Kaiser Aluminum Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Kaiser produces specialty semi-fabricated aluminum products for aerospace/high strength, automotive, general engineering and other industrial markets. It reports as one operating segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $375.3m | $415.4m | $770.5m | $803.4m |
| Operating income | $32.4m | $34.7m | $75.4m | $71.8m |
| Net income | $19.2m | $20.7m | $47.2m | $46.4m |
| Diluted EPS | $1.18 | $1.22 | $2.89 | $2.74 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $70.5m | $84.0m |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $29.9m | $35.8m |
| Adjusted EBITDA | $47.5m | $54.6m | $103.7m | $102.8m |
| Value added revenue (VAR) | $209.2m | $210.2m | $427.6m | $412.8m |
Margins: Q2 operating margin was approximately 8.6%, versus 8.4% a year earlier; net margin was 5.1%, versus 5.0%. Adjusted EBITDA as a percentage of VAR was approximately 22.7% in Q2 and 24.3% for the first half, compared with 26.0% and 24.9%, respectively.
Balance sheet and liquidity: June 30 cash and cash equivalents were $122.4m, short-term investments $24.4m, and total reported liquidity including net revolver availability $438.8m. The $300m revolving facility had no borrowings and $292m available after letters of credit. Long-term debt was $370.9m, comprising $375m principal of 5.875% senior notes due 2024, net of issuance costs. Current assets were $649.7m and current liabilities $178.9m. Cash, cash equivalents and short-term investments totaled $146.8m, down from $162.3m at year-end 2018.
Six-month cash flow included $70.5m from operations, $17.7m net cash used in investing and $55.5m used in financing. Cash, cash equivalents and restricted cash declined $2.7m to $136.9m. Financing included $28.6m in share repurchases and $20.1m in dividends.
Changes versus prior comparable periods
- Q2 sales declined 9.7%, reflecting shipments down 8% and average realized price per pound down 2%. Adjusted EBITDA fell $7.1m, principally due to Trentwood planned-outage costs, operating inefficiencies and lost production and shipments.
- First-half sales declined 4.1% as shipment volume fell 5%, partly offset by a 1% increase in realized price per pound. Adjusted EBITDA rose $0.9m; VAR increased $14.8m, offset by Trentwood downtime and lower automotive shipments.
- Aero/HS shipments increased 6% in Q2 and 11% for the first half. General engineering shipments decreased 13% and 14%, respectively, as capacity was redirected to aerospace and Trentwood experienced downtime. Automotive Extrusions shipments fell 21% in Q2 and 13% for the first half, reflecting the transition from ending programs to replacement programs.
- Operating cash flow decreased $13.5m year over year in the first half. The filing attributes 2019 working-capital pressures in part to higher inventory and lower accounts payable; 2018 cash flow benefited from a substantial accounts-payable increase.
Outlook, commentary and risks
- Management left its full-year 2019 outlook unchanged: low- to mid-single-digit year-over-year growth in shipments and VAR, and Adjusted EBITDA margin above 25% of VAR.
- Management reported a strong second-half Aero/HS order book with visibility well into 2020, while noting uncertainty around resolution timing for the Boeing 737 MAX. New automotive programs were expected to gain momentum in the second half, with management optimistic about automotive content growth in 2020–2021. Industrial demand remained strong but was moderating; normal seasonal weakness was anticipated in the second half.
- 2019 capital spending was expected to be approximately $75m–$80m, including continued Trentwood modernization and efficiency and operational-security projects.
- Environmental accruals were $16.7m. The company said reasonably possible additional undiscounted costs could total up to $11.6m over the remediation period; estimates may change as remediation plans and regulatory reviews progress. Trentwood PCB remediation and the Newark investigation were identified as continuing matters. Management considered other pending legal matters adequately accrued and not expected to have a material impact.
- Customer and supplier concentration is material: two customers represented 26% and 14% of Q2 sales; two customers accounted for 23% and 13% of receivables at June 30. The five largest primary-aluminum suppliers provided 74% of Q2 supply.
- Commodity and energy prices, customer demand and product mix, aerospace build rates and automotive program transitions create operating exposure. Derivatives are used for hedging, not speculation; the company estimated $11.9m of pre-tax net hedge losses in accumulated other comprehensive income would be reclassified into earnings within 12 months.
- The company adopted lease accounting standard ASC 842 in 2019, recognizing operating lease assets and liabilities; management reported no material effect on earnings or cash flows. A $0.60-per-share dividend was declared July 15, payable on or about August 15, 2019.
Important facts for investors to verify
- Whether Trentwood operations normalize and whether the planned second-half production and shipment recovery occurs.
- Progress and profitability of new Automotive Extrusions programs, including replacement of end-of-life programs.
- Whether full-year shipment, VAR and Adjusted EBITDA-margin guidance is achieved, particularly given Boeing 737 MAX uncertainty and moderating industrial demand.
- Working-capital and operating-cash-flow trends, planned capital spending, and the continued availability of revolver capacity.
- Updates to environmental remediation estimates, including the potential costs beyond the $16.7m accrual, and customer/supplier concentration exposure.