Kaiser Aluminum Corporation — Q3 2016 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2016. Kaiser manufactures semi-fabricated specialty aluminum products for aerospace/high-strength, automotive, general engineering and other industrial markets, operating one reportable segment, Fabricated Products, across 12 facilities in the U.S. and Canada.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $320.6 million | $336.4 million | $998.7 million | $1,075.3 million |
| Operating income (loss) | $29.8 million | $40.5 million | $132.5 million | $(381.1) million |
| Net income (loss) | $14.9 million | $22.1 million | $67.2 million | $(249.9) million |
| Diluted EPS | $0.82 | $1.21 | $3.70 | $(14.55) |
| Operating cash flow | Not separately stated | Not separately stated | $106.6 million | $108.9 million |
| Capital expenditures | Not separately stated | Not separately stated | $57.4 million | $38.4 million |
- Q3 operating margin was approximately 9.3%, versus 12.0% a year earlier. Cost of products sold excluding depreciation, amortization and other items was 79% of sales in both quarters.
- Fabricated Products segment operating income was $42.1 million in Q3 versus $47.3 million. Excluding the company’s identified non-run-rate items, segment operating income was $47.0 million versus $46.5 million. For the first nine months, adjusted segment operating income was $165.1 million versus $150.8 million.
- Nine-month 2015 results included a $490.9 million loss related to removal of Union VEBA net assets and a related $184.4 million tax benefit. This unusually large item substantially affects the year-over-year comparison; it is not representative of recurring operating performance.
- Q3 sales declined 5%, reflecting a 4% decrease in average realized price per pound and a 1% decrease in shipments. Nine-month sales declined 7%, with a 6% decrease in realized price and a 1% decrease in shipments. The lower metal-price component reduced reported sales; nine-month value-added revenue per pound increased to $1.32 from $1.28.
- Product mix was mixed: Q3 Aero/HS, automotive extrusion and other product sales declined, while general engineering sales increased. Nine-month shipments were 462.6 million pounds, compared with 468.2 million.
Cash, debt and liquidity
- At September 30, 2016, cash and cash equivalents were $72.9 million and short-term investments were $201.0 million. Total liquidity, including $280.3 million of net revolving-credit availability, was $554.2 million, versus $383.3 million at year-end 2015.
- Long-term debt was $368.5 million; there were no revolving-credit borrowings and $7.3 million of letters of credit. The $300 million revolving facility matures in December 2020.
- In May 2016, the company issued $375 million of 5.875% senior notes due 2024 and used proceeds in part to redeem the remaining $197.8 million principal amount of its 8.25% notes. Redemption resulted in an $11.1 million loss on extinguishment, including premium and unamortized issuance costs.
- Nine-month operating cash flow was $106.6 million. Investing activities used $228.5 million, including $201.1 million for available-for-sale securities and $57.4 million of capital expenditures. Financing activities provided $122.3 million, principally reflecting the new note issuance and repayment of the older notes.
- The company paid $24.4 million in dividends and repurchased $13.8 million of shares during the first nine months. It declared a further $0.45-per-share dividend after quarter-end, payable in November 2016.
Outlook, commentary and key risks
- For Q4 2016, management expected delivery of higher-than-normal in-transit plate inventory, but also seasonal demand weakness, year-end uncertainty and increasing competitive pricing pressure on non-contract general engineering and aerospace plate orders.
- For full-year 2016, management maintained an expectation of approximately 5% year-over-year value-added revenue growth in Aero/HS products, reduced its automotive extrusion growth outlook from 6% to approximately 2%, and expected total value-added revenue growth of approximately 3%–4%. It expected operating income excluding non-run-rate items and sales margin to improve through sales growth and manufacturing efficiencies.
- For 2017, management expected aerospace industry demand to decline slightly from 2016 amid supply-chain destocking, with market equilibrium anticipated in 2018 and Aero/HS industry demand growth of about 5% CAGR from 2016 to 2019. It anticipated double-digit 2017 value-added revenue growth in automotive extrusions as programs launch and ramp up.
- Planned 2016 capital spending was approximately $80 million. A multi-year $150 million Trentwood modernization project is intended to improve efficiency, quality and capacity; benefits were expected to begin over the next 18 months. Management stated liquidity and operating cash generation should fund requirements for at least the next 12 months, while noting performance depends on economic and other factors beyond its control.
- Risks include cyclicality and demand in aerospace, automotive and industrial markets; competitive pricing; customer and supplier concentration; aluminum, energy and foreign-exchange exposures; and execution of capital projects. Two customers accounted for 25% and 11% of Q3 sales; the top five suppliers provided 84% of primary aluminum supply.
- Environmental accruals were $17.5 million. The company stated reasonably possible additional undiscounted costs could total up to $12.3 million over the remediation period, with estimates subject to change as remediation studies and regulatory reviews progress. Management considered other pending legal matters adequately accrued and not expected to materially affect consolidated results or liquidity.
- A loss of a customer triggered a $2.6 million non-cash impairment of a customer-relationship intangible asset in Q3. Derivative positions expose the company to market-value changes; a $0.10-per-pound decline in LME aluminum was estimated to cause a $15.8 million unrealized mark-to-market loss, all else equal.
Important facts for investors to verify
- Whether aerospace supply-chain destocking and shorter plate lead times affect 2017 shipments, pricing and the projected 2018 recovery.
- Whether automotive program launches support management’s revised 2016 outlook and anticipated double-digit 2017 growth.
- Progress, spending and realized efficiency or capacity benefits from the Trentwood modernization and other expansion projects.
- Customer concentration, competitive pricing, and the level and volatility of derivative gains or losses and inventory valuation adjustments.
- Environmental remediation estimates, Union VEBA contribution liability, debt covenant capacity, and restrictions associated with the tax-asset rights plan and stock-transfer rules.