Kaiser Aluminum Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company produces semi-fabricated specialty aluminum products for aerospace and high strength, automotive, general engineering, and other industrial markets. It reports one operating segment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $255.7 million | $374.9 million | $900.7 million | $1,145.4 million |
| Operating income | $12.3 million | $40.7 million | $62.6 million | $116.1 million |
| Net income | $0.4 million | $25.4 million | $22.9 million | $72.6 million |
| Diluted EPS | $0.02 | $1.57 | $1.44 | $4.47 |
| Adjusted EBITDA | $30.2 million | $56.7 million | $124.0 million | $160.4 million |
| Cash from operating activities | — | $150.7 million | $153.9 million |
Q3 operating margin was approximately 4.8% (10.9% a year earlier); net margin was approximately 0.2% (6.8% a year earlier). For the nine months, operating margin was approximately 7.0% versus 10.1%, and net margin approximately 2.5% versus 6.3%. Adjusted EBITDA is a non-GAAP measure.
Q3 shipments declined 29% to 108.9 million pounds. Value added revenue (VAR), the company’s non-GAAP measure excluding hedged metal cost, was $154.4 million, up from $1.39 to $1.42 per pound but down in total from $214.8 million. Nine-month shipments were 383.1 million pounds, down 19%; VAR was $545.6 million versus $642.4 million.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $750.1 million, versus $264.3 million at December 31, 2019. Total liquidity, including $253.3 million of available revolving-credit capacity, was $1,003.4 million.
- Long-term debt carrying value was $837.6 million, compared with $492.6 million at year-end 2019. The company issued $350 million of 6.50% senior notes due 2025 during 2020; it also had $500 million principal amount of 4.625% notes due 2028. There were no revolver borrowings at September 30.
- Current assets were $1,109.6 million and current liabilities were $142.2 million. Stockholders’ equity was $719.3 million.
- Operating cash flow was $150.7 million and capital expenditures were $37.2 million for the first nine months. Cash dividends paid were $32.7 million. The company declared a $0.67-per-share dividend for Q3 and announced the same amount for payment in November.
Changes and operating drivers
- COVID-19 materially reduced demand, particularly for commercial aerospace products. Q3 sales fell 32% year over year; lower shipment volume accounted for most of the decline. Aerospace/high-strength shipments fell 59% in the quarter.
- Automotive Extrusions rebounded from the prior quarter’s customer shutdowns, with Q3 shipments up 5% year over year. General engineering remained comparatively strong, while other-product sales declined partly due to the planned exit from non-strategic applications.
- Q3 Adjusted EBITDA declined $26.5 million year over year, reflecting lower sales and reduced operating leverage, partly offset by cost reductions. Nine-month Adjusted EBITDA fell $36.4 million.
- Interest expense increased to $12.1 million in Q3 from $5.8 million, and to $28.7 million for the nine months from $17.3 million, principally reflecting the higher debt balance.
Outlook, risks and unusual items
- Management reiterated its second-half 2020 outlook: total VAR expected to decline approximately 10%–15% versus Q2 2020, with Adjusted EBITDA as a percentage of VAR in the mid-teens. It expected continued strength in defense, automotive and general engineering to partly offset weaker commercial aerospace demand.
- Management projected 2020 commercial aerospace VAR approximately 30%–35% below 2019, worse than its prior estimate of a 20%–25% decline, and said a return to 2019 levels could take two to four years. It cited a slow recovery, air-travel weakness, Boeing 737 MAX recertification timing and supply-chain destocking. Automotive build rates were projected to rise from 12.9 million vehicles in 2020 to more than 15.2 million in 2021.
- Management viewed 2020 as the likely business trough, while emphasizing uncertainty. It expected full-year 2020 capital spending of approximately $50–$60 million and said it would resume selected organic investments after limiting spending to critical sustaining projects.
- The company recorded $12.4 million of restructuring costs in the first nine months, with a $6.9 million liability remaining at September 30; cash payments may continue through 2022. It suspended share repurchases in March and made none in Q3.
- Environmental accruals totaled $20.7 million. The company said reasonably possible additional undiscounted costs could reach $11.6 million, including uncertainty around PCB remediation at Trentwood and other sites. It increased the Trentwood accrual by $3.8 million in Q3 and retained a $1.2 million accrual related to a Mead, Washington matter.
- Key risks include the duration and effects of COVID-19 on customers, suppliers, operations and demand; commercial aerospace and automotive downturns; and volatility or ineffectiveness in commodity and currency hedges. Management said it believed liquidity would cover expected requirements for at least the next 12 months, subject to operating performance and economic conditions.
Important facts for investors to verify
- Whether aerospace demand and supply-chain destocking track management’s recovery assumptions, and whether automotive and defense strength offsets continued weakness.
- Progress against the VAR, EBITDA-margin and $50–$60 million capital-spending outlook, as well as the basis for management’s view that 2020 was the trough.
- Debt-service burden and liquidity after the 6.50% notes issuance, including future cash needs and access to revolving-credit availability.
- Changes in environmental remediation estimates, especially Trentwood and Mead, and the potential for costs above recorded accruals.
- Restructuring execution, remaining cash payments, and the impact of lower utilization and manufacturing efficiency on margins.