Kaiser Aluminum Corporation — Q2 2010 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2010. Kaiser manufactures semi-fabricated specialty aluminum products, primarily through its Fabricated Products segment. Its 49% affiliate, Anglesey, stopped smelting in September 2009 and now operates a secondary-aluminum remelt and casting business. All figures below are in millions of dollars except per-share data, shipments, and where stated otherwise.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $282.4 | $232.1 | $549.9 | $498.0 |
| Operating income | $4.0 | $35.0 | $18.8 | $42.2 |
| Operating margin, approximate | 1.4% | 15.1% | 3.4% | 8.5% |
| Net income | $0.1 | $19.6 | $8.9 | $23.4 |
| Diluted EPS | $0.01 | $0.97 | $0.45 | $1.16 |
| Cash provided by operating activities | Not stated by quarter | $38.6 | $86.6 |
- Sales and operations: Q2 consolidated sales rose 22% year over year; six-month sales rose 10%. Fabricated Products shipments increased 31% in Q2 to 132.7 million pounds and 24% for the first half to 260.6 million pounds. Fabricated Products operating income increased to $33.1 million from $18.6 million for Q2, and to $56.1 million from $32.6 million for the first half.
- Profit drivers: Management attributed improved Fabricated Products results mainly to stronger demand and manufacturing efficiencies. For the first half, efficiency improvements contributed $11.5 million to the segment’s year-over-year operating-income increase, while value-added revenue per pound declined 14%, reflecting product mix and pricing pressures. Consolidated results included $19.0 million of Q2 and $18.7 million of first-half unrealized derivative losses, compared with unrealized gains of $26.6 million and $22.3 million in the respective 2009 periods.
- Cash, liquidity, and debt: Cash and cash equivalents were $134.4 million at June 30, versus $30.3 million at year-end 2009. The company reported $38.6 million of first-half operating cash flow, down from $86.6 million. Capital expenditures were $26.7 million. It issued $175.0 million face amount of 4.5% cash convertible senior notes due 2015; their carrying value was $138.4 million. Other long-term debt was $7.1 million. The $200 million revolving facility had no borrowings and $161.7 million available after letters of credit at quarter-end; the company reported covenant compliance. Management stated net debt was approximately $48 million.
- Balance sheet and shareholder returns: Total assets were $1,274.8 million and stockholders’ equity was $901.4 million. The company repurchased approximately 1.2 million shares for $44.2 million during the first quarter and paid $9.6 million in dividends in the first half. A $0.24-per-share quarterly dividend was declared in July.
Material changes versus the prior comparable period
- Higher Fabricated Products shipments and sales supported stronger segment operating income, but consolidated operating income and net income fell sharply because of the swing from derivative gains to losses, as well as higher interest expense following the March note issuance.
- Anglesey’s smelting-related sales in the 2009 comparison were reported gross; the company now presents sales from Anglesey’s remelt operations net because it acts as agent. This affects comparability of All Other sales and shipment figures.
- First-half 2010 operating cash flow decreased by $48.0 million year over year. The filing cites working-capital investment, including higher inventory and receivables, and lower cash from hedging activities versus 2009.
- The company established a new $200 million revolving facility maturing in March 2014 and issued the 2015 notes, changing its financing structure. It also recognized a $1.9 million impairment associated with the Greenwood, South Carolina facility held for sale.
Outlook, commentary, risks, and contingencies
- Near-term outlook: Management expected Q3 aerospace and high-strength shipments and value-added revenue to be similar to the first-half pace, while general engineering, automotive, and other application shipments and value-added revenue were expected to be lower than first-half levels due to normal seasonal weakness. It anticipated approximately $4 million of seasonal planned major maintenance costs and expected to maintain manufacturing efficiency gains. Management described aerospace destocking as a near-term constraint and expected it to begin abating as production ramps in 2011.
- Investment plans: Management expected 2010 capital expenditures and investments for Fabricated Products of $60–$70 million. The Kalamazoo, Michigan facility was expected to become fully operational in late 2010; $25–$30 million of investment was estimated for that facility during 2010.
- Market and operating risks: Results are sensitive to aluminum prices, product volume and mix, natural gas costs, foreign exchange, and derivative valuations. The filing warns that mark-to-market losses can create substantial non-cash earnings volatility. A $1.00-per-mmbtu change in natural gas prices was estimated to affect annual operating costs by approximately $3.7 million before hedging and customer pass-throughs.
- Debt and liquidity risks: Revolver availability depends on a borrowing base and is subject to covenants, collateral requirements, and restrictions on actions including dividends and share repurchases. Notes are cash-settled, can be put to the company after specified fundamental changes, and carry an approximately 11% effective interest rate despite the 4.5% coupon. Call options were purchased to substantially offset potential conversion payments above principal.
- Environmental and other contingencies: Environmental accruals totaled $7.6 million; management said reasonably possible additional costs could reach $16.9 million, primarily related to historical PCB use and remediation at Trentwood. The company reported various legal matters but said it believed reserves were adequate and pending matters would not materially adversely affect financial position, results, or liquidity. Canadian tax assessments and unrecognized tax benefits also remain relevant; gross unrecognized tax benefits were $15.7 million at June 30.
- Unusual and subsequent items: The Greenwood facility was sold on July 27, 2010 for approximately $4.8 million cash; management expected no material impact on revenue or net income. The Union VEBA sold 1,136,543 shares during the first half and, by July 23, had sold all shares permitted without Board approval for the 12-month period ending March 22, 2011. Management did not anticipate resuming equity-method accounting for Anglesey within the next 12 months.
Most important facts for investors to verify
- Whether volume, value-added pricing, and manufacturing efficiency sustain Fabricated Products profitability as aerospace destocking and seasonal softness develop.
- How much of reported earnings volatility reflects non-cash derivative marks versus realized hedge settlements and underlying operating performance.
- Current borrowing-base availability, revolver covenant headroom, and the cash interest and effective cost of the notes.
- The timing and ultimate cost of Trentwood and other environmental remediation relative to the $7.6 million accrual and disclosed possible excess costs.
- Execution, cost, and operating ramp-up of the Kalamazoo facility, alongside planned maintenance and 2010 capital spending.