Kaiser Aluminum Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Kaiser Aluminum manufactures semi-fabricated specialty aluminum products for aerospace/high strength, automotive, general engineering and other industrial markets. It operates one reportable segment, Fabricated Products.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $334.9 million | $367.2 million | $678.1 million | $738.9 million |
| Operating income (loss) | $57.9 million | $37.0 million | $102.7 million | $(421.6) million |
| Net income (loss) | $26.0 million | $20.2 million | $52.3 million | $(272.0) million |
| Diluted EPS | $1.43 | $1.11 | $2.87 | $(15.78) |
| Operating cash flow | — | $72.1 million | $48.3 million |
- Q2 sales fell 9% year over year, reflecting a 6% decline in average realized sales price per pound and a 3% decline in shipments. Lower metal costs drove much of the sales-price decrease; value added revenue per pound increased 5%.
- Q2 cost of products sold, excluding depreciation and other items, declined to 75% of sales from 80%. Operating income improved despite lower sales, supported by pricing, product mix, lower contained metal costs and manufacturing efficiencies.
- Fabricated Products segment operating income excluding non-run-rate items was $59.1 million in Q2 versus $55.7 million; for the six months it was $118.1 million versus $104.3 million. Reported 2015 first-half results were heavily affected by the $493.8 million Union VEBA removal loss.
- Q2 dividend declared per share was $0.45, versus $0.40 a year earlier. A further $0.45-per-share dividend was declared July 15 for payment in August.
Financial position, debt and liquidity
- At June 30, cash and cash equivalents were $195.3 million and short-term investments were $72.0 million, compared with $72.5 million and $30.0 million, respectively, at year-end 2015. Current assets were $640.4 million and current liabilities $153.0 million.
- Total liquidity, including $280.3 million of net revolver availability, was $547.6 million. The $300 million revolving facility had no borrowings and matures in December 2020.
- In May, the company issued $375 million of 5.875% senior notes due 2024. It redeemed the remaining $197.8 million principal of its 8.25% notes in June. Long-term debt was $368.2 million at June 30, versus $194.6 million at December 31, 2015. The redemption produced an $11.1 million extinguishment loss, including premium and unamortized issuance costs.
- Operating cash flow was $72.1 million; capital expenditures were $42.3 million, versus $22.9 million in the prior-year half. Financing cash flow was $135.4 million, principally reflecting the new notes and repayment of the old notes.
Outlook, commentary and notable items
- Management reiterated full-year value added revenue growth of 3%–5% year over year, with improvement in operating income excluding non-run-rate items and sales margin, supported by sales growth and manufacturing efficiencies.
- Aero/HS value added revenue outlook was revised to slightly above 5% year-over-year growth. Automotive Extrusions growth outlook was reduced from 10% to approximately 6% because one program ended earlier than expected and another ramped more slowly.
- Management anticipated normal seasonal demand weakness in Q3 and Q4; import pressure on general engineering plate was expected to weigh on prices and margins. Planned Q3 major maintenance expense was expected to be $5–$6 million above the quarterly run-rate for the first half. Full-year capital spending was expected to be approximately $80 million, including a multi-year $150 million Trentwood modernization and expansion project.
- Environmental accruals were $17.8 million; reasonably possible costs could exceed the accrual by up to an estimated $24.7 million over the remediation period. Trentwood groundwater treatment testing was underway, and Newark remediation estimates remained subject to further study and regulatory review.
- Customer concentration is significant: in Q2, one customer represented 27% of sales and another 10%. Approximately 63% of employees were covered by collective bargaining agreements; about 6% of employees were covered by agreements expiring within one year.
- The company adopted a tax-asset rights plan and extended stock-transfer restrictions to help preserve tax attributes. The plan and restrictions may constrain certain share transactions and could hinder the market for the common stock. Debt covenants also restrict certain activities. Management said available liquidity and expected operating funds should cover requirements for at least 12 months, subject to operating performance and other factors.
- Management identified aluminum, energy and foreign-currency exposures and uses hedges. A $0.10-per-pound aluminum price decrease was estimated to cause an $18.2 million unrealized mark-to-market loss on June 30 hedge positions; a $1 decrease in natural gas prices per MMBtu was estimated to cause a $5.9 million unrealized loss.
Most important facts for investors to verify
- Whether the reiterated full-year outlook is achieved given seasonal softness, import pressure and the revised automotive growth forecast.
- Underlying segment performance excluding derivative mark-to-market effects, inventory write-downs and other non-run-rate items.
- Execution, timing and expected returns of the Trentwood project, planned capital spending and Q3 maintenance costs.
- Environmental remediation estimates and the potential for costs above the recorded accrual.
- Debt-service capacity, covenant terms and the practical availability of liquidity; also confirm the impact of the tax-asset rights plan and transfer restrictions on shareholders.
- Customer concentration and the status of labor agreements approaching expiration.