Kaiser Aluminum Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report; it also provides unaudited fourth-quarter results. Kaiser manufactures specialty semi-fabricated aluminum products for aerospace/high strength, automotive, general engineering and other industrial markets.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $1,514.1 million | $1,585.9 million |
| Shipments | 625.0 million lb | 652.4 million lb |
| Net income | $62.0 million | $91.7 million |
| Diluted EPS | $3.83 | $5.43 |
| Operating income | $125.7 million | $143.6 million |
| Operating margin | 8.3% | 9.1% |
| Value added revenue (VAR; non-GAAP) | $855.5 million | $827.9 million |
| Adjusted EBITDA (non-GAAP) | $212.7 million | $204.8 million |
| Adjusted EBITDA / VAR | 24.9% | 24.7% |
| Operating cash flow | $232.3 million | $150.2 million |
| Capital expenditures | $60.2 million | $74.1 million |
Net sales fell about 5% and shipments about 4%; higher VAR per pound and stronger aerospace mix supported higher VAR and Adjusted EBITDA. Fourth-quarter 2019 net sales were $368.7 million and net loss was $10.6 million, including a $25.2 million goodwill impairment and a $20.3 million debt-extinguishment loss.
At year-end, cash and cash equivalents plus short-term investments were $343.0 million. Total reported liquidity was $695.9 million, including $352.9 million of net revolving-credit availability; there were no revolver borrowings. Debt was $500.0 million principal at face value, consisting of 4.625% senior notes due 2028; the prior $375.0 million 5.875% notes were redeemed in December. The company reported $792.3 million of total liabilities and $733.9 million of stockholders’ equity. The annual dividend declared was $2.40 per share; the board later declared $0.67 per share for the first quarter of 2020.
Material changes versus 2018
- Aero/HS shipments increased 10% to 273.6 million lb, with sales rising to $803.2 million, driven by commercial aerospace supply-chain restocking and military demand.
- Automotive Extrusions shipments declined 10% to 94.3 million lb; sales fell to $190.5 million amid lower build rates, model changeovers, program delays and the General Motors strike.
- GE shipments declined 11% to 236.3 million lb, partly because Trentwood capacity was directed toward aerospace demand and partly because industrial demand and restocking weakened in the second half.
- Other-product shipments declined 36% as Kaiser continued shifting capacity away from non-core applications.
- Adjusted EBITDA increased $7.9 million, but reported net income declined. Results included $25.2 million of non-cash goodwill impairment and $20.3 million of debt-refinancing charges. Trentwood downtime affected Adjusted EBITDA by about $15 million; the GM strike by about $5 million.
- Liquidity increased from $454.3 million to $695.9 million. Operating cash flow improved, aided by inventory reduction and lower receivables. The company issued $500 million of new notes, redeemed the old notes, and entered a new $375 million revolver maturing in October 2024.
Outlook, risks and unusual items
Management’s outlook in the filing expected 2020 total shipments and VAR to increase at a low-single-digit rate year over year, with Adjusted EBITDA margin above 26% of VAR. It expected Aero/HS shipments and VAR to decline by a single digit, partly reflecting the Boeing 737 MAX situation; Automotive Extrusions shipments to grow by double digits as programs launched; and higher GE shipments as semiconductor demand strengthened and destocking eased. These are management expectations, not guarantees.
Kaiser planned 2020 capital spending of approximately $100–$125 million and a multi-year $375 million Trentwood expansion and operational-security program, including a $145 million plate stretcher. The full project was expected to run through 2025 and increase heat-treat plate capacity by about 25%, subject to market conditions.
- Demand and concentration: Exposure to cyclical aerospace, automotive and industrial markets, customer destocking, aircraft production changes, alternative materials and concentrated customers. Reliance and Boeing represented approximately 25% and 17% of 2019 sales, respectively; the five largest customers accounted for about 55%.
- Operations and execution: Trentwood plate production is concentrated at one facility; downtime, project delays, start-up difficulties or failure to realize planned efficiencies could affect results. Automotive program transitions and labor disruptions also pose risks.
- Input costs and liquidity: Metal-price pass-through can lag, while energy, freight and some other costs may not be recoverable from customers. Lower aluminum prices can reduce borrowing-base availability; derivatives introduce market, collateral and counterparty risks.
- Environmental exposure: The company accrued $17.0 million for environmental remediation and said reasonably possible additional costs could be up to $11.6 million over the remediation period. Work at Trentwood and Newark remains subject to further studies, regulatory review and changing estimates.
- Other contingencies and unusual items: The IMT goodwill impairment reflected a longer-than-expected development horizon for additive manufacturing, with Kaiser prioritizing machining opportunities. The auditor identified revenue recognition, environmental contingencies and IMT goodwill valuation as critical audit matters. The audit opinion was unqualified, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether 2020 shipment, VAR and margin expectations were achieved, particularly the assumed offset to Boeing 737 MAX-related aerospace weakness.
- Progress, total cost, timing and capacity benefits of the Trentwood investment program.
- Recovery in automotive programs and GE demand, and whether cost efficiencies offset downtime and pricing pressures.
- Customer concentration, especially Reliance and Boeing, and any changes in receivables concentration or customer demand.
- Environmental remediation estimates and any changes in the $17.0 million accrual or potential additional exposure.
- Debt service, covenant headroom, revolver availability and the sustainability of dividends and share repurchases.