added revenue rose to $736.2 million from $644.2 million, and to $1.26 per pound from $1.15.
- Operating income excluding identified non-run-rate items increased to $183.6 million from $118.2 million. Reported operating income included a $15.2 million operating derivative mark-to-market gain in 2012, versus a $29.9 million loss in 2011.
- Operating cash flow increased, supported in part by lower inventory. Cash and short-term investments rose substantially following the May 2012 issuance of $225 million of Senior Notes.
- Debt at face value increased to $400 million: $225 million of 8.25% Senior Notes due 2020 and $175 million of 4.5% cash convertible notes due 2015.
Outlook, commentary and risks
- Management expected first-half 2013 value-added revenue and EBITDA margin on value-added revenue to be flat or slightly higher than the first half of 2012. It cited weak industrial demand, limited visibility, flat-to-prior-year first-half automotive build rates, and an inventory overhang in aerospace extruded and drawn products.
- Management remained positive on second-half 2013 and longer-term prospects, particularly for aerospace and automotive. It expected aerospace growth in 2013, but at a more modest pace than in 2012, and forecast approximately 2% growth in 2013 North American automotive build rates in its broader discussion.
- Planned 2013 Fabricated Products capital expenditures and investments were $50–$80 million, including a planned $35 million Spokane casting unit and potential Phase 5 plate expansion. The range depended in part on project timing.
- Year-end liquidity was $618.2 million, including $273.4 million cash, $85.0 million short-term investments and $259.8 million of net revolver availability. No revolver borrowings were outstanding. Management believed available resources and expected operating cash flow would cover requirements for at least 12 months.
- Environmental accruals were $21.7 million, primarily related to PCB remediation at the Spokane facility, expected to extend over roughly 30 years. The company said reasonably possible additional costs could reach $18.7 million; approved remediation work plans were expected to begin implementation in 2013.
- Material risks include aerospace and industrial cyclicality, competition and substitution by other materials, energy and raw-material costs, derivative and counterparty exposure, labor and multi-employer pension obligations, debt covenants, and reliance on significant customers. The largest customer represented approximately 22% of 2012 sales and the five largest approximately 46%.
- A $20.0 million variable VEBA contribution for 2012 was accrued for payment in the first quarter of 2013. The reported VEBA asset is an accounting measure; Kaiser stated it has no claim to those plan assets and its cash obligation is governed by a contribution formula and cap.
Important facts for investors to verify
- How much of the sharp year-over-year earnings improvement reflects recurring operations versus derivative mark-to-market changes, VEBA accounting and other non-run-rate items.
- Whether aerospace demand, product mix and value-added revenue support planned capacity investments, and whether first-half 2013 softness or inventory effects persist.
- Debt service and refinancing requirements, including the $175 million convertible notes due in 2015 and the 8.25% notes due in 2020; confirm covenant headroom and revolver availability.
- The final scope, timing and cost of Spokane PCB remediation relative to the $21.7 million accrual and disclosed potential additional costs.
- Exposure to customer concentration, aluminum and energy price movements, labor negotiations, and VEBA contributions.
The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2012.