Kaiser Aluminum Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in millions of dollars unless stated otherwise. Kaiser manufactures semi-fabricated specialty aluminum products; its reportable operating segment is Fabricated Products.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $328.9 | $345.2 | $666.3 | $710.6 |
| Operating income | $40.1 | $39.6 | $90.1 | $85.8 |
| Net income | $18.6 | $21.0 | $52.1 | $47.5 |
| Diluted EPS | $0.98 | $1.09 | $2.70 | $2.48 |
| Operating margin | 12.2% | 11.5% | 13.5% | 12.1% |
| Net margin | 5.7% | 6.1% | 7.8% | 6.7% |
- Cash flow: First-half operating cash flow was $48.9, down from $74.7 a year earlier. Capital expenditures were $26.0 versus $16.9. Investing activities provided $12.2, mainly reflecting purchases and sales of short-term securities; financing activities used $52.8, including buybacks and dividends. Cash and cash equivalents ended the period at $281.7.
- Liquidity: Cash, short-term investments of $47.3, and net revolving-credit availability of $259.4 totaled $588.4. No revolver borrowings were outstanding; $7.0 supported letters of credit.
- Debt: Long-term debt was $384.3, comprising $225.0 of 8.25% senior notes due 2020 and $159.3 carrying value of 4.5% cash-convertible notes due 2015. The revolver commitment is $300.0 and matures in September 2016.
- Margins and value added: First-half Fabricated Products value-added revenue was $370.9, down from $380.3; value-added revenue per pound rose to $1.30 from $1.25. The filing reports a $12.9 first-half non-cash LIFO benefit, compared with $7.8 in 2012.
Material changes versus prior period
- Second-quarter sales fell 5%, while operating income edged up to $40.1; net income and diluted EPS declined year over year. For the first half, sales fell 6%, but operating income and net income increased.
- First-half shipments declined 6% to 285.4 million pounds. In Q2, shipments were down 1% to 145.4 million pounds. Management attributed weaker aerospace shipments partly to customer inventory overhang despite strong aerospace demand; general engineering shipments were affected by a slow first-quarter manufacturing environment. Other-product shipments declined as the company focused on higher-value products.
- Interest expense rose to $18.3 for the first half from $10.6, principally reflecting the senior notes issued in 2012 and debt discount amortization.
- The first-half effective tax rate fell to 27.7% from 38.3%, in part because a Canadian tax audit settlement reduced unrecognized tax benefits. A $7.7 tax refund was expected in 2013.
- Stock repurchases totaled $40.5 for 654,277 shares in the first half. The company paid $11.6 in dividends, or $0.60 per share, and ended June with $81.4 remaining under its repurchase authorization.
Outlook, risks and unusual items
- Management expected reduced aerospace supply-chain de-stocking and increased automotive extrusion content from new programs to support second-half demand, partly offset by normal seasonality. It expressed a positive long-term view for aerospace and automotive applications. No quantified earnings or sales guidance was provided.
- 2013 Fabricated Products capital expenditures and investments were expected to be approximately $80.0, including a planned $35.0 Trentwood casting station and other capacity, quality, and efficiency projects.
- Management believed liquidity sources would meet cash requirements for at least the next 12 months, while noting dependence on operating performance and economic conditions. The $159.3 carrying-value convertible notes became eligible for holder conversion in Q3 2013 under specified market-price conditions; management considered early conversion unlikely and expected liquidity to cover principal if conversion occurred.
- Environmental accruals were $21.7, primarily relating to remediation work at the Trentwood facility, expected to extend over about 30 years. The company said costs could reasonably exceed accruals by up to an estimated $19.1, and estimates may change.
- Management cited possible impairment within 12 months of $3.1 goodwill and $3.2 intangible assets associated with the Florence, Alabama facility, given potential volume weakness and customer quality-standard impacts.
- Derivative mark-to-market losses were $4.9 for the first half, compared with gains of $3.0 in the prior-year period. The company uses hedges for metal, energy, currency, and convertible-note exposures; results can be affected by commodity-price movements and valuation changes.
- Anglesey ceased secondary-aluminum operations at its Wales facility during Q2. The filing reported no material developments in legal proceedings or material changes to risk factors since the prior quarter.
Important facts for investors to verify
- Whether aerospace customer inventory de-stocking eases and shipments recover as management anticipated, and how automotive program launches affect volumes.
- How much reported earnings benefited from LIFO accounting, the customer’s $4.5 minimum-volume payment, and the tax settlement; assess results excluding these items.
- Progress, timing, and potential cost changes for Trentwood environmental remediation, including the possible $19.1 excess over the recorded accrual.
- Funding and execution of the approximately $80.0 2013 capital program, and effects on liquidity alongside dividends and share repurchases.
- Convertible-note conversion exposure and the ability to meet the 2015 maturity, while monitoring debt service costs and revolving-credit availability.
- Potential impairment of the Florence facility’s goodwill and intangible assets, and the development of derivative-related gains or losses.