Kaiser Aluminum Earnings 2018-12-31
KALU 10K Annual Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018 |
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________________________ to_________________________________________ |
Commission File Number: 1-09447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 94-3030279 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
27422 Portola Parkway, Suite 200 Foothill Ranch, California | 92610-2831 | |
(Address of principal executive offices) | (Zip Code) | |
(949) 614-1740 | ||
(Registrant's telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class | Name of each exchange on which registered | |
Common stock, par value $0.01 per share | Nasdaq Stock Market LLC | |
Securities registered pursuant to section 12(g) of the Act: | ||
None | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company o |
Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2018) was approximately $1.7 billion.
As of February 15, 2019, there were 16,093,993 shares of the Common Stock of the registrant outstanding.
Documents Incorporated by Reference. Certain portions of the registrant's definitive proxy statement related to the registrant's 2019 annual meeting of stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Business | ||
Risk Factors | ||
Unresolved Staff Comments | ||
Properties | ||
Legal Proceedings | ||
Mine Safety Disclosures | ||
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | ||
Selected Financial Data | ||
Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
Quantitative and Qualitative Disclosures About Market Risk | ||
Financial Statements and Supplementary Data | ||
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||
Controls and Procedures | ||
Other Information | ||
Directors, Executive Officers and Corporate Governance | ||
Executive Compensation | ||
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||
Certain Relationships and Related Transactions and Director Independence | ||
Principal Accountant Fees and Services | ||
Exhibits and Financial Statement Schedules | ||
Form 10-K Summary | ||
PART I
Forward-Looking Statements
This Annual Report on Form 10-K (this "Report") contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Report, including Item 1. "Business – Business Operations," Item 1A. "Risk Factors," and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates," or the negative of the foregoing or other variations or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties and that actual results may vary from those in the forward-looking statements as a result of various factors. These factors include: the effectiveness of management's strategies and decisions; general economic and business conditions, including cyclicality and other conditions in the aerospace, automotive and other end markets we serve; developments in technology; new or modified statutory or regulatory requirements; changing prices and market conditions; and other factors discussed in Item 1A. "Risk Factors" and elsewhere in this Report. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements.
Readers are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included herein are made only as of the date of this Report and we undertake no obligation to update any information contained in this Report or to publicly release any revisions to any forward-looking statements that may be made to reflect events or circumstances that occur, or that we become aware of, after the date of this Report except as required by law.
Item 1. Business
Availability of Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, any amendments to those reports and other information with the Securities and Exchange Commission ("SEC"). You may obtain the documents that we file electronically from the SEC's website at http://www.sec.gov. Our filings with the SEC are made available free of charge on our website at http://www.kaiseraluminum.com as soon as reasonably practicable after we file or furnish the materials with the SEC. News releases, announcements of upcoming earnings calls and events in which our management participates or hosts with members of the investment community, and an archive of webcasts of such earnings calls and investor events and related investor presentations, are also available on our website. Information on our website is not incorporated into this Report unless expressly noted.
Business Overview
Kaiser Aluminum Corporation, a Delaware corporation, manufactures and sells semi-fabricated specialty aluminum mill products for the following end market applications: aerospace and high strength ("Aero/HS products"); automotive ("Automotive Extrusions"); general engineering ("GE products"); and other industrial ("Other products"). Our fabricated aluminum mill products include flat-rolled (plate and sheet), extruded (rod, bar, hollows and shapes), drawn (rod, bar, pipe, tube and wire) and certain cast aluminum products. The sophistication of our products is due to the metallurgy and physical properties of the metal and the special characteristics that are required for particular end uses. We strategically choose to serve technically challenging applications for which we can deploy our core metallurgical and process technology capabilities to produce highly engineered mill products with differentiated characteristics that present opportunities for us to receive premium pricing and to create long-term profitable growth.
With respect to the global market for flat-rolled aluminum mill products, our focus is on heat treat plate and sheet for applications that require higher strength and other desired product attributes that cannot be achieved by common alloy rolled products. The primary end market applications of flat-rolled heat treat plate and sheet are Aero/HS products (which we sell globally) and GE products (which we predominantly sell within North America).
Similarly, in the areas of aluminum extrusions, we focus on demanding Aero/HS products, Automotive Extrusions and GE products that require high strength, machinability or other specific properties where we can create and maintain a defensible competitive position because of our technical expertise, strong production capability and high product quality. We primarily serve North American demand for extruded mill products.
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Our rolling mill in Spokane, Washington ("Trentwood") produces heat treat plate and sheet for aerospace and general engineering end market applications. Our 11 extrusion/drawing facilities, 10 of which are in the United States and one of which is in Canada, serve aerospace, automotive or general engineering applications. In 2018, our consolidated Net sales totaled $1.6 billion on 652.4 million pounds shipped from these 12 focused facilities. Our newest facility, which we acquired on September 19, 2018, is located in Columbia, New Jersey and focuses on multi-material additive manufacturing ("3D Printing") and machining technologies for aerospace and defense, automotive, high tech and general industrial applications. We employed approximately 2,860 people at December 31, 2018.
