Kaiser Aluminum Corporation — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018; filing dated February 22, 2019. This is an annual report, not a standalone Q4 filing. The company makes specialty semi-fabricated aluminum products for aerospace/high-strength, automotive, general engineering and other industrial markets.
Financial and operating performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $1,585.9 million | $1,397.5 million |
| Shipments | 652.4 million pounds | 625.7 million pounds |
| Value-added revenue | $827.9 million | $786.3 million |
| Operating income | $143.6 million | $155.2 million |
| Operating income excluding non-run-rate items | $160.9 million | $159.1 million |
| Net income | $91.7 million | $45.4 million |
| Diluted EPS | $5.43 | $2.63 |
| Cash from operations | $150.2 million | $141.5 million |
| Capital expenditures | $74.1 million | $75.5 million |
- Sales increased 13.5%, shipments 4%, and value-added revenue 5%. Higher average aluminum costs lifted reported sales; value-added revenue, which deducts hedged metal cost, better reflects conversion activity.
- FY2018 net margin was approximately 5.8% and operating margin approximately 9.1%. Cost of products sold excluding depreciation and amortization was $1,300.7 million, about 82% of sales.
- Net income more than doubled, primarily reflecting the prior-year Tax Act charge; FY2017 also included an $18.4 million goodwill impairment. Operating income excluding non-run-rate items improved modestly, while reported operating income declined.
- FY2018 operating income included a net $17.3 million charge from items management classifies as non-run-rate, principally derivative mark-to-market effects. The filing’s adjusted operating income measure is non-GAAP.
- Year-end cash and cash equivalents were $125.6 million and short-term investments $36.7 million. Total liquidity was $454.3 million, including $292.0 million of undrawn revolving-credit availability; no revolver borrowings were outstanding.
- Debt included $375.0 million face value of 5.875% senior notes due 2024 (carrying value $370.4 million); interest expense was $22.7 million. The current ratio was approximately 3.2 based on current assets of $656.6 million and current liabilities of $205.5 million.
Business mix and changes versus prior year
- Aero/HS sales rose to $739.4 million from $653.7 million, with shipments up 7%, supported by stronger aircraft builds, moderating aerospace supply-chain destocking and added Trentwood capacity.
- Automotive Extrusions sales increased to $239.3 million from $217.3 million; shipments rose 3%. GE sales grew to $546.0 million from $476.2 million, while Other Products sales rose to $61.2 million from $50.3 million.
- Management attributed the higher adjusted operating income to favorable volume and product mix and improved conversion costs, partly offset by freight, tariffs, overhead and benefit costs, and higher depreciation.
- The company acquired Imperial Machine & Tool Co. (IMT), an additive-manufacturing and machining business, in September 2018 for $43.2 million net of cash acquired. The acquisition added $25.2 million of goodwill.
- FY2018 results reflect adoption of new revenue-recognition guidance. The company recorded a $10.1 million cumulative-effect increase to opening retained earnings; compared with the prior accounting method, FY2018 reported net income was $5.4 million higher. New hedge accounting also moved unrealized commodity-hedge changes from earnings to other comprehensive income.
Outlook, risks and contingencies
- For 2019, management forecast a low- to mid-single-digit percentage increase in shipments and value-added revenue, and a slight improvement in operating income excluding non-run-rate items as a percentage of sales.
- Management expected strong aerospace demand and further moderation in destocking. Automotive Extrusions were expected to face a transition year as current programs end and new programs launch; North American vehicle builds were expected to be slightly below 2018.
- Planned major maintenance at Trentwood in Q2 2019 was estimated to reduce earnings by approximately $15 million through incremental costs and lost production and sales. Planned 2019 capital spending was $80–$90 million.
- Pricing increases had been initiated for certain non-contract GE and Aero/HS products. Management cited positive demand and pricing momentum entering 2019, while noting uncertainty around trade negotiations and economic conditions.
- Customer concentration is significant: Reliance represented about 25% and Boeing about 15% of FY2018 sales; the five largest customers accounted for approximately 54%. Key risks include aerospace and automotive cyclicality, customer inventory destocking, competition, pricing pressure, tariff and freight costs, and reliance on aluminum and scrap availability.
- Environmental accruals were $16.9 million, primarily for legacy remediation, including PCB-related work at Trentwood. The company estimated reasonably possible additional costs of up to $11.6 million over the remediation period; timing and ultimate cost remain uncertain.
- The company sought Section 232 tariff exclusions that could enable recovery of approximately $2.4 million in duties paid, but recognized no refund because the outcome was uncertain. Hedging, energy and metal-price exposures, labor relations, multiemployer pension plans, and production interruption—particularly at Trentwood—are additional risks.
- The auditor issued unqualified opinions on the financial statements and internal controls. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether 2019 shipment and value-added revenue growth, pricing improvements and new automotive program launches met management’s expectations.
- The realized earnings and production impact of the Trentwood maintenance outage, and whether planned capital projects deliver expected efficiency and quality benefits.
- Customer concentration and end-market exposure, especially Reliance, Boeing, aerospace supply-chain inventory and North American vehicle production.
- Actual aluminum, scrap, freight and tariff cost recovery, including the status of the requested Section 232 duty refund.
- Changes in liquidity, working capital, debt and cash returns to shareholders; FY2018 dividends were $2.20 per share and share repurchases totaled $61.9 million.
- Developments in environmental remediation and whether related costs exceed the recorded accrual or the disclosed possible additional amount.