Business Context and Reporting Period
Company: Kaiser Aluminum Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Kaiser Aluminum is a leading North American manufacturer of semi-fabricated specialty aluminum products. Operations are organized into two primary segments: Fabricated Products (aerospace, defense, automotive, and general engineering) and Primary Aluminum (via a 49% interest in Anglesey Aluminium Limited). The company also maintains a Corporate segment.
Key Financial Metrics
| Metric (in millions, except per share) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Sales | $232.1 | $413.5 | $498.0 | $812.5 |
| Operating Income | $35.0 | $38.0 | $42.2 | $106.1 |
| Net Income | $19.6 | $22.8 | $23.4 | $61.9 |
| Diluted EPS | $0.97 | $1.11 | $1.16 | $3.00 |
| Cash from Operations (6 Mo) | $86.6 (vs. $4.8 in 2008) | |||
| Cash & Equivalents (End of Period) | $14.6 (vs. $0.2 at Dec 31, 2008) | |||
| Long-Term Debt | $7.1 (vs. $43.0 at Dec 31, 2008) | |||
| Working Capital | $175.9 (vs. $193.7 at Dec 31, 2008) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 44% in Q2 2009 and 39% for the six months ended June 30, 2009, compared to the prior year. This was driven by a 32% drop in Fabricated Products shipment volume and a 49% decrease in Primary Aluminum pricing due to lower London Metal Exchange (LME) aluminum prices.
- Profitability: Net income decreased 14% in Q2 and 62% for the six-month period. Despite lower sales, operating income remained relatively stable in Q2 due to significant non-cash mark-to-market gains on derivative positions ($26.6 million in Q2).
- Liquidity Improvement: Cash and cash equivalents increased significantly from $0.2 million to $14.6 million. The company repaid $36.0 million of borrowings under its revolving credit facility, leaving no outstanding balance as of June 30, 2009.
- Inventory Reduction: Inventories decreased from $172.3 million to $128.1 million, reflecting lower metal prices and reduced production levels.
Guidance, Outlook, and Risks
- Anglesey Curtailment: The company expects its 49% affiliate, Anglesey Aluminium Limited, to fully curtail smelting operations by September 30, 2009, due to the decommissioning of the nuclear power plant supplying the facility. Consequently, the company fully impaired its investment in Anglesey and expects no dividends from this affiliate in the foreseeable future.
- Restructuring: In Q2 2009, the company recorded $5.1 million in restructuring charges related to closing the Tulsa, Oklahoma facility and curtailing operations at Bellwood, Virginia. A temporary shutdown of the Bellwood facility was planned for July 2009.
- Market Outlook: Management anticipates weaker demand for aerospace and high-strength products in the short term due to supply chain de-stocking. However, automotive demand is expected to improve in the second half of 2009.
- Dividends: On July 15, 2009, the Board declared a quarterly cash dividend of $0.24 per share. The company's credit facility restricts dividends to $25 million per fiscal year and requires $100 million in borrowing availability.
- Environmental Contingencies: The company has accrued $8.7 million for environmental matters but estimates costs could exceed accruals by up to $16.8 million, primarily related to PCB remediation at the Trentwood facility.
Investor Verification Checklist
- Derivative Valuation: Verify the impact of the $26.6 million non-cash mark-to-market gain on Q2 operating income, as this significantly masks underlying operational performance.
- Anglesey Timeline: Confirm the status of Anglesey's power supply negotiations and the certainty of the September 2009 curtailment date.
- Restructuring Costs: Monitor the execution of the Bellwood facility shutdown and the associated cash outflows for severance and contract terminations.
- Capital Expenditures: Review the progress and funding of the $75-$85 million capital expenditure program for 2009, specifically the Kalamazoo facility expansion.
- Environmental Liabilities: Assess the potential for the $16.8 million estimated excess environmental cost to materialize and impact future cash flows.