A fundamental part of our business model is to remain neutral to the impact from fluctuations in the market price for aluminum, thereby earning profit predominately from the conversion of aluminum into semi-fabricated mill products. We refer to this as "metal price neutrality." We purchase primary and scrap, or recycled, aluminum, our main raw material, at prices that fluctuate on a monthly basis, and our pricing policies generally allow us to pass the underlying cost of metal through to our customers so that we remain neutral to metal pricing. However, for some of our higher value added revenue products sold on a spot basis, competitive dynamics may limit the amount and/or delay the timing of selling price increases to recover our increased aluminum costs, resulting in a lag up to several months during which we may be exposed to metal price risk. As a result, we can experience an adverse impact when metal prices increase, and a favorable impact to us when metal prices decline, as we and our competitors tend to defer adjusting pricing unless market dynamics require such in a declining metal cost environment. Additionally, we sometimes enter into firm-price customer sales agreements that specify a firm underlying metal price plus a conversion price. Spot sales with lagged metal price pass through and firm-price sales agreements create metal price exposure for us, which we mitigate through a hedging program with an objective to remain metal price neutral.
We have long-standing relationships with our customers, which consist primarily of blue-chip companies including leading aerospace and automotive manufacturers, tier one aerospace and automotive suppliers and metal service centers. Approximately 52% of our shipments is sold direct to manufacturers or tier one suppliers and approximately 48% is sold to metal service centers. In our served markets, we seek to be the supplier of choice by pursuing "Best in Class" customer satisfaction driven by quality, availability, service and delivery performance. We strive to differentiate our product portfolio through our broad product offering and our KaiserSelect® products, which are engineered and manufactured to deliver enhanced product characteristics with improved consistency, so as to result in better performance, lower waste and, in many cases, lower production cost for our customers.
We further strive to enhance the efficiency of product flow to our customers and our status as a supplier of choice by tightly integrating the management of our operations across multiple production facilities, product lines and target markets. Additionally, our strategy to be a supplier of choice and low cost producer is facilitated by a culture of continuous improvement that is facilitated by the Kaiser Production System ("KPS"), an integrated application of tools such as Lean Manufacturing, Six Sigma and Total Productive Manufacturing. Using KPS, we seek to continuously reduce our own manufacturing costs and eliminate waste throughout the value chain.
We strive to strengthen our competitive position through strategic capital investments aimed at increasing our capacity and expanding our manufacturing capabilities. For more than a decade, we have made aggregate organic investments of more than $700.0 million, or approximately two times depreciation. During that time, we have nearly tripled our capacity for heat treat plate at Trentwood, and have expanded our capabilities to capitalize on growth in our end markets for Aero/HS and GE products. We have also made significant investments to expand capacity and enhance our capabilities across our automotive platform to facilitate sales growth in Automotive Extrusions. In addition, we have invested, and continue to invest, to enhance manufacturing cost efficiency, to improve product quality and to promote operational security across our platform.
We believe our recent capital projects, which have been focused on further enhancing manufacturing cost efficiency and improving product quality, are critical to maintaining and strengthening our position in an increasingly competitive market environment. Details of these capital projects are discussed in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report under the caption, "Liquidity and Capital Resources."
Because we recognize that we operate in cyclical markets, another key component of our business model is to maintain financial strength and flexibility throughout the business cycle so that even in economic downturns we can proactively pursue strategic growth with financial and competitive strength. We manage and monitor our financial strength through routine analysis of our liquidity position under scenarios of varying business and economic cycles.
Kaiser Aluminum was founded by Henry J. Kaiser in 1946 with the lease and eventual purchase of three aluminum facilities from the United States government. Over the ensuing decades, Kaiser Aluminum grew to become a fully-integrated aluminum company involved in all aspects of the aluminum industry. From 2000 to 2010, as a result of a strategic reassessment of our competitive positions in the upstream and downstream portions of the aluminum industry, we divested or closed our non-
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strategic bauxite mining, alumina refining and primary aluminum operations and focused on downstream operations where we had a competitive advantage. Consequently, we no longer participate in commodity segments within the aluminum industry and focus solely on the production of semi-fabricated specialty aluminum products for major suppliers and manufacturers for applications in our chosen aerospace/high strength, automotive, general engineering and other industrial end market applications.
Business Operations
Overview
Our business focuses on producing rolled, extruded and drawn aluminum products used principally for aerospace and defense, automotive and general engineering products that include consumer durables, electronics and products for electrical and machinery and equipment applications. See "Selected Operational and Financial Information" within Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report for selected shipment and sales information for our fabricated aluminum products by end market application.
Aero/HS Products. Our Aero/HS products include heat treat plate and sheet, hard alloy extruded shapes, cold finish rod and bar, seamless drawn tube and billet used for a wide variety of end uses in the global aerospace and defense industries. Typical applications are structural aircraft components that must perform consistently under extreme variations in temperature and pressure due to frequent take-offs, landings and changes in altitude. Required physical properties include high tensile strength, superior fatigue resistance and exceptional durability even in harsh environments. We use high-strength 2000- and 7000-series alloys and apply a variety of thermal practices to manufacture our Aero/HS products to meet the demanding specifications required for such safety-critical applications. While competing materials such as titanium and composites have displaced aluminum for certain applications on several newer aircraft designs, aluminum continues to be the material used most extensively for structural aerospace and defense applications because it is light weight, can meet demanding performance requirements and is cost effective relative to other materials. Overall, the aerospace and defense industries' consumption of fabricated aluminum products is driven by factors that include airframe build rates, the mix of aircraft models being built and defense spending. Unanticipated changes in build rates and mix of aircraft models being built can trigger restocking or destocking throughout the long aerospace supply chain, temporarily impacting demand for our Aero/HS products. Growth in demand for aerospace plate has exceeded demand growth for other forms of Aero/HS products as aircraft manufacturers have migrated to monolithic component design, where a single piece of aluminum, usually a plate, is heavily machined to form a desired part rather than creating the same part by assembling sub-components made of aluminum sheet, extrusions or forgings that are affixed to one another using rivets, bolts or welds. As more applications convert to monolithic design, we expect aerospace plate demand to continue to grow at a pace higher than our other Aero/HS products.
