Kaiser Aluminum Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in millions of dollars unless otherwise noted. Kaiser manufactures semi-fabricated specialty aluminum products and reports one operating segment, Fabricated Products.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $338.9 | $319.9 | $1,018.1 | $986.2 |
| Operating income | $32.6 | $41.6 | $111.1 | $131.7 |
| Net income | $15.9 | $25.4 | $56.2 | $77.5 |
| Diluted EPS | $0.85 | $1.34 | $3.02 | $4.02 |
| Operating margin | 9.6% | 13.0% | 10.9% | 13.4% |
| Net margin | 4.7% | 7.9% | 5.5% | 7.9% |
- Q3 net sales rose 6%, primarily reflecting a 15% increase in the hedged cost of alloyed metal. Shipments increased 2% to 144.3 million pounds, while value-added revenue declined to $179.8 from $181.9 and value-added revenue per pound fell to $1.25 from $1.29.
- For the first nine months, sales rose 3%; shipments increased 5% to 447.8 million pounds. Automotive Extrusions shipments increased 25% and Aero/HS shipments increased 6%. Lower Aero/HS pricing and the absence of a $4.5 customer payment received in the 2013 period weighed on results.
- Cost of products sold excluding depreciation and other items increased to 83% of sales in Q3 from 81%, and to 82% for the nine months from 80%. Higher metal costs, maintenance and energy expense contributed to the increase; manufacturing conversion and other costs improved.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $212.3 and short-term investments were $100.1. Total liquidity, including $263.3 of net revolver availability, was $575.7. The $300.0 revolving facility had no borrowings and $7.7 of letters of credit outstanding.
- Operating cash flow for the first nine months was $103.7, versus $90.6 a year earlier. Capital expenditures were $39.6, versus $47.0. Operating cash flow less capital expenditures was $64.1, an arithmetic measure rather than a company-defined metric.
- Cash increased $42.8 during the nine-month period. Financing cash outflows included $28.7 of share repurchases and $19.1 of dividends.
- Debt carrying value totaled $395.2: $170.2 of Convertible Notes classified as current and $225.0 of 8.25% Senior Notes due 2020. The 4.5% Convertible Notes mature April 1, 2015. Management said it expected sufficient liquidity to repay them at maturity or upon conversion, with related cash-settled call options intended to cover conversion value above principal and interest.
- Capital expenditures were expected to total $50-$60 for 2014. A $0.35 per-share dividend was declared for payment in November 2014.
Material changes, outlook and risks
- Management attributed approximately $5.2 of adverse Q3 operating-income impact to two temporary events at the Spokane facility: elevated internal scrap and rework during a heat-treat plate process refinement, and unplanned sheet-processing downtime.
- Adjusted for identified non-run-rate items, Fabricated Products operating income was $42.4 in Q3, compared with $42.1 a year earlier; for the first nine months it was $128.8, compared with $141.3. These are company-presented measures. Reported segment operating income was $35.6 and $121.2, respectively.
- Management expected Q4 value-added revenue and EBITDA to be similar to Q3, with improving aerospace and automotive extrusion demand partly offset by normal seasonality and planned major maintenance, including an extended Newark outage. Full-year EBITDA was expected to be slightly below 2012 and 2013 levels. Management expressed a positive view of 2015 and beyond, citing aerospace demand, automotive extrusion growth, improving industrial demand and ramp-up of capacity projects. No specific EBITDA amount was provided.
- Environmental accruals totaled $20.2. The company stated reasonably possible additional undiscounted costs could reach an estimated $24.9 over the remediation period; remediation may continue for 30 or more years, and estimates could change.
- Operational risks include aluminum, energy and foreign-exchange price exposure, demand and product-mix changes, facility execution, and possible collateral requirements under certain derivative contracts. A qualitative review found no required goodwill or intangible-asset adjustment at the Florence facility, but management warned that failure to improve costs or pricing could lead to impairment. Idled assets resulted in $1.5 of impairment charges during the first nine months.
- The company reported no material legal-proceeding developments or material changes to previously disclosed risk factors. It said liquidity sources were expected to cover requirements for at least the next 12 months, subject to operating performance and other factors.
Important facts for investors to verify
- Whether the Spokane production issues were resolved and whether planned Newark maintenance or other production constraints affected subsequent shipments and margins.
- Progress toward the stated Q4 and full-year EBITDA outlook, and the basis for the expected improvement in 2015 and beyond.
- Repayment or conversion of the $175.0 principal Convertible Notes due April 2015, including the cash flows and terms of the related call options and warrants.
- Updated environmental remediation estimates and any changes to the $20.2 accrual or potential additional exposure.
- Actual capital spending, liquidity and cash generation, including the effect of VEBA contributions and shareholder returns.