Kaiser Aluminum Corporation — Q1 2015 Form 10-Q
Reporting period: Quarter ended March 31, 2015. Kaiser Aluminum manufactures semi-fabricated specialty aluminum products for aerospace/high-strength, automotive, general engineering and other industrial markets. Results are unaudited and interim.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $371.7 million | $335.1 million |
| Operating income (loss) | $(458.6) million | $32.1 million |
| Net income (loss) | $(292.2) million | $15.8 million |
| Diluted EPS | $(16.85) | $0.85 |
| Cash provided by operations | $7.4 million | $27.1 million |
| Capital expenditures | $11.3 million | $15.4 million |
- Sales rose 11%, reflecting 4% higher shipments and a 6% increase in average realized sales price per pound. Shipments were 157.9 million pounds, up 4%.
- Fabricated Products segment operating income was $44.9 million, versus $35.4 million. Excluding management-designated non-run-rate items, segment operating income was $48.6 million versus $38.0 million. Conversion-cost improvements and higher volume contributed; lower planned maintenance was partly timing-related.
- Cost of products sold excluding depreciation and other items was 81% of sales, compared with 84%. Hedged alloyed-metal cost increased, while conversion costs declined.
- The reported operating and net losses primarily reflect a $492.2 million non-cash charge associated with removing Union VEBA net assets and related accounting balances. The resulting non-cash loss after a $184.4 million tax benefit was $307.8 million. The charge does not represent a comparable cash outflow.
- Cash and cash equivalents were $220.9 million at quarter-end; short-term investments were $30.0 million. Total liquidity, including $274.1 million of net revolving-credit availability, was $525.0 million. Operating cash flow was lower year over year, including working-capital movements and VEBA contributions.
- Quarter-end debt included $175.0 million of current convertible notes and $225.0 million of 8.25% senior notes due 2020. On April 1, 2015, the company settled the convertible notes and related option assets for a net cash outflow of $178.9 million. No revolver borrowings were outstanding at March 31.
Material changes and capital returns
- Under a new five-year labor agreement, the company’s obligation to make variable contributions to the Union VEBA ends after September 2017. It removed the Union VEBA’s assets and related balances from its accounts and accrued estimated remaining contributions of $45.4 million as of March 31. Actual contributions depend on the contractual cash-flow formula.
- Cash, cash equivalents and short-term investments declined from $291.7 million at December 31, 2014 to $250.9 million at March 31, primarily due to capital spending, share repurchases, dividends and $13.7 million of VEBA contributions, partly offset by operating cash flow and investment-sale proceeds.
- The company repurchased 405,259 shares for $30.0 million and paid $7.1 million in dividends during the quarter. After quarter-end, the board authorized an additional $100 million for repurchases; $133.8 million remained available as of April 27. A further $0.40-per-share dividend was declared for payment in May.
Outlook, risks and contingencies
- Management expressed optimism about aerospace and automotive demand, manufacturing-cost efficiencies and capacity investments. It anticipated improving spot-market pricing for heat-treat plate as aerospace supply-chain inventories abated.
- Expected 2015 capital spending was $50–$60 million, mainly supporting automotive-extrusion capacity expansion. Management said available liquidity and expected operating funds should cover requirements for at least the next 12 months, while noting results and funding needs depend on operating performance and economic conditions.
- Risks include cyclical end-market demand, metal-price pass-through delays, energy and input costs, and customer and supplier concentration. In Q1, two customers accounted for 23% and 10% of Fabricated Products sales; the top five aluminum suppliers provided 75% of annual supply.
- Environmental accruals were $19.4 million. The company said reasonably possible additional undiscounted costs could reach an estimated $24.7 million over the remediation period, which may extend 30 years or more; estimates could change as studies and regulatory reviews proceed.
- Forward-looking statements are subject to economic, market, regulatory and execution risks. The filing reported no material changes in risk factors or legal proceedings since the 2014 Form 10-K. Disclosure controls were deemed effective.
Investor facts to verify
- How the Union VEBA accounting change and remaining $45.4 million contribution estimate affect reported earnings, cash needs and future periods.
- Completion and cash-flow impact of the April 1 convertible-note settlement, including the $178.9 million net outflow and subsequent debt balances.
- Whether shipment growth, conversion-cost savings and the aerospace/automotive outlook persist, and whether 2015 capital spending stays within the $50–$60 million range.
- Potential revisions to environmental remediation estimates and exposure to key customers, aluminum suppliers, metal prices and energy costs.