Kaiser Aluminum Corporation — Q1 2020 Form 10-Q
Business context and period. Unaudited results cover the quarter ended March 31, 2020, compared with Q1 2019. Kaiser manufactures specialty semi-fabricated aluminum products for aerospace and high strength, automotive, general engineering, and other industrial markets. It reports one operating segment. COVID-19 began materially affecting customer activity late in the quarter.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $369.3 million | $395.2 million |
| Operating income | $45.6 million | $43.0 million |
| Net income | $29.1 million | $28.0 million |
| Diluted EPS | $1.81 | $1.71 |
| Adjusted EBITDA (non-GAAP) | $59.4 million | $56.2 million |
| Net cash from operating activities | $52.4 million | $22.8 million |
| Capital expenditures | $21.1 million | $13.6 million |
- Sales declined about 7%; shipments fell 4% to 155.6 million pounds, and average realized price per pound declined 2%. The lower metal cost component drove much of the price decrease.
- Operating margin was approximately 12.3%, versus 10.9% a year earlier; net margin was approximately 7.9%, versus 7.1%.
- Cash and cash equivalents were $307.2 million, short-term investments $39.3 million, and net revolver availability $341.5 million. Reported total liquidity was $688.0 million; there were no revolver borrowings.
- Long-term debt was $492.8 million. The company had $500 million principal amount of 4.625% senior notes due 2028; the balance sheet amount reflects debt issuance costs.
- Operating cash flow benefited from higher accounts payable, partly offset by increased inventory. Financing cash outflows included $12.5 million of share repurchases and $11.3 million of dividends and equivalents.
Material changes and operating detail
- Aero/HS sales were $196.0 million, down slightly; management reported aerospace value-added revenue (VAR) up about 4% on 1% lower shipments, reflecting favorable pricing and mix.
- Automotive Extrusions sales were $47.4 million, down from $53.0 million; VAR declined about 7% on 5% lower shipments as customers closed plants late in the quarter.
- General Engineering sales were $121.7 million, versus $130.0 million; shipments and VAR were described as flat. Other products sales fell to $4.2 million from $13.7 million, principally reflecting the planned exit from non-strategic applications.
- Adjusted EBITDA increased $3.2 million year over year, attributed to aerospace pricing and mix and cost improvement; lower-volume pandemic-related inefficiencies were partly offset by prior-year Trentwood downtime costs not recurring.
- Cash and short-term investments together shifted toward cash: short-term investments declined to $39.3 million from $78.7 million. Share repurchases were suspended on March 18, 2020.
Outlook, risks, and unusual items
- Management withdrew its prior full-year 2020 outlook, stating that earlier guidance did not account for COVID-19 and should not be relied upon. It expects future results to be adversely affected, but the duration and full impact were unclear.
- Management estimated 2020 commercial aerospace VAR could be 20%–25% below 2019 levels for the relevant customers. Defense demand was expected to remain strong through 2020; automotive and industrial demand were exposed to customer shutdowns and weaker activity.
- To preserve liquidity, the company was flexing costs, limiting capital spending to critical sustaining projects, and monitoring timing of its $375 million multi-year Trentwood expansion, including a planned initial $145 million plate-stretcher investment. No full-year capital-spending outlook was provided.
- Environmental accruals totaled $17.0 million. The company disclosed that reasonably possible undiscounted costs could exceed accruals by up to an estimated $11.6 million over the remediation period; estimates may change as investigations and remediation planning progress. A new EPA notice concerned property near the former Mead smelter.
- Net derivative liabilities were approximately $29.0 million at quarter-end, compared with $7.2 million at December 31, 2019. Cash-flow hedges produced a $15.9 million after-tax OCI loss; management estimated $18.1 million of pre-tax hedge losses in AOCI would be reclassified into earnings within 12 months.
- The board declared a $0.67-per-share dividend on April 14, 2020, payable around May 15. Management said available liquidity and expected operating funds should cover requirements for at least 12 months, subject to operating performance and economic conditions.
Most important facts for investors to verify
- Subsequent quarterly sales, shipments, and customer demand—especially commercial aerospace and automotive—against management’s COVID-19 expectations.
- Whether operating cash flow remains adequate when working-capital movements, including accounts payable and inventory, normalize.
- Progress on liquidity preservation, capital-spending reductions, the Trentwood expansion timetable, and the dividend and repurchase policies.
- Changes to environmental remediation estimates, including the possible costs above the $17.0 million accrual, and the resolution of the Mead-site EPA matter.
- Realized impacts of derivative positions and whether hedge losses reclassified from AOCI materially affect future earnings.