Kaiser Aluminum Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in millions of dollars unless noted. Kaiser produces specialty semi-fabricated aluminum products, primarily for aerospace, automotive and general engineering markets.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $275.7 | $375.3 | $645.0 | $770.5 |
| Operating income | $4.7 | $32.4 | $50.3 | $75.4 |
| Net income (loss) | $(6.6) | $19.2 | $22.5 | $47.2 |
| Diluted EPS | $(0.41) | $1.18 | $1.41 | $2.89 |
| Adjusted EBITDA | $34.4 | $47.5 | $93.8 | $103.7 |
| Value added revenue (VAR) | $174.6 | $209.2 | $391.2 | $427.6 |
- Q2 sales fell 27% year over year as shipments declined 24% and average realized price per pound declined 4%. Six-month sales decreased 16%.
- Q2 operating margin was approximately 1.7%, versus 8.6% a year earlier. Reported results included $11.9 million in restructuring charges.
- Operating cash flow was $94.9 for the first half, compared with $70.5 in 2019; capital expenditures were $31.8. Cash, cash equivalents and restricted cash ended the period at $724.6.
- Cash and cash equivalents were $710.6, with no short-term investments. Total liquidity, including $282.3 of revolving-credit availability net of letters of credit, was $992.9. No revolver borrowings were outstanding.
- Long-term debt was $837.1 on the balance sheet, compared with $492.6 at year-end 2019. The company issued $350.0 of 6.50% unsecured notes due 2025; it also had $500.0 principal amount of 4.625% notes due 2028.
- Current assets were $1,107.7 and current liabilities $150.4 at June 30, 2020. The company declared a $0.67 per-share dividend after quarter-end.
Changes, outlook and risks
- COVID-19 substantially reduced demand, particularly after commercial aircraft production suspensions and temporary North American automotive plant closures. Q2 shipments fell in every reported end-market category; Automotive Extrusions volume declined 58% year over year.
- Management expected full-year VAR for large commercial aerospace and defense applications to be approximately 15%–20% below 2019; together those businesses represented about half of total VAR. For the second half of 2020, management forecast total VAR 10%–15% below Q2, with EBITDA as a percentage of VAR in the mid-teens. It expected Q3 below Q4, partly due to shipment timing and approximately $4.0 million of higher major maintenance costs.
- The company initiated a workforce restructuring plan in Q2; $11.9 million of costs were recorded and $10.5 million remained payable at quarter-end, with cash payments expected through 2022. Capital spending was restricted to critical sustaining projects, then management anticipated 2020 spending of approximately $50–$60 million.
- Environmental accruals totaled $18.2 million. The company said reasonably possible additional undiscounted costs could reach $11.6 million; remediation and monitoring may extend for 30 or more years. A newly recorded $1.9 million accrual related to a USEPA notice concerning property near the former Mead smelter.
- Other principal uncertainties include the duration and severity of COVID-19, customer demand and supply-chain disruption, forecast accuracy and hedge effectiveness, commodity and energy prices, and possible changes in environmental remediation estimates. Management stated available liquidity was expected to cover requirements for at least the next 12 months, subject to operating performance and economic conditions.
Key investor verification points
- Track aerospace and automotive demand, shipment volumes, and whether management’s second-half VAR and EBITDA outlook was achieved.
- Reconcile Adjusted EBITDA and VAR, which are non-GAAP measures, to GAAP results and assess the effect of restructuring and other identified non-run-rate items.
- Review cash generation, capital spending, debt service, and liquidity after the $350 million note issuance; confirm revolver availability and covenant headroom.
- Monitor environmental investigations and remediation, particularly the Trentwood, Newark and Mead matters, and potential costs beyond recorded accruals.
- Assess the effect of lower or delayed customer demand on hedges, including the $8.8 million pretax net mark-to-market loss in AOCI expected to be reclassified into earnings within 12 months.