Kaiser Aluminum Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Kaiser manufactures semi-fabricated specialty aluminum products for aerospace/high-strength, general engineering, automotive, and other industrial markets. It reported one operating segment, Fabricated Products.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $337.4 million | $365.4 million |
| Operating income | $50.0 million | $46.2 million |
| Net income | $33.5 million | $26.5 million |
| Diluted EPS | $1.73 | $1.38 |
| Operating cash flow | $6.3 million | $35.0 million |
| Capital expenditures | $9.3 million | $9.0 million |
- Sales declined about 8%; shipments fell 11% to 140.0 million pounds. Average realized value-added revenue rose to $1.34 per pound from $1.24.
- Operating margin was approximately 14.8%, versus 12.6%. Fabricated Products operating income was $55.2 million, compared with $54.1 million; excluding identified non-run-rate items, it was $51.5 million versus $48.9 million.
- Cash and cash equivalents were $248.0 million at quarter-end, with $85.6 million in short-term investments. Total liquidity, including net revolver availability, was $612.7 million.
- Long-term debt was $382.3 million: $225.0 million of 8.25% senior notes due 2020 and $157.3 million carrying value of 4.5% cash convertible notes due 2015. The $300 million revolving facility had no borrowings and $279.1 million net availability.
- Current assets were $757.5 million and current liabilities $157.2 million. Cash declined $25.4 million during the quarter.
Changes versus prior period
- Lower shipments and sales reflected a slow general manufacturing economy, inventory overhang in some aerospace extrusion products, and reduced shipments across general engineering, automotive, and other products. Aero/high-strength shipments declined 4% despite management’s characterization of aerospace demand as strong.
- Net income increased despite lower sales, supported by improved operating income and a lower effective tax rate: 19.7% versus 38.1%. The 2013 tax provision included a $7.5 million benefit from reduced uncertain tax benefits following a Canadian tax-authority settlement.
- Interest expense rose to $9.3 million from $4.1 million, primarily reflecting the senior notes issued in May 2012.
- Operating cash flow decreased to $6.3 million, with working-capital uses and the timing of corporate payments among the factors. The company paid a $20.0 million variable VEBA contribution relating to 2012.
Outlook, commentary, and risks
- Management anticipated continued demand headwinds in Q2 and higher planned capital and project expense, while expecting first-half 2013 value-added revenue and adjusted EBITDA margins to be comparable to first-half 2012. It remained positive on long-term growth, particularly in aerospace and automotive. No specific full-year earnings guidance was provided.
- Management expected approximately $80 million of 2013 Fabricated Products capital expenditures and investments, including a $35 million Trentwood casting unit and projects to expand heat-treated plate capacity and support automotive programs.
- The company said available liquidity and expected operating funds should cover requirements for at least 12 months, while noting performance depends on economic conditions and other factors beyond its control.
- Environmental accruals were $22.0 million, primarily including Trentwood remediation. The company estimated reasonably possible additional costs of up to $19.1 million over 30 years; estimates could change as remediation plans and approvals develop.
- Key exposures include aluminum, energy, foreign exchange, market demand and product mix. Hedging substantially reduced expected natural-gas price exposure for 88% of remaining 2013 purchases, 83% of 2014 purchases, and 48% of 2015 purchases.
- Other notable items: a $4.5 million customer payment in lieu of minimum multi-year contract volumes; an expected $7.9 million Canadian tax refund; and the announced closure of Anglesey’s remelt and casting operations, which management did not expect to have a financial impact. The filing added cybersecurity and IT-system disruption as a risk factor.
Important facts for investors to verify
- Whether the Q2 demand headwinds and shipment weakness persisted, particularly in general engineering and aerospace extrusions.
- How much of Q1 earnings and tax-rate improvement came from the customer payment and Canadian tax settlement, and whether the expected refund was received.
- Whether operating cash flow recovers after Q1 working-capital needs and the VEBA contribution, and how planned capital spending affects liquidity.
- Progress, regulatory approvals, and potential cost changes for Trentwood remediation, including the possible additional $19.1 million exposure.
- Execution and returns from the announced capacity investments and the planned share repurchases and dividends.