KAISER ALUMINUM CORP annual report, FY2013

Kaiser Aluminum Corporation — FY 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013; the filing also provides unaudited fourth-quarter results. Kaiser manufactures specialty semi-fabricated aluminum products through one reportable segment, Fabricated Products, operating 12 North American facilities.

Financial results and position

MetricFY 2013FY 2012
Net sales$1,297.5 million$1,360.1 million
Shipments563.7 million pounds585.9 million pounds
Operating income$173.3 million$165.9 million
Net income$104.8 million$85.8 million
Diluted EPS$5.44$4.45
Operating cash flow$111.7 million$152.4 million
Capital expenditures$70.4 million$44.1 million
  • Annual sales decreased about 4.6% and shipments about 3.8%; operating income increased about 4.5% and net income about 22.1%. Approximate operating margin was 13.4%, versus 12.2%; net margin was 8.1%, versus 6.3%.
  • Reported operating income included $27.4 million of net non-run-rate benefits, chiefly $22.5 million of non-cash VEBA periodic benefit income. Operating income excluding non-run-rate items was $183.4 million, essentially flat with $183.6 million in 2012.
  • Cash and cash equivalents were $169.5 million, short-term investments $129.5 million, and total liquidity including unused revolving-credit availability $552.1 million at year-end. The $300 million revolving facility had no borrowings; net availability was $253.1 million.
  • Debt was $400 million at face value: $225 million of 8.25% senior notes due 2020 and $175 million of 4.5% cash convertible notes due 2015. Carrying value was $388.5 million. Interest expense was $35.7 million, up from $29.1 million.
  • Current assets were $690.8 million and current liabilities $150.6 million. Total assets were $1.77 billion and stockholders’ equity $1.08 billion.
  • Fourth-quarter 2013 sales were $311.3 million, operating income $41.6 million, and net income $27.3 million, compared with $314.0 million, $23.9 million, and $9.1 million, respectively, in Q4 2012.

Material changes and business drivers

  • Aerospace/high-strength shipments were nearly flat year over year at 224.3 million pounds; general engineering shipments fell to 222.5 million pounds, and Other product shipments declined to 52.8 million pounds. Automotive extrusion shipments rose to 64.1 million pounds.
  • Management attributed weaker general engineering output partly to throughput inefficiencies during major Spokane facility construction. Higher automotive value-added revenue and lower energy and major-maintenance costs partly offset higher manufacturing costs and depreciation.
  • Value-added revenue per pound increased to $1.30 from $1.26, while average realized selling price edged down to $2.30 from $2.32, reflecting lower underlying metal costs passed through to customers.
  • Operating cash flow fell from 2012, while cash and short-term investments declined to $299.0 million from $358.4 million. Capital spending rose as Spokane expansion projects advanced. The company paid $23.0 million in dividends and repurchased 1.23 million shares for $79.3 million.

Outlook, risks, and unusual items

  • For 2014, management expected modestly higher aerospace plate shipments despite supply-chain inventory drawdown, with competitive pricing pressure on spot plate sales. It anticipated stronger shipments from non-plate aerospace products as excess inventories eased.
  • Management expected several new automotive programs to lift Automotive Extrusions shipments and value-added revenue to record levels. It cited an estimated 3.8% increase in 2014 North American automotive build rates. General engineering demand was expected to improve modestly, subject to broader manufacturing conditions and spot-price competition.
  • Management forecast $50–$60 million of 2014 capital expenditures. It expected higher costs and inefficiencies in the first half from Spokane casting-complex and plate-expansion ramp-ups and automotive-program launches, with efficiency benefits expected as projects reached full production in the second half.
  • Tax settlements and a Canada–U.S. advance pricing agreement provided $10.5 million of tax benefit; the effective tax rate was 26.8%, versus 38.5% in 2012. The company reported $7.6 million of cash tax benefit from the CRA settlement and a further $2.9 million expected refund.
  • The Convertible Notes became conditionally convertible in Q1 2014 after the stock-price trigger was met. Conversion requires cash settlement; management expected the related call options and available liquidity to cover the obligation, but conversion could affect liquidity.
  • Environmental accruals were $22.8 million. Management said reasonably possible additional costs could be up to $25 million over the remediation period, particularly for Spokane and Newark matters; estimates may change as studies and approvals progress.
  • Key exposures include customer concentration (Reliance represented about 23% of sales and the five largest customers about 47%), cyclical aerospace and automotive demand, aluminum/energy prices, labor and multiemployer pension obligations, production disruptions, and debt covenants. The filing reports a clean audit opinion and effective internal control over financial reporting as of year-end.

Investor verification priorities

  • Reconcile reported earnings with the $27.4 million net non-run-rate benefit, including VEBA income and LIFO and derivative effects.
  • Track Spokane project completion, ramp costs, capacity utilization, and whether forecast efficiency gains materialize.
  • Monitor aerospace inventory normalization, spot pricing, shipment trends, and new automotive-program launches.
  • Verify cash generation, capital spending, dividends, share repurchases, and liquidity against the $400 million face-value debt and 2015 convertible-note maturity/conversion risk.
  • Follow environmental remediation developments and potential costs beyond the $22.8 million recorded accrual.
  • Assess customer concentration and the effect of any changes in Reliance or other major-customer demand.