Kaiser Aluminum Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 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.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $374.9 million | $393.1 million | $1,145.4 million | $1,196.5 million |
| Operating income | $40.7 million | $34.9 million | $116.1 million | $106.7 million |
| Net income | $25.4 million | $21.7 million | $72.6 million | $68.1 million |
| Diluted EPS | $1.57 | $1.29 | $4.47 | $4.03 |
| Adjusted EBITDA | $56.7 million | $47.4 million | $160.4 million | $150.2 million |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $153.9 million | $112.5 million |
Q3 operating margin was approximately 10.9%, versus 8.9% a year earlier; net margin was approximately 6.8%, versus 5.5%. For the first nine months, operating margin was approximately 10.1%, versus 8.9%. Q3 Adjusted EBITDA was 26.4% of value added revenue (VAR), compared with 23.1%; the nine-month ratio was approximately 25.0%, versus 24.3%. VAR, a non-GAAP measure, was $214.8 million in Q3 and $642.4 million for nine months.
Q3 shipments were 154.2 million pounds, down 3% year over year; nine-month shipments were 472.5 million pounds, down 4%. Q3 sales rose in Aero/HS products to $198.9 million from $185.7 million, while Automotive Extrusions, GE, and Other products declined. Nine-month Aero/HS sales increased to $586.8 million; the other end-market categories declined.
Cash, debt, and capital allocation
- At September 30, cash and cash equivalents were $172.1 million and short-term investments were $25.3 million. Net availability on the $300 million revolver was $292.0 million, leaving total stated liquidity of $489.4 million. Restricted cash of $14.4 million was additional but not included in that total.
- Long-term debt was $371.1 million, representing $375 million principal of 5.875% senior notes due May 2024, net of issuance costs. There were no revolver borrowings.
- Nine-month investing cash use was $29.3 million, including $40.7 million of capital expenditures; financing cash use was $77.7 million, including $40.6 million of share repurchases and $29.8 million of dividends.
- The company repurchased 128,615 shares in Q3 for $12.0 million at a weighted-average $92.95 per share. Quarterly dividends were $0.60 per share.
Changes, outlook, and management commentary
- Despite lower sales and shipments, Q3 operating income, net income, EPS, and Adjusted EBITDA increased year over year. Management attributed higher quarterly Adjusted EBITDA primarily to favorable sales impact, lower planned major maintenance, and lower tariff and other costs.
- Management cited strong aerospace demand and higher value-added pricing, offset by weakening industrial demand and GE supply-chain destocking. Automotive shipments were affected by delayed program launches and the General Motors strike. First-half Trentwood downtime and lower automotive shipments weighed on nine-month results.
- Management expected Q4 2019 results to be similar to Q4 2018, with normal seasonal weakness, slowing industrial demand, and a possible $3 million to $6 million Adjusted EBITDA impact from the GM strike, depending on the pace of supply-chain recovery.
- For full-year 2019, the company continued to expect low- to mid-single-digit year-over-year VAR growth and an Adjusted EBITDA margin above 25%; shipments were expected to decline as product mix shifted toward Aero/HS products. The aerospace order book was described as strong with visibility well into 2020, while timing of a Boeing 737 MAX resolution remained uncertain.
- 2019 capital spending was forecast at approximately $65 million to $70 million. Management expected increased Trentwood capacity in 2020 from modernization and less downtime, and was evaluating phased future expansions.
Risks, contingencies, and unusual items
- Environmental accruals were $16.5 million. The company said reasonably possible undiscounted costs could exceed accruals by up to an estimated $11.6 million; remediation may continue for 30 years or more, and estimates may change.
- Two customers represented 24% and 19% of Q3 sales; one customer accounted for 33% of receivables at quarter-end. The top five aluminum suppliers provided 81% of Q3 primary aluminum supply.
- Approximately 35% of employees were covered by collective bargaining agreements expiring within one year of September 30, 2019. Commodity and energy price movements, hedging outcomes, end-market cycles, customer concentration, and operational downtime are material sensitivities.
- Non-run-rate items totaled $3.7 million in Q3 and $8.0 million for nine months in 2019, including LIFO adjustments, derivative mark-to-market effects, workers’ compensation discounting, and environmental expenses.
- The company adopted lease accounting standard ASC 842 in 2019, recording operating lease assets and liabilities; it reported no material earnings or cash-flow impact. No material developments in legal proceedings or changes to disclosed risk factors were reported.
Important facts for investors to verify
- Whether aerospace demand and the Trentwood modernization translate into sustained shipment growth and capacity improvements, and how Boeing 737 MAX timing affects orders.
- The actual financial and operating impact of the GM strike, automotive program delays, and continued weakness or destocking in general engineering.
- Whether management achieves its 2019 VAR-growth and Adjusted EBITDA-margin outlook, considering the stated Q4 risks.
- Environmental remediation costs versus the $16.5 million accrual, including the stated potential excess of up to $11.6 million.
- Customer and supplier concentration, labor-agreement expirations, and the company’s ability to sustain liquidity, capital spending, dividends, and repurchases.