Kaiser Aluminum Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Kaiser manufactures semi-fabricated specialty aluminum products for aerospace and high strength, automotive, general engineering, and other industrial markets. It reports one operating segment, Fabricated Products.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $415.4 million | $356.3 million | $803.4 million | $711.6 million |
| Operating income | $34.7 million | $12.5 million | $71.8 million | $71.8 million |
| Net income | $20.7 million | $4.7 million | $46.4 million | $40.7 million |
| Diluted EPS | $1.22 | $0.27 | $2.74 | $2.34 |
| Operating cash flow | — | $84.0 million | $73.1 million |
- Q2 sales increased 17% year over year, reflecting 6% higher shipments and 10% higher average realized price per pound. Six-month sales rose 13%, with shipments up 4% and average realized price up 9%.
- Q2 cost of products sold was 83% of sales, versus 81% a year earlier. Management cited higher metal and freight costs and incomplete pass-through of metal cost increases; average value-added revenue per pound declined 2% in both the quarter and first half.
- Fabricated Products operating income excluding non-run-rate items was $57.3 million in Q2 versus $57.5 million, and $107.4 million for the first half versus $113.5 million. The prior-year Q2 included an $18.4 million goodwill impairment.
- At June 30, cash and cash equivalents were $164.0 million, short-term investments $71.9 million, and total liquidity including unused revolver capacity $527.8 million. Long-term debt was $370.0 million; no revolver borrowings were outstanding, and net borrowing availability was $291.9 million.
- Six-month capital expenditures were $35.8 million. Cash used for dividends and equivalents was $19.3 million and stock repurchases were $18.9 million. The company reported $84.0 million of operating cash flow, compared with $73.1 million in the prior-year period.
Changes, outlook, and notable items
- Management reported record quarterly shipments, supported by strong demand and capacity from recent investments. General engineering and automotive shipments increased; aerospace shipments were slightly higher in Q2 but lower for the first half.
- The company adopted ASC 606 using the modified retrospective method. The filing reports that adoption increased Q2 2018 net income by $1.1 million but reduced first-half net income by $3.4 million versus presentation without adoption. Prior-year comparisons were not restated.
- Management’s 2018 outlook was unchanged: mid-single-digit growth in shipments and value-added revenue. Demand remained strong in automotive and general engineering; aerospace demand was expected to improve as supply-chain destocking moderated and aircraft production increased.
- Management expected Q2 price increases to benefit Q3, but said much of that benefit would be offset by higher planned second-half maintenance costs, including a planned one-week Trentwood hot-line and large-stretcher outage in Q4. Full-year 2018 capital spending was expected to be approximately $80 million.
- Environmental accruals were $16.5 million. The company said reasonably possible additional undiscounted environmental costs could reach $12.2 million over the remediation period; estimates may change as remediation studies and regulatory reviews progress. It stated pending other legal matters were not expected to materially affect financial position, results, or liquidity.
- Customer and supply concentration are notable: two customers represented 27% and 11% of Q2 sales; the top five aluminum suppliers provided 83% of primary aluminum supply in Q2. The company uses commodity and energy hedges, but metal-price pass-through delays, energy costs, demand cycles, and customer or supplier concentration remain relevant risks.
- The company expects adoption of lease accounting standard ASC 842 in 2019 to have a material impact on its financial statements. The filing reported no material change in risk factors from year-end 2017 and no material developments in reported legal proceedings.
Key facts for investors to verify
- Assess how much reported sales and earnings trends reflect metal-price movements and the ASC 606 accounting change, versus underlying shipment volume and conversion economics.
- Track whether price increases offset metal and freight inflation, and whether anticipated second-half maintenance costs affect margins as management expected.
- Review cash conversion, planned capital spending, and continuing shareholder returns against the company’s liquidity and debt obligations.
- Monitor environmental remediation estimates and regulatory progress at Trentwood and Newark, as well as concentrated customer and aluminum-supplier exposures.
- Reconcile the reported GAAP results with management’s non-GAAP value-added revenue and operating-income measures when reviewing subsequent disclosures.