Automotive Extrusions. Automotive Extrusions consist of extruded aluminum products for many North American automotive applications. Examples of the variety of extruded products that we supply to the automotive industry include extruded products for the body-in-white structural components, crash management systems, anti-lock braking systems and drawn tube for drive shafts. For some Automotive Extrusions, we perform limited fabrication, including sawing and cutting to length. Demand for Automotive Extrusions is determined based upon automotive build rates in North America and aluminum content. In recent years, automotive original equipment manufacturers ("OEMs") and their suppliers have, at an increasing pace, been converting many automotive components that historically were made of steel to aluminum to decrease weight without sacrificing structural integrity and safety performance and thereby achieve greater fuel efficiency standards mandated by stringent United States' Corporate Average Fuel Economy ("CAFE") regulations. We believe fuel efficiency standards along with consumer preference for larger vehicles will continue to drive growth in demand for aluminum extruded components in passenger vehicles as a replacement for the heavier weight of steel components. Our Automotive Extrusions are designed and produced to provide specific mechanical properties and performance attributes required in automotive applications across a broad mix of North American OEMs and automotive platforms. We believe that these attributes are not easily replicated by our competitors and are important to our customers, who are typically tier one automotive suppliers.
GE Products. Our broad portfolio of GE products consists primarily of 6000-series alloy plate, sheet, rod, bar, tube, wire and standard extruded shapes. The 6000-series alloy is an extremely versatile, medium-strength, heat treatable alloy that can be both extruded and rolled. Our GE products have a wide range of uses and applications, many of which involve further fabrication for numerous transportation and other industrial end market applications where machining of plate, rod and bar is intensive. For example, our GE products are used to produce armor for military vehicles, ordnances, manufacturing cells for semiconductor production, numerous electronic devices, after-market motor sport parts, tooling plate, parts for machinery and equipment, bolts, screws, nails and rivets. Demand growth and cyclicality for GE products tend to mirror broad economic patterns and
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industrial activity in North America. Demand is also impacted by the destocking and restocking of inventory throughout the supply chain.
Other Products. Other products consist of extruded, drawn and cast billet aluminum products for a variety of North American industrial end uses. Demand for Other products tends to mirror broad economic patterns and industrial activity in North America. We continue to redirect our resources and production capacity to focus on strategic Aero/HS products, Automotive Extrusions and GE products, and away from our Other products.
Manufacturing Processes
We use two main processes, flat rolling and extrusion/drawing, to produce our fabricated products in the desired forms and dimensions and with the desired physical properties. Both processes start by heating aluminum, a rolling ingot or extrusion billet, to an elevated temperature at which the metal is malleable and then applying pressure in a manner that both forces the metal into a desired shape and begins the "working" of the metal to enhance its strength and related properties.
Flat Rolling. Our manufacturing process for aluminum flat-rolled products uses ingot, a large rectangular slab of aluminum, as the starter material. The ingot is processed through a series of rolling operations that can be done at elevated (hot) or room (cold) temperatures. Finishing steps may include heat treatment, annealing, stretching, leveling or slitting to achieve the desired metallurgical, dimensional and/or performance characteristics. Aluminum flat-rolled products are manufactured in a variety of alloys, a range of tempers (hardness), gauges (thickness) and widths and various finishes. Flat-rolled aluminum semi-finished products are classified as sheet (under 0.25 inches in thickness) or plate (0.25 inches or greater in thickness).
Extrusion/Drawing. Our extrusion process begins with a cast billet, which is an aluminum cylinder of varying length and diameter cut from a cast log. After heating the billet to make the metal malleable, it is placed into an extrusion press and squeezed (extruded) through a die that gives the material the desired two-dimensional cross section. The material can be quenched as it leaves the press, or processed through a post-extrusion heat treatment cycle, to control the material's physical properties. The extrusion is straightened, typically by stretching, and then cut to length before being hardened in aging ovens. Drawing is a fabrication operation in which extruded tubes and rods are pulled through a die, or drawn. The primary purpose of drawing is to reduce the diameter and wall thickness while improving physical properties and dimensions. Material may go through multiple drawing steps to achieve the final dimensional specifications. Extruded and drawn semi-fabricated products are manufactured in a variety of alloys and a range of tempers (hardness).
Additionally, some of our locations have remelt and casting operations to produce the ingot or log for flat rolling or extrusion. To produce the ingot or log, we purchase primary aluminum, recycled scrap aluminum segregated by alloys and other metals (including copper, zinc and magnesium) that are necessary to create various aluminum alloys. We also recycle internally generated scrap from our own manufacturing processes. Initially in solid form, aluminum is heated in a vessel to a temperature at which it melts. While in molten form, additional metals (aluminum alloyed scrap, alloy metals, primary aluminum or high purity aluminum) are introduced to achieve the proper mixture of chemical elements for a particular alloy. When the desired chemical composition of the molten metal has been achieved, it is poured into a mold in which the molten metal cools in a controlled manner and solidifies into a rolling ingot or extrusion log. The size of the mold determines the dimensions of the rolling ingot or extrusion log. Our casting operations at our facilities in Kalamazoo, Michigan, London, Ontario, Los Angeles, California, Newark, Ohio and Sherman, Texas produce extrusion log and cut billet for their operations and for our other facilities that do not have casting operations. Trentwood casts rolling ingot for its own consumption.
