Kaiser Aluminum Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Kaiser manufactures semi-fabricated specialty aluminum products for aerospace/high-strength, general engineering, automotive, and other industrial markets. Its sole reportable segment is Fabricated Products.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $319.9m | $335.5m | $986.2m | $1,046.1m |
| Operating income | $41.6m | $56.2m | $131.7m | $142.0m |
| Net income | $25.4m | $29.2m | $77.5m | $76.7m |
| Diluted EPS | $1.34 | $1.51 | $4.02 | $3.98 |
| Operating margin | 13.0% | 16.7% | 13.4% | 13.6% |
Sales fell 5% in Q3 and 6% year to date, mainly reflecting lower shipments. Q3 shipments declined 4% to 141.1 million pounds; nine-month shipments fell 6% to 426.5 million pounds. Value-added revenue, which excludes hedged alloyed-metal cost, was $181.9m in Q3 versus $184.0m, and $552.8m for nine months versus $564.3m. Q3 Fabricated Products operating income excluding the company’s identified non-run-rate items was $42.1m, down from $50.0m.
- Cash flow: Nine-month operating cash flow was $90.6m, versus $106.7m. Capital expenditures were $47.0m, versus $25.7m.
- Liquidity: At September 30, cash and cash equivalents were $224.6m and short-term investments $115.9m. Including $257.0m of net revolver availability, reported total liquidity was $597.5m. The $300m revolver had no borrowings; $6.9m supported letters of credit.
- Debt: Long-term debt carrying value was $386.4m: $225.0m of 8.25% senior notes due 2020 and $161.4m carrying value on $175.0m principal of 4.5% cash-convertible notes due 2015. The notes are cash-settled, not convertible into shares.
- Shareholder returns: Nine-month dividends totaled $17.3m ($0.90 per share); share repurchases were $43.9m for 707,077 shares. A further $0.30-per-share dividend was declared October 15, payable in November.
Changes, outlook, and notable items
- Q3 sales and earnings weakened year over year; nine-month net income edged higher despite lower sales and operating income. Q3 diluted EPS declined to $1.34 from $1.51.
- Management cited Trentwood construction-related disruption and operating inefficiencies, an inventory overhang in certain aerospace products, an extended planned Newark equipment outage, and higher major-maintenance costs. Automotive extrusion shipments rose 6% in Q3 as new programs ramped up; general engineering and other-product shipments declined.
- Management expected some manufacturing-efficiency improvement in Q4, but not a full recovery; construction disruption, equipment downtime, and major maintenance were expected to continue. Normal seasonal softness was anticipated in general engineering and automotive demand.
- For 2014, management expected aerospace inventory overhangs to persist for several quarters and anticipated short-term competitive pressure on general-engineering and aerospace plate spot prices. It remained positive on longer-term value-added growth from aerospace/high-strength products and automotive extrusions. No full-year earnings or revenue guidance was provided in the supplied filing text.
- Planned 2013 Fabricated Products capital expenditures and investments were approximately $70m, including Trentwood casting and heat-treat plate expansion projects and automotive-program capacity upgrades.
- Notable earnings factors included Q3 LIFO inventory benefits of $6.8m, nine-month LIFO benefits of $19.7m, and a nine-month $3.4m unrealized operating-hedge loss. Canadian tax audit and pricing-agreement settlements reduced the nine-month effective tax rate; a $10.7m refund was expected within 12 months. VEBA periodic benefit income also increased year over year.
- Environmental accruals totaled $21.8m. The company said costs could reasonably exceed accruals by up to an estimated $19.1m over the remediation period, potentially extending to 30 years; estimates could change. Management also said Florence facility weakness could lead to goodwill or intangible-asset impairment, although its September quantitative test found no impairment.
- Convertible-note holders became eligible to convert during Q4 2013 after the stock-price threshold was met. Management considered early conversion unlikely and said it expected adequate liquidity to repay principal if conversion occurred. The company anticipated a 2013-related VEBA variable contribution in Q1 2014 of up to $20m.
Important facts for investors to verify
- Whether aerospace supply-chain inventory levels and spot-price pressure persist, and how they affect shipment volume, mix, and value-added revenue.
- Progress, costs, and operational benefits of Trentwood expansion projects; whether efficiency improves as management expected.
- Actual 2013 capital spending and the amount and timing of the VEBA contribution, which could be up to $20m.
- Environmental remediation estimates and any changes to the $21.8m accrual or potential additional exposure.
- Convertible-note conversion activity, required cash repayment, and the offset expected from the related call options.
- Execution and returns from repurchases, dividends, and growth investments, alongside liquidity and debt-service needs.