Kaiser Aluminum Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company produces specialty semi-fabricated aluminum products for aerospace/high strength, automotive, general engineering and other industrial markets. It reports one operating segment, Fabricated Products.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $388.0 million | $355.3 million |
| Operating income | $37.1 million | $59.3 million |
| Net income | $25.7 million | $36.0 million |
| Diluted EPS | $1.51 | $2.04 |
| Operating cash flow | $26.1 million | $4.1 million |
| Capital expenditures | $19.7 million | $14.8 million |
Sales rose about 9%, reflecting 2% higher shipments and an 8% increase in average realized price per pound, largely from higher metal costs. Reported operating margin fell to about 9.6% from 16.7%; net margin fell to about 6.6% from 10.1%. Fabricated Products operating income excluding non-run-rate items was $50.1 million, versus $56.0 million. Management attributed the normalized decline mainly to higher contained-metal and freight costs, partly offset by improved manufacturing conversion costs.
Shipments were 166.1 million pounds versus 163.6 million. General engineering and automotive shipments increased; aerospace/high-strength shipments declined amid supply-chain destocking. Value-added revenue was $202.6 million, down from $203.9 million, and value-added revenue per pound declined to $1.22 from $1.25.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $135.0 million and short-term investments were $83.8 million. Including $291.9 million of net revolver availability, total liquidity was $510.7 million, down from $526.7 million at year-end.
- The $300 million revolving facility had no borrowings; $8.1 million supported letters of credit. Long-term debt was $369.8 million, primarily the $375 million 5.875% senior notes due May 2024.
- Operating cash flow was $26.1 million; investing activities provided $80.6 million, mainly from $100.3 million of proceeds from securities, while financing used $22.8 million. Cash and restricted cash totaled $148.2 million at quarter-end.
- The company paid $10.0 million in dividends and repurchased $6.1 million of shares under its program. A $0.55-per-share dividend was declared after quarter-end.
Outlook, commentary and key risks
- Management maintained its 2018 outlook: mid-single-digit year-over-year growth in shipments and value-added revenue. It expected aerospace demand to improve as destocking moderated, while automotive and general engineering demand remained strong.
- Management anticipated continued margin pressure from rising freight and contained-metal costs and said it would pursue price increases and manufacturing-efficiency improvements. Planned 2018 capital spending was approximately $80 million, including the Trentwood modernization; about 40% of that project’s $150 million total investment remained to be spent.
- Accounting changes affect comparability. ASC 606 adoption increased opening retained earnings by $10.1 million and raised Q1 2018 reported net income by $4.5 million versus the amount under prior revenue guidance; prior-period results were not recast. Adoption of hedge-accounting guidance also shifted commodity-hedge mark-to-market effects from earnings to other comprehensive income. Reported Q1 2017 included a $15.1 million derivative gain in earnings.
- Environmental accruals were $16.6 million. The company said reasonably possible additional undiscounted costs could reach $12.2 million, with remediation and monitoring potentially extending 30 years or more; estimates may change as investigations and regulatory reviews progress.
- Customer and supply concentration warrant attention: two customers represented 27% and 13% of Q1 sales, and the top five primary-aluminum suppliers provided 81% of supply. Other exposures include aluminum, alloy-metal and energy prices, aerospace and automotive cycles, supply-chain inventory changes, labor negotiations and environmental liabilities.
- Management stated that available liquidity and operating cash flow should fund expected needs for at least the next 12 months, subject to operating performance and economic conditions. The filing reported no material change in risk factors from the 2017 Form 10-K and no material legal-proceeding developments.
Most important facts for investors to verify
- Whether margin pressure from metal and freight costs persists and whether announced price increases offset it.
- Whether aerospace destocking moderates and the company achieves its mid-single-digit shipment and value-added revenue growth outlook.
- How ASC 606 and hedge-accounting presentation affect comparisons of reported results and cash conversion.
- Progress, remaining cost and expected benefits of the Trentwood modernization and the approximately $80 million 2018 capital-spending plan.
- Developments in environmental remediation estimates, concentrated customer demand and primary-aluminum supply availability.