On September 19, 2018, we acquired Imperial Machine & Tool Co. ("IMT"), a leader in 3D Printing and machining technologies for aerospace and defense, automotive, high-tech and general industrial applications. IMT focuses on challenging, multi-discipline additive manufacturing projects along with intricate multi-axis computer numerical control machining on many of its printed structures critical to yielding quality end-use components.
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A description of the manufacturing processes and category of products at each of our production facilities at December 31, 2018 is shown below:
Location | Types of Products | Manufacturing Process | ||
Chandler, Arizona (Extrusion) | Aero/HS, GE | Extrusion | ||
Chandler, Arizona (Tube) | Aero/HS | Extrusion/Drawing | ||
Columbia, New Jersey | Aero/HS, Auto, GE, Other | Additive Manufacturing/Machining | ||
Florence, Alabama | Aero/HS, GE, Other | Drawing | ||
Jackson, Tennessee | Aero/HS, Auto, GE | Extrusion/Drawing | ||
Kalamazoo, Michigan | Auto, GE | Extrusion | ||
London, Ontario (Canada) | Auto | Extrusion | ||
Los Angeles, California | GE, Other | Extrusion | ||
Newark, Ohio | Aero/HS, GE | Extrusion/Rod Rolling | ||
Richland, Washington | GE | Extrusion | ||
Richmond, Virginia (Bellwood) | Auto, GE | Extrusion/Drawing | ||
Sherman, Texas | Auto, GE, Other | Extrusion | ||
Spokane, Washington (Trentwood) | Aero/HS, GE | Flat Rolling | ||
As reflected by the table above, many of our facilities employ the same basic manufacturing process and produce the same types of products. We make a significant effort to tightly integrate the management of our multiple manufacturing locations, product lines and end market applications to most efficiently and effectively serve the needs of our customers. We centralize purchasing of our primary and scrap, or recycled, aluminum requirements and related alloying agents in order to better manage price, credit and other benefits. Our sales force and the management thereof are also significantly integrated as many customers purchase a number of different products that are produced at different plant facilities. We believe that integration of our operations allows us to capture efficiencies while allowing our facilities to remain highly focused on their specific processes and end market applications.
Raw Materials
To make our fabricated products, we purchase primary aluminum and scrap, or recycled, aluminum from third party suppliers in varying percentages depending on various market factors, including price and availability. The price we pay for primary aluminum is typically based on the average Midwest Transaction Price ("Midwest Price"), which reflects the primary aluminum supply/demand dynamics in North America. The average Midwest Price is comprised of the average London Metal Exchange ("LME") plus average Midwest premium. The average LME and the average Midwest premium for 2018, 2017 and 2016 were $0.96 + $0.19, $0.89 + $0.09 and $0.73 + $0.07, respectively. Scrap aluminum is typically purchased at a discount to the Midwest Price but can require additional processing.
In addition to selling fabricated aluminum products to third parties, certain of our production facilities supply log, billet or other intermediate material to certain of our other facilities for further value added production. As examples, our London, Ontario facility supplies billet to our Richmond, Virginia facility, and our Newark, Ohio facility supplies log and billet to our Jackson, Tennessee facility.
Pricing, Metal Price Risk Management and Hedging
As noted above, we purchase primary and scrap, or recycled, aluminum, our principal raw material, on a floating price basis typically based on the average Midwest Price. Our pricing of fabricated aluminum products is generally intended to lock in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price fluctuation through to our customers. In order to meet our objective to be metal price neutral, we manage the risk of fluctuations in the price of aluminum through our pricing policies and use of financial derivatives. Our three principal pricing mechanisms are as follows:
• | Spot price. A majority of our customers for GE products and some of our customers for Aero/HS products pay a product price that incorporates the spot price of primary aluminum (LME plus Midwest premium) in effect at the time of shipment to a customer. Spot prices for these products change regularly based on competitive dynamics. Fluctuation in the underlying aluminum price is a significant factor influencing changes in competitive spot prices. Through spot |
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pricing, we generally can pass metal price risk through to customers. For some of our higher value added revenue products sold on a spot basis, however, the pass through of metal price movements can lag by several months (the timing of which depends in part on market conditions), with a favorable impact to us when metal prices decline and an adverse impact to us when metal prices increase. We, from time to time, enter into hedging transactions with third parties to minimize the impact to us of metal price swings for these higher value added revenue products.
• | Index-based price. The pricing structure of our typical automotive and aerospace contracts calls for our customer to pay a product price that incorporates a monthly index-based price for primary aluminum, such as the average Midwest Price for primary aluminum. Index-based pricing typically allows us to pass metal price risk through to the customer and applies to virtually all of our Automotive Extrusions sales and the majority of our Aero/HS products sales. |
• | Firm-price. Some of our customers who commit to volumes and timing of delivery pay a firm-price, creating metal price risk that we must hedge. We are able to limit exposure to metal price risks created by firm-price customer sales contracts by using third-party hedging instruments. Total fabricated product shipments for which we were subject to price risk were, in millions of pounds, 200.6, 185.6 and 213.7 during 2018, 2017 and 2016, respectively. |
All metal procurement and hedging activities are managed centrally to minimize transaction costs, monitor consolidated net exposures and respond promptly to changes in market factors. Hedging activities are conducted in compliance with a policy approved by our Board of Directors and administered by our hedging committee (members of which include our principal executive officer, principal financial officer and principal accounting officer).
Sales, Marketing and Distribution
Industry sales for fabricated products fluctuate in response to competitive and market dynamics. Sales are made directly to customers by our sales personnel located in the United States, Canada, Western Europe and China and by independent sales agents in other regions of Asia, Latin America and the Middle East. Our sales and marketing efforts are focused on the markets for Aero/HS products, Automotive Extrusions, GE products and Other products.
