Kaiser Aluminum Corporation — Q2 2017 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2017. Kaiser manufactures specialty semi-fabricated aluminum products for aerospace and high strength, automotive, general engineering, and other industrial markets; it reports one operating segment, Fabricated Products.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $356.3 million | $334.9 million | $711.6 million | $678.1 million |
| Operating income | $11.4 million | $57.9 million | $70.9 million | $102.7 million |
| Net income | $4.7 million | $26.0 million | $40.7 million | $52.3 million |
| Diluted EPS | $0.27 | $1.43 | $2.34 | $2.87 |
- Sales increased 6% in Q2 and 5% for the first half. Shipment volume rose 3% in both periods; higher metal costs lifted reported sales, while value-added revenue per pound declined 5%.
- Calculated operating margins were approximately 3.2% in Q2 2017 versus 17.3% in Q2 2016, and 10.0% versus 15.1% for the six-month periods. The Q2 decline included an $18.4 million goodwill impairment and an $11.9 million unrealized derivative loss, compared with a $10.9 million unrealized gain a year earlier.
- Fabricated Products operating income excluding the company’s identified non-run-rate items was $57.5 million in Q2 versus $59.1 million, and $113.5 million for six months versus $118.1 million. The filing attributes the decreases chiefly to lower sales margins and product mix, partly offset by favorable scrap spreads and cost improvements.
- Six-month operating cash flow was $73.1 million, capital expenditures were $39.7 million, and cash flow after capital expenditures was $33.4 million. Financing used $86.9 million, including $64.4 million for share repurchases and $17.9 million for dividends and equivalents.
- At June 30, cash and cash equivalents were $57.1 million and short-term investments were $175.7 million. Total liquidity, including $286.8 million of net revolver availability, was $519.6 million. Long-term debt was $369.2 million, principally the 5.875% senior notes due 2024; there were no revolver borrowings.
- Current assets were $615.8 million and current liabilities $156.3 million. The company declared a $0.50-per-share dividend after quarter-end, payable in August.
Changes, outlook, and risks
- General engineering and automotive shipments strengthened; aerospace shipments fell amid supply-chain destocking. Q2 shipments rose 5% in general engineering and 9% in automotive, while Aero/HS shipments declined 2%. Management cited temporary plate capacity constraints during Trentwood project work.
- The $18.4 million goodwill impairment related to the Chandler, Arizona extrusion facility. Management cited lower expected demand for hard-alloy extruded shapes, including reduced wide-body aircraft build rates, substitution toward composites, titanium or plate, and continued low business-jet build rates.
- Management maintained its 2017 outlook: Aero/HS full-year shipments expected to be similar to 2016; automotive shipments expected to grow at a double-digit rate and value-added revenue at a mid-single-digit rate. It expects aerospace destocking to be largely completed in 2017, though isolated inventory overhang may persist into 2018. Management anticipated normal seasonality, about $4.0 million of Trentwood major maintenance in the second half, and approximately $80 million of 2017 capital spending.
- The multi-year Trentwood modernization initiative totals $150 million; approximately half had been spent by June 30. Normal operations and material flows were expected to resume by the end of Q3, with benefits beginning later in the year.
- Environmental remediation accruals were $16.9 million; reasonably possible additional costs could reach $12.2 million over the remediation period, which may extend 30 years or more. The final Union VEBA contribution, payable in 2018, is variable and capped at $12.8 million.
- Customer and supplier concentration is notable: two customers represented 28% and 12% of Q2 sales; the top five primary-aluminum suppliers provided 80% of first-half supply. Results are also exposed to aerospace and automotive demand, product mix, metal and energy prices, and hedging effects. Management stated liquidity should be sufficient for at least 12 months, subject to operating and market conditions.
Investor verification priorities
- Assess whether aerospace destocking, aircraft build rates, and Chandler’s lower extrusion demand assumptions persist or change.
- Track value-added revenue and margins separately from metal-price-driven sales growth, including derivative mark-to-market volatility.
- Verify Trentwood project timing, execution, expected capacity and quality benefits, and the planned capital spending.
- Monitor environmental remediation estimates, the final VEBA payment, customer concentration, and available liquidity after repurchases and dividends.