Kaiser Aluminum Corporation — FY2017 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2017, with unaudited quarterly data. Kaiser manufactures specialty semi-fabricated aluminum products for aerospace/high strength, automotive, general engineering and other industrial markets. It reports one operating segment, Fabricated Products, and seeks to pass aluminum price changes through to customers.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Shipments | 625.7 million lbs | 614.3 million lbs |
| Net sales | $1,397.5 million | $1,330.6 million |
| Value added revenue | $786.3 million | $813.0 million |
| Operating income | $150.7 million | $177.8 million |
| Net income | $45.4 million | $91.7 million |
| Diluted EPS | $2.63 | $5.09 |
| Cash from operations | $141.5 million | $165.6 million |
| Capital expenditures | $75.5 million | $76.1 million |
Sales increased 5.0%, reflecting shipment growth and higher metal prices, while value added revenue fell 3.3%. Operating margin was approximately 10.8%, versus 13.4% in 2016; net margin was approximately 3.2%, versus 6.9%. Segment operating income excluding management-defined non-run-rate items was $205.2 million, down from $219.0 million.
Performance varied by end market: Aero/HS shipments declined 4% to 233.0 million lbs and sales fell to $653.7 million; Automotive Extrusions shipments rose 9% to 101.0 million lbs and sales increased to $217.3 million; GE shipments rose 6% to 264.7 million lbs and sales increased to $476.2 million. Other-product shipments declined to 27.0 million lbs.
Liquidity, debt and capital returns
- Year-end liquidity was $526.7 million: $51.1 million cash, $183.7 million short-term investments and $291.9 million net revolver availability. No revolver borrowings were outstanding.
- Long-term notes had $375.0 million face value, 5.875% interest and maturity in 2024; balance-sheet carrying value was $369.6 million. The revolving credit facility provides up to $300 million and matures in December 2020.
- Cash dividends paid were $35.0 million ($2.00 per share); the company repurchased 938,680 shares for $77.8 million. The board raised the quarterly dividend to $0.55 per share in early 2018.
- Operating cash flow declined approximately 15% year over year. The filing states that available liquidity and operating cash generation are expected to cover at least the next 12 months’ requirements.
Material changes and unusual items
- Reported net income included an $18.4 million non-cash goodwill impairment related to the Chandler, Arizona extrusion facility, following weaker expected demand for hard-alloy shapes.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21% and drove $37.2 million of incremental tax expense, principally from remeasuring deferred tax assets. The resulting 2017 effective tax rate was 65.9%; management estimated a longer-term effective rate in the mid-20% range.
- Higher metal costs and competitive price pressure compressed margins on higher-value products; aerospace destocking and construction disruption at Trentwood constrained Aero/HS shipments. Favorable scrap pricing and manufacturing efficiencies partly offset these pressures.
- Fourth-quarter 2017 net sales were $353.1 million, operating income $40.0 million and net loss $15.2 million, compared with fourth-quarter 2016 sales of $331.9 million and net income of $24.5 million. The 2017 quarter included the tax-law impact.
- Environmental accruals were $16.6 million. The company said reasonably possible costs could exceed accruals by up to an estimated $12.5 million over the remediation period; remediation may continue for 30 years or more.
Outlook, commentary and risks
Management expected 2018 total shipments and value added revenue to grow at a mid-single-digit rate. It forecast mid-single-digit growth in Aero/HS shipments as aerospace destocking moderates, and in automotive shipments and value added revenue; North American vehicle builds were expected to rise 1%–2%. The company anticipated continued price pressure and higher contained metal costs. Planned 2018 capital spending was approximately $80 million; the Trentwood modernization is a five-year, $150 million program, with about 40% remaining at year-end 2017.
Key risks include cyclical aerospace and automotive demand, customer inventory destocking, competition and import pricing, reliance on major customers (Reliance represented 27% and Boeing 12% of 2017 sales), aluminum/scrap and energy cost exposure, production disruption concentrated at Trentwood, labor negotiations and multi-employer pension exposure, environmental remediation, and debt covenant or liquidity constraints. Kaiser’s hedging can reduce commodity exposure but may create mark-to-market volatility and collateral needs.
Important facts for investors to verify
- Whether aerospace destocking eased and Aero/HS shipment growth tracked management’s 2018 outlook.
- Whether value-added margins recovered despite competitive pricing and higher metal costs.
- Progress, remaining cost and realized capacity/quality benefits from the Trentwood modernization.
- Final tax accounting under the Tax Act and the effect of the expected lower tax rate and tax attributes.
- Environmental remediation estimates, particularly Trentwood groundwater work and the Newark study.
- Customer concentration, revolver availability and compliance with debt and dividend restrictions.
The filing reports effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.