Aero/HS Products. We sell our Aero/HS products to metal service centers, as well as directly to aerospace manufacturers and tier one suppliers. Sales are made primarily under long-term agreements as well as on an order-by-order basis. We serve this market with a North American sales force focused on Aero/HS and GE products and our sales personnel in Western Europe and China.
Automotive Extrusions. Our Automotive Extrusions are sold primarily to tier one automotive suppliers. Almost all sales of Automotive Extrusions occur through direct channels using a North American direct sales force that works closely with our technical sales support organization.
GE Products. A majority of our GE products are sold to large metal service centers in North America on an order-by-order basis, with orders primarily consisting of standard catalog type items shipped with a relatively short lead-time. We service this market with a North American sales force focused on GE and Aero/HS products.
Other Products. Other products are primarily sold directly to industrial end users on an order-by-order basis using a North American direct sales force.
Customers
In 2018, we had over 740 customers, of which, our two largest customers were Reliance Steel & Aluminum Co. ("Reliance") and The Boeing Company ("Boeing"). While the loss of Reliance or Boeing as customers could have a material adverse effect on us, we believe that our long-standing relationship with each is good and that the risk of losing either as a customer is remote. See Note 16 of Notes to Consolidated Financial Statements included in this Report for information about our significant concentrations.
Research and Development
We operate three research and development centers. Our Rolling and Heat Treat Center and our Metallurgical Analysis Center are both located at Trentwood. The Rolling and Heat Treat Center has complete hot rolling, cold rolling and heat treat capabilities to simulate, in small lots, processing of flat-rolled products for process and product development on an experimental scale. The Metallurgical Analysis Center consists of a full metallographic laboratory and a scanning electron microscope to support research and development programs as well as respond to plant technical service requests. The third center, our Solidification and Casting Center, is located in Newark, Ohio and has a developmental casting unit capable of
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casting billets and ingots for extrusion and rolling experiments. The casting unit is also capable of casting full size billets and ingots for processing on the production extrusion presses and rolling mills.
A significant amount of our research and development is devoted to product and process development within our production operations, largely focused on controlling the manufacturing process to improve product quality, ensure consistency and enhance one or more specific product attributes. This has resulted in the creation and delivery of our highly differentiated KaiserSelect® products.
The recent acquisition of IMT with its facility in Columbia, New Jersey provides us with significant technology and intellectual property that complements our metallurgical and application engineering expertise to further advance our capability to deliver highly engineered solutions for our customers. IMT's multi-material expertise in aluminum, titanium, tantalum, molybdenum, nickel alloys, tungsten, cobalt chromium and stainless steel offers a differentiated approach by combining traditional machining know-how and related technical capabilities with additive manufacturing expertise to drive innovative solutions.
We hold numerous patents, trademarks, trade secrets and copyrights that relate to the design, use and marketing of products. We consider this intellectual property to be important, but no single property is material to the overall conduct of our business.
Competition
The fabricated aluminum industry is highly competitive. We focus our fabricating operations on technically challenging applications for flat-rolled heat treat plate and sheet and extruded/drawn products that allow us to apply our core metallurgical and process technology capabilities to produce highly engineered products with differentiated characteristics. We seek to further differentiate ourselves from our competitors by providing a broad product offering and striving to deliver "Best in Class" customer satisfaction.
Our primary competitors in the global market for Aero/HS products are Arconic, Inc., Constellium N.V. and Aleris Corporation. In serving our North American customers for both Automotive Extrusions and GE products, our primary competitors are Arconic, Inc. and Norsk Hydro ASA, and for certain of these products, we also compete with smaller, regional participants. In North America, we also compete with general engineering heat treat plate products imported from South Africa, Europe and China. Some of our competitors are substantially larger, have greater financial resources and may have other strategic advantages.
Because many of our products are used in safety critical applications, our customers have demanding standards for product quality and consistency that make it difficult to become a qualified supplier. Suppliers must pass a rigorous qualification process to sell to both airframe and automotive manufacturers and must also make significant investments in infrastructure and specialized equipment to supply products for these high strength applications. Further, sophisticated manufacturing processes make it difficult to become a qualified supplier, even with proper equipment. For example, producing heat treat plate and sheet products, particularly for aerospace applications, requires technological expertise that only a few companies have developed through significant investment in research and development and decades of operating experience.
Employees
At December 31, 2018, we employed approximately 2,860 people, of which approximately 2,800 were employed in our manufacturing locations and approximately 60 were employed in our corporate office in Foothill Ranch, California.
The table below shows each manufacturing location, the primary union affiliation, if any, and the expiration date for the current union contracts as of December 31, 2018. As indicated below, union affiliations are with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC ("USW"), International Association of Machinists ("IAM") and International Brotherhood of Teamsters ("Teamsters"). See Note 16 of Notes to Consolidated Financial Statements in this Report for additional information about concentration of labor subject to collective bargaining agreements.
