Kaiser Aluminum Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also provides fourth-quarter results. Kaiser manufactures specialty semi-fabricated aluminum products, principally for aerospace/high-strength, general engineering, automotive, and other industrial markets. Its sole reportable segment is Fabricated Products; it also owns 49% of Anglesey Aluminium.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $1,301.3 million | $1,079.1 million |
| Operating income | $55.0 million | $41.1 million |
| Net income | $25.1 million | $12.0 million |
| Diluted EPS | $1.32 | $0.61 |
| Operating cash flow | $62.8 million | $66.3 million |
| Capital expenditures | $32.5 million | $38.9 million |
| Cash and cash equivalents, year-end | $49.8 million | $135.6 million |
- Fabricated Products shipments rose 9% to 560.9 million pounds; average realized sales price rose 10% to $2.32 per pound. Fabricated Products sales increased 21% to $1,301.3 million.
- Fabricated Products operating income was $108.6 million, versus $78.6 million. Excluding identified non-run-rate items, segment operating income was $116.7 million, versus $100.7 million.
- Fourth-quarter 2011 sales were $317.6 million, operating income $15.6 million, and net income $6.1 million.
- Net cash used in investing activities was $116.3 million, including $83.2 million for the Chandler, Arizona aerospace-extrusion acquisition. Financing activities used $32.3 million.
- Year-end current assets were $434.5 million and current liabilities $149.8 million. The $300 million revolving facility had no borrowings and $251.6 million net availability at year-end ($275.6 million as of February 23, 2012).
- Debt included $175 million face amount of 4.5% cash convertible senior notes due April 2015 (reported carrying value $148.0 million after unamortized discount) and $4.7 million of other secured debt. The revolver matures September 2016.
- Cash dividends were $0.96 per share for 2011. A $0.25-per-share quarterly dividend was declared in January 2012 and paid in February.
Changes versus prior period and significant items
- Sales and earnings increased from 2010, reflecting higher volume and realized prices, stronger demand across end markets, improved product mix, and contributions from acquired facilities. Net income more than doubled.
- FY2011 included $25.9 million of non-cash, pre-tax unrealized derivative losses. Total Fabricated Products non-run-rate items were an $8.1 million charge; reported consolidated operating income also reflects $26.5 million of non-cash mark-to-market losses on primary-aluminum hedges in All Other.
- Cash declined mainly because of the Chandler acquisition. Operating cash flow decreased from 2010, with inventory and receivables growth partly offset by higher payables.
- The company amended its revolving facility in September 2011, increasing commitments from $200 million to $300 million, extending maturity to 2016, and improving pricing and flexibility.
- FY2010 and FY2009 financial statements and 2010 and 2011 interim results were restated after errors in Union VEBA participant and benefit-election data. Management said the prior-period effects were not material; the 2010 restatement reduced reported net income by $2.1 million.
Outlook, risks, and contingencies
- Management expected robust aerospace demand to continue in 2012 and cited increasing aircraft build rates, larger airframes, and monolithic aircraft design. It expected North American automotive build rates to rise approximately 10% in 2012 and improving general engineering demand, with normal seasonal strength in the first half.
- Planned 2012 Fabricated Products capital expenditures and investments were $40–$50 million. Spending included capacity expansion for aerospace extrusions in Chandler and aerospace plate at Spokane; management also anticipated further growth investment and considered complementary acquisitions.
- Environmental accruals were $22.0 million, primarily related to proposed remediation of historical PCB contamination at the Trentwood facility over an expected 30-year period. The final remediation approach remained subject to regulatory review; management estimated reasonably possible costs could exceed accruals by up to $21.7 million.
- Key risks include economic and end-market cyclicality, aerospace and automotive demand, customer concentration (Reliance Steel represented about 21% of 2011 sales; the five largest customers about 42%), raw-material and energy price movements, competition and material substitution, labor and pension obligations, and execution of acquisitions and capacity projects.
- Derivative fair values produced a reported net liability position of $23.8 million at year-end. Market movements can cause non-cash earnings volatility and may create liquidity needs through margin calls; counterparty performance is also a risk.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of year-end because of a material weakness in reviewing the completeness and accuracy of data used to value Union VEBA postretirement obligations. Deloitte issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. The company stated the VEBA accounting liability does not determine its funding obligation or affect its liquidity or cash flow.
Important facts for investors to verify
- Whether management remediates the Union VEBA data-review material weakness and whether future filings require further adjustments.
- Actual 2012 aerospace, automotive, and general engineering demand, and the contribution and ramp-up costs of the Chandler acquisition and expansion projects.
- Cash conversion and working-capital requirements, including whether inventory growth persists and whether cash generation supports planned capital spending and dividends.
- Progress on the Trentwood environmental consent decree, final remediation scope, and any change to the $22.0 million accrual or potential excess exposure.
- Convertible-note terms and refinancing or cash repayment capacity ahead of the $175 million principal maturity in 2015, along with covenant and revolver availability.
- Customer concentration, derivative-related volatility and liquidity exposure, and the status of labor agreements under negotiation in 2012.