Kaiser Aluminum Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company manufactures semi-fabricated specialty aluminum products, primarily through its Fabricated Products segment. Financial amounts are in millions of dollars unless otherwise indicated.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $345.2 | $338.8 | $710.6 | $661.4 |
| Operating income | $39.6 | $14.7 | $85.8 | $34.5 |
| Net income | $21.0 | $4.1 | $47.5 | $14.9 |
| Diluted EPS | $1.09 | $0.21 | $2.48 | $0.78 |
| Operating margin | 11.5% | 4.3% | 12.1% | 5.2% |
| Net margin | 6.1% | 1.2% | 6.7% | 2.3% |
Q2 shipments rose 1% to 147.2 million pounds; six-month shipments increased 5% to 303.9 million pounds. Higher value-added revenue per pound, particularly from aerospace/high-strength products, supported results. Six-month Fabricated Products operating income was $99.2, versus $51.0 a year earlier.
Six-month operating cash flow was $74.7, compared with $32.9 in 2011. Capital expenditures were $16.9, implying operating cash flow less capital expenditures of $57.8. Cash and cash equivalents were $317.8 at June 30, up from $49.8 at year-end 2011.
Debt, liquidity, and capital
In May, the company issued $225.0 of 8.250% senior notes due June 2020, receiving $218.6 net of financing fees. Balance-sheet debt was $376.6, including the convertible notes at carrying value; the two note issues had $400.0 of combined principal. The company repaid the remaining $4.7 Florence facility promissory note. The $300.0 revolving facility had no borrowings, $8.7 of letters of credit, and $265.2 of net availability. Reported total liquidity was $583.0. The company reported covenant compliance.
The company paid $9.8 in dividends during the first half and declared a further $0.25 per share dividend for August 2012. A $75.0 share repurchase authorization remained in place, with $46.9 available at June 30, subject to debt-document restrictions.
Changes, outlook, and notable items
- Sales increased 2% in Q2 and 7% for the first half year over year. Results benefited from improved product mix and value-added pricing; lower aluminum prices generally pass through to customers, though price changes can lag for some products.
- Management expected strong aerospace and automotive demand to continue in the second half of 2012 and 2013. It anticipated second-half 2012 total value-added revenue to be somewhat above the comparable 2011 period but slightly below the first half due to seasonality. It cited gradual recovery in general engineering demand.
- Management expected 2012 Fabricated Products capital spending of $40–$50. It was expanding heat-treat plate capacity at Spokane, with the added capacity expected to be fully utilized in 2013. No specific earnings guidance was provided.
- Q2 included $0.6 of non-cash derivative mark-to-market gains; the first half included a $3.0 operating mark-to-market gain and a $7.8 non-cash LIFO benefit. The filing cautions that these items can make reported results fluctuate.
- The board lifted transfer restrictions on all remaining 2,202,495 Union VEBA shares during the first half. The accounting release increased reported equity, but was not an operating cash inflow.
- The company recorded $22.0 of environmental accruals, principally related to remediation at its Trentwood facility. It said costs could reasonably exceed accruals by up to an estimated $18.7 over 30 years; the remediation approach remained subject to regulatory review, with a consent decree expected in late 2012.
- Disclosure controls were reported ineffective at quarter-end because a material weakness remained concerning completeness and accuracy of information used to value Union VEBA postretirement obligations. Management was implementing corrective actions, but said remediation would require successful operation and testing of controls.
- The filing describes a restatement of 2009–2011 financial statements and 2010–2011 interim periods for Union VEBA participant-data and benefit-election errors. Management characterized the prior-period errors as not material; Q2 2011 net income was reduced by $0.4 to $4.1 in the restated comparative figures.
Key investor verification points
- Assess how much of the earnings improvement reflects sustainable volume, pricing, and product mix versus LIFO and derivative mark-to-market effects.
- Review senior-note and convertible-note terms, interest burden, restrictive covenants, and the company’s ability to fund debt service and planned investment.
- Track aerospace, automotive, and general engineering demand, including shipment and value-added revenue trends and the Spokane capacity expansion.
- Follow the Trentwood environmental consent decree and whether remediation estimates change from the $22.0 accrual or the stated potential $18.7 excess.
- Confirm remediation of the Union VEBA valuation material weakness and monitor the related benefit-obligation estimates and prior-period restatement disclosures.