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Contract | ||||
Location | Union | Expiration Date | ||
Chandler, Arizona (Extrusion) | Non-union | — | ||
Chandler, Arizona (Tube) | USW | Apr 2021 | ||
Columbia, New Jersey | Non-union | — | ||
Florence, Alabama | USW | Mar 2020 | ||
Jackson, Tennessee | Non-union | — | ||
Kalamazoo, Michigan | USW | Feb 2021 | ||
London, Ontario (Canada) | USW Canada | Feb 2022 | ||
Los Angeles, California | Teamsters | Apr 2022 | ||
Newark, Ohio | USW | Sep 2020 | ||
Richland, Washington | Non-union | — | ||
Richmond, Virginia (Bellwood) | USW/IAM | Nov 2020/Nov 2020 | ||
Sherman, Texas | IAM | Apr 2022 | ||
Spokane, Washington (Trentwood) | USW | Sep 2020 | ||
Environmental Matters
We are subject to a number of environmental laws and regulations, to potential fines or penalties assessed for alleged breaches of such environmental laws and regulations and to potential claims and litigation based upon such laws and regulations.
We have established procedures for regularly evaluating environmental loss contingencies. Our environmental accruals represent our undiscounted estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, existing requirements, currently available facts, existing technology and our assessment of the likely remediation actions to be taken. See Note 9 of Notes to Consolidated Financial Statements included in this Report.
Legal Structure
Our current corporate structure is summarized as follows:
• | We directly own 100% of the issued and outstanding shares of capital stock of Kaiser Aluminum Investments Company, a Delaware corporation ("KAIC"), which functions as an intermediate holding company. |
• | We directly own 100% of the ownership interest in Kaiser Aluminum Beijing Trading Company, which was formed in China for the primary purpose of engaging in market development and commercialization and distribution of our products in Asia. |
• | KAIC owns 100% of the ownership interests of each of: |
• | Kaiser Aluminum Fabricated Products, LLC, a Delaware limited liability company ("KAFP"), which directly holds the assets and liabilities associated with our manufacturing operations (excluding those assets and liabilities associated with our Columbia, New Jersey and London, Ontario facilities and certain of the assets and liabilities associated with our operations in the State of Washington) and owns 100% of the ownership interest of: |
• | Kaiser Aluminum Washington, LLC, a Delaware limited liability company, which holds certain of the assets and liabilities associated with our operations in the State of Washington. |
• | Kaiser Aluminum Canada Limited, an Ontario corporation, which holds the assets and liabilities associated with our London, Ontario facility; |
• | Kaiser Aluminum Mill Products, Inc., a Delaware corporation, which engages in market development and commercialization and distribution of our products in the United Kingdom; |
• | Trochus Insurance Co., Ltd., a corporation formed in Bermuda, which has historically functioned as a captive insurance company; |
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• | Kaiser Aluminum France, SAS, a corporation formed in France for the primary purpose of engaging in market development and commercialization and distribution of our products in Europe; and |
• | Imperial Machine & Tool, Co, a New Jersey corporation, which holds certain of the assets and liabilities associated with our Columbia, New Jersey facility and owns 100% of the ownership interest of: |
• | Solid Innovations, LLC, a Pennsylvania limited liability company, which holds certain of the assets and liabilities associated with our Columbia, New Jersey facility. |
Item 1A. Risk Factors
In addition to the factors discussed elsewhere in this Report, the risks described below are those that we believe are material to our company. The occurrence of any of the events discussed below could significantly and adversely affect our business, prospects, financial position, results of operations and cash flows as well as the trading price of our securities.
We operate in a highly competitive industry.
We compete with others in the fabricated products segment of the aluminum industry based upon quality, availability, price, customer service and delivery performance. Some of our competitors are substantially larger than we are, have greater financial resources than we do, operate more facilities than we do, are geographically closer to our customers than we are, employ more efficient or advanced technologies than we do, or have other strategic advantages. Additionally, new parties may become capable of manufacturing similar products and qualifying them with our customers, which could lead to further competitive pressure. Competitors' facilities located in certain other countries may have a manufacturing cost advantage compared to our facilities, which are located in the United States and Canada. Such foreign competitors may sell products similar to our products at lower prices as a result of having lower manufacturing costs or due to currency exchange rates that periodically favor foreign competition. Some foreign competitors may also dump their products in the United States and Canada in violation of existing trade laws. We may not be able to compete by differentiating ourselves based on the quality, availability and delivery of our products or our customer service. Additionally, we may not be able to reduce our cost structure and our selling prices to be competitive with others, and tariffs introduced to protect manufacturers in the United States and Canada from foreign price competition may not be fully effective. Increased competition could cause a reduction in our shipment volumes, our product pricing or both shipment volumes and product pricing, which could have an adverse effect on our financial position, results of operations and cash flows.
We depend on a core group of significant customers.
In 2018, Reliance and Boeing were our two largest customers, representing approximately 25% and 15%, respectively, of our net sales. Our five largest customers in total accounted for approximately 54% of our 2018 net sales. Most of these customers have one or more sizable sales agreements with us. If one or more of these customers experienced a prolonged period of adverse demand, depressed business activity or financial distress, if any of these customers breached or sought relief from its contractual obligations under its sales agreements with us or if any of these customer relationships otherwise ended or materially deteriorated and such lost business was not successfully replaced, our financial position, results of operations and cash flows could be adversely affected.
We experience fluctuation in certain costs that we cannot pass through to our customers and face pressure from our customers on pricing.
We generally are unable to pass fluctuations of certain costs through to our customers, including the cost of energy, certain raw materials and freight. Further, cost cutting initiatives that many of our customers have adopted generally result in downward pressure on pricing. If we are unable to generate sufficient productivity improvements and cost savings in the future to offset reductions in our selling prices and increases in our costs that we cannot pass through to our customers, our financial position, results of operations and cash flows could be adversely affected.
Our industry is very sensitive to foreign economic, regulatory and political factors that may adversely affect our business.
