Kaiser Aluminum Corporation — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2015. Kaiser manufactures semi-fabricated specialty aluminum products, primarily for aerospace/high-strength, automotive, general engineering and other industrial markets. It operates one reportable segment, Fabricated Products.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $367.2 million | $344.1 million | $738.9 million | $679.2 million |
| Operating income (loss) | $37.0 million | $46.4 million | $(421.6) million | $78.5 million |
| Net income (loss) | $20.2 million | $24.5 million | $(272.0) million | $40.3 million |
| Diluted EPS | $1.11 | $1.33 | $(15.78) | $2.18 |
| Operating cash flow | Not separately provided for the quarter | $48.3 million | $71.3 million |
Q2 sales rose 7% year over year, reflecting 5% higher shipments and a 1% increase in average realized sales price per pound. Shipments reached 159.8 million pounds, up 5%. Reported Q2 operating income was about 10.1% of sales; cost of products sold excluding depreciation, amortization and other items was 80% of sales, unchanged from Q2 2014. Fabricated Products segment operating income was $50.6 million versus $50.2 million; excluding disclosed non-run-rate items, it was $55.7 million versus $48.4 million.
For the first half, the reported loss principally reflects a $493.8 million loss associated with removing Union VEBA net assets and related balances from the accounts. The company reported a $163.8 million income tax benefit for the half, including a $184.4 million benefit related to that accounting change. The filing characterizes the VEBA-related loss as non-cash; the net loss attributable to the removal was $307.8 million after tax.
At June 30, cash and cash equivalents were $54.3 million, short-term investments $30.0 million, and net availability under the revolving facility $267.1 million, for total reported liquidity of $351.4 million, down from $560.8 million at year-end 2014. Six-month capital expenditures were $22.9 million; operating cash flow less capital expenditures was $25.4 million. Total debt was $225.0 million in 8.25% senior notes due 2020; the $175.0 million principal of convertible notes was settled in April. No revolver borrowings were outstanding. Current assets were $546.5 million and current liabilities $163.5 million.
Material changes versus the prior comparable period
- Q2 Fabricated Products shipments rose 5%; aerospace/high-strength shipments increased 4% and automotive extrusions 21%. The company reported record quarterly shipments for both categories.
- First-half sales increased 9%, with shipments up 5% and average realized sales price per pound up 4%. Value-added revenue for the half increased to $400.6 million from $375.2 million.
- Q2 net income declined to $20.2 million from $24.5 million, despite higher sales. First-half results turned to a substantial reported loss because of the Union VEBA accounting change.
- Liquidity fell mainly due to the convertible-note settlement, capital spending, share repurchases, dividends and VEBA contributions, partly offset by operating cash and proceeds from securities sales.
Outlook, commentary, risks and unusual items
- Management expected year-over-year value-added revenue growth of 7% to 9%. It cited record commercial aerospace build rates, a strong order book, heat-treat plate lead times extending into 2016, and growth in automotive extrusion programs.
- Management expected seasonal demand weakness and higher major-maintenance costs in the second half of 2015, including about 10 days of planned Trentwood downtime in Q3. It anticipated 2015 capital spending of $50 million to $60 million, primarily supporting automotive extrusion capacity.
- Management noted potential increased import competition for general engineering plate in 2016; aerospace and general engineering heat-treat plate prices were expected to remain below 2012–2013 levels. The filing cautions that interim results are not necessarily indicative of full-year results.
- The company accrued $19.5 million for environmental remediation. It considered additional costs of up to $25.1 million reasonably possible over the remediation period; remediation and monitoring could extend 30 or more years, and estimates may change.
- Derivative exposures include aluminum, energy and foreign currency. The net fair value of derivatives was a $17.3 million liability; certain agreements may require additional collateral if liquidity falls below specified thresholds. One customer represented 25% of Q2 sales, and a second represented 10%.
- The company said its liquidity sources should be sufficient for at least the next 12 months, while noting funding depends on operating performance and other factors. The revolver was scheduled to mature in September 2016. The next quarterly dividend of $0.40 per share had been declared after quarter-end.
Important facts for investors to verify
- How much of the reported first-half loss is attributable to the non-cash Union VEBA accounting change, and what ongoing cash contribution obligations remain? The company estimated $47.0 million of remaining Union VEBA contributions through September 2017.
- Whether the 7%–9% value-added revenue growth outlook and $50–$60 million capital-spending expectation were achieved, including the effects of maintenance downtime and competition.
- Liquidity and cash generation after the convertible-note settlement, repurchases and dividends; confirm revolver availability and the September 2016 maturity.
- Potential revisions to the $19.5 million environmental accrual, the reasonably possible additional exposure, and the progress of remediation plans and regulatory approvals.
- Effects of customer concentration, aluminum and energy price movements, derivative collateral requirements, and warrant settlements that began July 1, 2015.