Kaiser Aluminum Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Kaiser manufactures semi-fabricated specialty aluminum products, primarily for aerospace, automotive, general engineering and other industrial markets.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $336.4 million | $338.9 million | $1,075.3 million | $1,018.1 million |
| Operating income (loss) | $40.5 million | $32.6 million | $(381.1) million | $111.1 million |
| Net income (loss) | $22.1 million | $15.9 million | $(249.9) million | $56.2 million |
| Diluted EPS | $1.21 | $0.85 | $(14.55) | $3.02 |
| Cash from operating activities | Not presented by quarter | $108.9 million | $103.7 million |
Q3 operating margin was approximately 12.0%, versus 9.6% a year earlier. Nine-month reported results were dominated by a $490.9 million loss on removal of Union VEBA net assets; the filing describes this as a non-cash accounting charge. A related $184.4 million tax benefit was recorded.
- Cash and liquidity: Cash and cash equivalents were $82.6 million and short-term investments $30.0 million at September 30, down from $177.7 million and $114.0 million, respectively, at year-end 2014. Total reported liquidity, including $239.1 million of net revolver availability, was $351.7 million.
- Cash flow and investment: Nine-month operating cash flow was $108.9 million; capital expenditures were $38.4 million. Financing activities used $249.1 million, including settlement of the convertible notes, share repurchases and dividends. Ending cash was $82.6 million.
- Debt: $218.9 million principal amount of 8.25% Senior Notes remained outstanding; no revolving-credit borrowings were outstanding. The $175.0 million convertible notes were settled in April 2015. The $300 million revolving facility was due to mature in September 2016.
- Margins and volume: Q3 shipments rose 4% to 150.5 million pounds, while sales fell 1%, reflecting a 5% decline in average realized selling price per pound. Value-added revenue increased to $199.3 million from $179.8 million. Nine-month shipments rose 5% to 468.2 million pounds and value-added revenue rose to $599.9 million from $555.0 million.
Material changes and management commentary
- Q3 Fabricated Products operating income increased to $47.3 million from $35.6 million. Excluding the company’s identified non-run-rate items, it was $46.5 million versus $42.4 million. The improvement reflected better pricing and product mix and stronger automotive shipments, partly offset by the planned Trentwood maintenance outage and automotive production inefficiencies.
- Nine-month Fabricated Products operating income was $142.8 million, versus $121.2 million; excluding identified non-run-rate items, it was $150.8 million versus $128.8 million.
- Automotive Extrusions shipments rose 24% in Q3 and 19% for the nine-month period. Aerospace/high-strength shipments were flat in Q3 and up 4% year to date.
- Management expected 2015 value-added revenue growth at the high end of its 7%–9% year-over-year outlook. It expected normal Q4 seasonal weakness, partly offset by improved Trentwood throughput and manufacturing efficiency. Planned maintenance and related costs in the second half were expected to exceed first-half costs by $8–$10 million.
- For 2016, management anticipated solid top-line growth, led by aerospace and automotive shipments, continued double-digit value-added revenue growth in automotive extrusions, and improved manufacturing efficiencies. The heat-treat plate order book and lead times extended well into the first half of 2016.
Risks, contingencies and unusual items
- Environmental accruals totaled $18.8 million. The company said reasonably possible additional undiscounted costs could reach $24.7 million over the remediation period; remediation and monitoring may continue for 30 years or more. Estimates may change as regulatory reviews and studies progress.
- Aluminum, energy and foreign-exchange hedges expose results to mark-to-market volatility and may require additional collateral if specified liquidity thresholds are breached. Q3 included $1.7 million of unrealized derivative losses; nine-month derivative losses were $7.7 million.
- One customer represented 25% of Fabricated Products sales in Q3 and 25% for the first nine months of 2015. One customer represented 17% of trade receivables at September 30.
- Approximately 63% of employees were covered by collective bargaining agreements; 5% of employees were under agreements expiring within one year of September 30.
- After quarter-end through October 19, the company repurchased $21.1 million principal amount of Senior Notes at approximately 107.5% of face value. It also declared a $0.40-per-share dividend payable in November.
- Management stated it believed available liquidity and operating cash generation would fund requirements and planned investment for at least the next 12 months, while noting results depend on economic conditions and other factors beyond its control.
Important facts for investors to verify
- How much of the reported nine-month loss reflects the Union VEBA accounting change, and what are the remaining cash contribution obligations? The filing estimated $44.1 million of variable contributions through September 2017.
- Whether the Q4 and 2016 shipment, value-added revenue and efficiency outlooks were achieved, particularly given maintenance effects and volatile automotive order patterns.
- Liquidity after post-quarter debt repurchases, dividends, capital spending and any collateral requirements on derivatives; also assess the September 2016 revolver maturity.
- Potential changes in environmental remediation estimates and customer concentration, especially the customer accounting for 25% of sales.