We import primary aluminum from, and manufacture fabricated products used in, foreign countries. Our financial position, results of operations and cash flows could be adversely affected by numerous factors in the politically and economically diverse jurisdictions: (i) from which our input materials are sourced; (ii) in which we operate; (iii) in which our customers operate; or (iv) in which our products are consumed or further fabricated. Such factors include but are not limited to:
• | the adoption of tariffs, duties and other forms of taxation; |
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• | trade disputes; |
• | the implementation of controls on imports, exports or prices; |
• | the imposition of currency restrictions; |
• | inflation relative to the United States and related fluctuations in currency and interest rates; |
• | government regulation in the countries in which we operate, service customers or purchase raw materials; |
• | civil unrest and labor problems; |
• | the nationalization or appropriation of rights or other assets; and |
• | acts or threats of war or terrorism. |
The commercial aerospace industry is cyclical and downturns in the commercial aerospace industry could adversely affect our business.
We derive a significant portion of our revenue from products sold to the aerospace industry. Notwithstanding a secular growth trend spanning nearly two decades, the aerospace industry has historically been highly cyclical. Numerous factors that influence demand for new commercial aircraft could result in cancellations or deferrals of aircraft orders and a global decrease in new commercial aircraft deliveries. These factors include but are not limited to: (i) declines or reduced growth trends in global travel and airline passenger traffic; (ii) the rate of replacement of older aircraft with more fuel efficient aircraft; (iii) changing airline strategies affecting preferences for single-aisle aircraft models as opposed to twin-aisle or jumbo aircraft models; (iv) airline industry profitability; (v) the state of regional and global economies; (vi) concerns regarding terrorism or the threat of terrorism; (vii) concerns regarding pandemics of infectious disease; and (viii) safety concerns with newly introduced aircraft. Despite existing backlogs, adverse developments in any one or more of these influencing factors may lead to reduced demand for new aircraft that utilize our products, which could adversely affect our financial position, results of operations and cash flows.
Reductions in demand for our products may be more severe than, and may occur prior to, reductions in demand for our customers' products.
Most of our products undergo further fabrication by other parties before being deployed in their end uses. In particular, our Aero/HS products undergo numerous stages of further fabrication or assembly by a number of parties in the supply chain, often over the course of many months. The lead time from when we sell our Aero/HS product to when the finished product is installed on an aircraft often exceeds a year. Due to this long lead time, demand for our products may increase prior to demand for our customers' products or may decrease when our customers experience or anticipate softening demand for their products. Our customers typically respond to reduced demand for their products by depleting their inventory until their inventory falls to a new desired level. This causes a greater reduction in demand for our products than our customers experience for their products. Further, the reduction in demand for our products can be exacerbated if our customers' inventory levels had been higher than normal, if production is delayed for specific commercial airframe models, if our customers previously had purchased products from us at committed sales contract volumes that exceeded their actual need or for other reasons. The amplified reduction in demand for our products while our customers consume their inventory to meet their business needs (destocking) may adversely affect our financial position, results of operations and cash flows.
Reductions in defense spending for aerospace and non-aerospace military applications could adversely affect demand for our products.
Our products are used in a wide variety of military applications, including military aircraft, armored vehicles and ordnance. Certain military programs are used by the U.S. armed forces, as well as by the defense forces of our allied foreign powers. Military programs that currently use or in the future could use our products may be subject to changes in military strategy and government priorities. Further, while many of the U.S. government programs span several years, they are often funded annually, and funding is generally subject to congressional appropriations. When U.S. and foreign allied governments are faced with competing national priorities, there can be significant pressure to reduce defense spending, which could reduce the demand for our products and adversely affect our financial position, results of operations and cash flows.
Our customers may reduce their demand for aluminum products in favor of alternative materials.
Our products compete with other materials for use in various customer applications. For instance, the commercial aerospace industry has used and continues to evaluate the further use of titanium, composites and carbon fiber materials as alternatives to
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aluminum to reduce aircraft weight and increase fuel efficiency. Additionally, while the automotive industry has continued to increase use of aluminum in vehicle production to reduce vehicle weight and increase fuel efficiency, manufacturers may revert to steel or other materials for certain applications and rely on improved drivetrain technology, more efficient engines, aerodynamics or other measures to achieve fuel efficiency goals. The willingness of customers to use materials other than aluminum could adversely affect the demand for our products, particularly our Aero/HS products and Automotive Extrusions, and thus could adversely affect our financial position, results of operations and cash flows.
Our customers may reduce their demand for our products if the government relaxes fuel efficiency standards or if oil prices remain low for a protracted period of time.
Efficient use of fossil fuels partially drives demand for aluminum in transportation applications. The U.S. Environmental Protection Agency ("EPA"), other federal regulatory agencies and regulatory agencies of certain states have generally sought to limit growth of fossil fuel usage by establishing stricter fuel efficiency standards. However, the environmental agendas of prior administrations could be reversed and previously established fuel efficiency standards could be relaxed by administrations that place less emphasis on environmental issues. Additionally, in periods of lower oil prices, the economic benefits of replacing older aircraft and automobiles with more fuel-efficient models are less compelling. A relaxation of fuel efficiency standards by the regulatory agencies or an extended period of moderate oil prices could reduce demand for new more efficient aircraft and automobiles, which could adversely affect the demand for our products and have an adverse effect on our financial position, results of operations and cash flows.
Downturns in the automotive and ground transportation industries could adversely affect our business.
