Business Context and Reporting Period
Company: Kaiser Aluminum Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Kaiser Aluminum is a leading North American manufacturer of semi-fabricated specialty aluminum products. The company operates one reportable segment, Fabricated Products, which produces rolled, extruded, drawn, and forged aluminum for aerospace, defense, automotive, and general engineering applications. In September 2009, the company's 49% interest in Anglesey Aluminium Limited (a smelter in Wales) ceased smelting operations due to the expiration of its power contract and transitioned to a secondary aluminum remelt and casting operation.
Key Financial Metrics
| Metric | 2009 | 2008 | 2007 |
|---|---|---|---|
| Net Sales | $987.0 million | $1,508.2 million | $1,504.5 million |
| Operating Income (Loss) | $118.7 million | ($91.0 million) | $182.0 million |
| Net Income (Loss) | $70.5 million | ($68.5 million) | $101.0 million |
| Earnings Per Share (Basic) | $3.51 | ($3.45) | $4.91 |
| Cash from Operating Activities | $127.7 million | $46.9 million | $129.6 million |
| Capital Expenditures | $59.2 million | $93.2 million | $61.8 million |
| Total Assets | $1,085.5 million | $1,145.4 million | $1,165.2 million |
| Long-term Borrowings | $7.0 million | $43.0 million | $0 |
| Cash and Cash Equivalents | $30.3 million | $0.2 million | $68.7 million |
Liquidity: As of December 31, 2009, the company had $161.9 million of borrowing capacity available under its revolving credit facility (net of letters of credit) and no outstanding borrowings on the facility.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 34% to $987.0 million in 2009 compared to 2008. This was driven by a 23% decrease in Fabricated Products shipment volumes and a 13% decrease in realized prices, reflecting weak economic conditions and inventory destocking by customers. Additionally, primary aluminum sales from Anglesey ceased in September 2009.
- Profitability Turnaround: The company reported a net income of $70.5 million in 2009, reversing a net loss of $68.5 million in 2008. This improvement was significantly aided by non-run-rate items, including an $80.5 million unrealized mark-to-market gain on derivative positions in 2009, compared to an $87.1 million loss in 2008.
- Inventory Adjustments: The company recorded a $9.3 million lower of cost or market inventory write-down in 2009, a significant reduction from the $65.5 million write-down recorded in 2008.
- Restructuring: Restructuring costs totaled $5.4 million in 2009 (related to facility closures and workforce reductions) compared to $8.8 million in 2008.
- Debt Reduction: The company repaid all borrowings under its revolving credit facility during 2009, reducing long-term borrowings from $43.0 million to $7.0 million (a promissory note for a facility purchase).
Guidance, Outlook, and Risks
Outlook for 2010:
- Aerospace/High Strength: Management expects shipments to be slightly improved in the first half of 2010 compared to the average of the last three quarters of 2009, though destocking by airframe manufacturers is expected to continue.
- General Engineering: Demand is expected to steadily improve with the North American industrial economy; destocking is believed to have ended.
- Automotive: Demand is expected to improve approximately 35% relative to 2009, tracking improved build rates, though levels will remain below historic norms.
- Capital Projects: The company expects to launch its new Kalamazoo, Michigan facility in the first half of 2010, with full-scale production by year-end.
Key Risks and Contingencies:
- Customer Concentration: The largest customer, Reliance Steel & Aluminum, accounted for approximately 20% of net sales in 2009. The loss of this customer would have a material adverse effect.
- Anglesey Investment: The company fully impaired its investment in Anglesey. Equity method accounting was suspended in Q3 2009 due to significant losses at Anglesey. The company does not expect to resume equity accounting or receive dividends in the next 12 months.
- Market Volatility: Results are sensitive to fluctuations in primary aluminum prices, energy costs, and foreign exchange rates. The cessation of Anglesey smelting eliminated a "natural hedge," increasing reliance on third-party hedging instruments.
- Environmental Liabilities: The company has accrued $9.7 million for environmental matters, primarily at the Trentwood facility. It is reasonably possible that costs could exceed accruals by up to $16.9 million.
- VEBA Obligations: The company is obligated to make annual variable cash contributions to the Union VEBA and Salaried VEBA based on profitability, capped at $20 million annually.
Investor Verification Checklist
- Derivative Gains: Verify the sustainability of the $80.5 million unrealized mark-to-market gain on derivatives, which was a primary driver of 2009 profitability.
- Anglesey Status: Confirm the operational status of Anglesey's remelt operations and the likelihood of future equity income recognition or dividend distributions.
- Customer Concentration: Assess the stability of the relationship with Reliance Steel & Aluminum, which represents 20% of sales.
- Environmental Accruals: Review the potential for additional costs related to PCB remediation at the Trentwood facility, which could exceed current accruals by up to $16.9 million.
- Capital Expenditures: Monitor the progress and cost overruns of the Kalamazoo, Michigan facility expansion, with an estimated additional $25-30 million required for completion.
- VEBA Contributions: Evaluate the impact of the variable VEBA contribution obligation on future cash flows, particularly if profitability increases significantly.