Kaiser Aluminum Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 22, 2011. This is an annual report, not a standalone fourth-quarter filing. The company manufactures specialty semi-fabricated aluminum products, principally for aerospace, general engineering, automotive, and industrial markets.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $1,079.1 million | $987.0 million |
| Operating income | $44.4 million | $118.7 million |
| Net income | $14.1 million | $70.5 million |
| Diluted EPS | $0.72 | $3.51 |
| Cash from operations | $66.3 million | $127.7 million |
| Capital expenditures | $38.9 million | $59.2 million |
| Cash and equivalents at year-end | $135.6 million | $30.3 million |
Sales rose 9%, while operating income and net income fell substantially. Approximate operating and net margins were 4.1% and 1.3%, respectively, versus 12.0% and 7.1% in 2009. Fabricated Products shipments increased 20% to 514.2 million pounds; segment sales reached $1,078.8 million and segment operating income was $78.6 million. Value-added revenue per pound declined to $1.08 from $1.20, reflecting mix shift and somewhat lower pricing. The effective tax rate was 50.4%.
Fourth-quarter 2010 sales were $265.8 million, operating income was $12.4 million, and net loss was $0.3 million, or $0.02 per share. Fourth-quarter 2009 net income was $24.1 million, or $1.20 per share.
Liquidity, debt, and capital
- Cash was $135.6 million; the $200 million revolving facility had no borrowings and $168.9 million of availability after letters of credit at year-end. The company reported compliance with its covenants.
- Debt included $175 million principal amount of 4.5% cash-settled convertible notes due 2015, plus $13.1 million of other debt. The notes’ balance-sheet carrying value was $141.4 million after discount; reported long-term borrowings, including current amounts, were $188.0 million.
- Operating cash flow declined by $61.4 million year over year, including a $40.4 million increase in inventory in the Fabricated Products business. FY2010 dividends were $0.96 per share, totaling $19.0 million.
- Current assets were $471.4 million and current liabilities $142.3 million. Working capital was $329.1 million; the current ratio was approximately 3.3.
Material changes and unusual items
- Improved economic conditions, reduced distributor destocking, and stronger automotive demand helped lift fabricated shipments. Aerospace shipments increased moderately, but aerospace plate destocking continued.
- Anglesey, in which Kaiser holds 49%, ceased primary smelting in September 2009 after its power contract expired and began remelt/casting operations. Because secondary aluminum sales are reported net, the prior smelting business’s gross sales fell sharply; All Other sales were $0.3 million in 2010 versus $89.9 million in 2009. Kaiser suspended equity-method accounting for Anglesey and expected no resumption or dividends in the next 12 months.
- FY2010 operating income included $13.9 million of environmental expense and $3.9 million of asset impairments; the company reported $100.7 million of operating income excluding its identified non-run-rate items. FY2009 included $80.5 million of non-cash derivative mark-to-market gains, contributing to reported operating income of $118.7 million.
- In March 2010, Kaiser issued $175 million of notes, established a $200 million revolving facility maturing in 2014, bought call options intended to offset cash conversion payments, issued warrants with a $61.36 initial strike, and repurchased approximately 1.2 million shares for $44.2 million.
- Kaiser acquired the Nichols Florence, Alabama assets in August 2010 for $15.7 million in consideration, including a $6.7 million note. The Alexco Chandler, Arizona extrusion acquisition closed January 1, 2011, for $83.3 million net cash consideration; it is a subsequent event, not a 2010 operating contribution.
Outlook, risks, and contingencies
Management expected higher 2011 demand across its markets, including approximately 14% growth in North American automotive build rates, gradual recovery in general engineering, and increased aerospace/high-strength demand. It anticipated a seasonally strong first half and longer-term aerospace growth, while noting that aerospace supply-chain inventory normalization timing remained uncertain. Planned priorities included ramping Kalamazoo, integrating Alexco, and improving manufacturing efficiency. Expected 2011 capital expenditures were $35–$45 million. These are management expectations, not guarantees.
- Environmental accruals were $20.2 million, including a substantial increase related to proposed PCB remediation at Trentwood. The company estimated reasonably possible additional costs of up to $21.3 million over 30 years; the remediation plan remained subject to regulatory review, public comment, and approval.
- Customer concentration is significant: Reliance accounted for approximately 23% of 2010 sales, and the five largest customers approximately 45%. Demand is exposed to aerospace, automotive, industrial and defense cycles, customer destocking, competition, and substitution by other materials.
- Risks include aluminum, energy and freight costs; hedging volatility, margin calls and counterparty performance; debt service and credit-facility covenants; labor negotiations and potentially underfunded multi-employer pension plans; environmental and tax contingencies; and execution/integration of acquisitions and expansion projects.
- The company reported effective internal control over financial reporting and an unqualified independent audit opinion on its financial statements and controls. No material legal proceedings were reported in Item 3.
Investor verification priorities
- Reconcile reported earnings with the unusually large prior-year derivative gains and other non-run-rate items; assess underlying segment profitability and margins.
- Verify the pace of 2011 shipment recovery, particularly aerospace plate inventory normalization, automotive demand, and Kalamazoo utilization.
- Review the final Trentwood remediation agreement and whether environmental costs could exceed the $20.2 million accrual and disclosed $21.3 million possible excess.
- Assess post-Alexco liquidity, acquisition integration, total debt obligations, and the cash-settlement exposure and hedge-counterparty risk of the notes.
- Monitor customer concentration, VEBA contribution obligations, dividend capacity under credit-facility restrictions, and any changes in Anglesey’s status.