The demand for our Automotive Extrusions and many of our general engineering and other industrial products is dependent on the production of cars, light trucks, SUVs and heavy duty vehicles and trailers in North America. The automotive industry is highly cyclical, as new vehicle demand is dependent on consumer spending and is tied closely to the overall strength of the North American economy. Even with the automotive industry's growing use of aluminum to reduce vehicle weight, weak demand for, or lower production of, new cars, light trucks, SUVs and heavy duty vehicles and trailers could adversely affect the demand for our products and have an adverse effect on our financial position, results of operations and cash flows.
Changes in consumer demand for particular motor vehicles could adversely affect our business.
Sensitivity to fuel prices and consumer preferences can influence consumer demand for motor vehicles that have a higher content of the aluminum Automotive Extrusions that we supply. The loss of business with respect to, or a lack of commercial success of, one or more particular vehicle models for which we are a significant supplier could have an adverse impact on our financial position, results of operations and cash flows.
We may experience difficulties in the launch or production ramp-up of new products which could adversely affect our business.
As we ramp up manufacturing processes for newly introduced products, we may experience difficulties, including manufacturing disruptions, delays or other complications, which could adversely impact our ability to serve our customers, our reputation, our costs of production and, ultimately, our financial position, results of operations and cash flows.
Unplanned events may interrupt our production operations, which may adversely affect our business.
The production of fabricated aluminum products is subject to unplanned events such as explosions, fires, inclement weather, natural disasters, accidents, equipment failures, labor disruptions, transportation interruptions and supply interruptions. Operational interruptions could significantly curtail the production capacity of a facility for a period of time. We have redundant capacity and capability to produce many of our extruded products within our manufacturing platform to mitigate our business risk from such interruptions, but interruptions at Trentwood where our production of plate and sheet is concentrated, could significantly compromise our ability to meet our customers' needs. Delayed delivery of our products to customers who require on-time delivery from us may cause customers to purchase alternative products at a higher cost, reschedule their own production or incur other incremental costs. Customers may be able to pursue financial claims against us for their incremental costs, and we may incur costs to correct such problems in addition to any liability resulting from such claims. Interruptions may also harm our reputation among actual and potential customers, potentially resulting in a loss of business. To the extent these losses are not covered by insurance, our financial position, results of operations and cash flows could be adversely affected by such events.
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We may not be able to successfully implement our productivity enhancement and cost reduction initiatives that are necessary to offset competitive price pressure.
Over time, we have experienced pricing pressure on many of our products and anticipate continued pricing pressure in the future. Ongoing and heightened competitive price pressure makes it increasingly important for us to be a low cost producer. Although we have undertaken and expect to continue to undertake productivity enhancement and cost reduction initiatives, including significant investments in our facilities to improve our manufacturing efficiency, cost and product quality, we cannot make assurances that we will complete all of these initiatives, that we will fully realize the estimated cost savings from such activities, that short-to-medium term improvements from new efficiencies and lower cost structure achieved will become permanent or that we will be able to continue to reduce cost and increase productivity over the long term.
Our investment and other expansion projects may not be completed, start up as scheduled or deliver the expected capacity and other benefits.
Our ability to complete our investment and expansion projects and the timing and costs of doing so are subject to various risks associated with all major construction projects, many of which are beyond our control, including technical or mechanical problems and economic conditions. Additionally, the start-up of operations after such projects have been completed can be complicated and costly. If we are unable to fully complete these projects, if the actual costs for these projects exceed our expectations, if the start-up phase after completion is more complicated than anticipated or if the capacity and other benefits of these projects are less than anticipated, our financial position, results of operations and cash flows could be adversely affected.
Our business could be adversely affected by increases in the cost of aluminum.
Our largest inputs to produce fabricated aluminum products are primary aluminum and recycled scrap aluminum. Primary aluminum pricing fluctuates in response to global supply and demand and also reflects the impact of duties and tariffs imposed by the United States and certain other countries. Recycled scrap aluminum is generally priced at a discount to primary aluminum that loosens and tightens in response to regional aluminum scrap supply and demand. The timing and magnitude of changes in market pricing for primary and scrap aluminum are largely unpredictable. Our pricing structures for fabricated aluminum products generally allow us to pass fluctuations in the price of primary aluminum through to our customers so that we can minimize our exposure to metal price risk. However, competitive dynamics for certain of our high value added products may limit the amount or delay the timing of selling price increases on our products to recover our increased aluminum costs, resulting in a time lag during which we may be partially exposed to metal price risk. If these events were to occur, they could have an adverse effect on our financial position, results of operations and cash flows. In addition, if the market price for primary aluminum were to remain high for an extended period of time, the corresponding increase in our selling price for our fabricated products may cause some of our customers to switch to other materials in lieu of our products, causing sales of our fabricated aluminum products to decrease, which could adversely affect our financial position, results of operations and cash flows.
Our business could be adversely affected by the pricing and availability of recycled scrap aluminum.
We can efficiently use certain forms of recycled scrap aluminum in lieu of primary aluminum and alloying metals in our operations because recycled scrap aluminum trades at a discount to primary aluminum. The size of the discount to primary aluminum depends on regional scrap aluminum supply and demand dynamics. Larger discounts, generally available in periods of ample regional scrap aluminum supply relative to demand, enhance the economic advantage to us of using recycled scrap aluminum in lieu of primary aluminum and alloying metals. The timing and magnitude of changes in scrap discounts relative to primary aluminum are largely unpredictable. If the availability of recycled scrap aluminum in our regional markets were to tighten, scrap discounts relative to primary aluminum could decline and the amount of recycled scrap aluminum we could procure for use in our operations could decline, either of which could have an adverse effect on our financial position, results of operations and cash flows.
Reduced pricing for aluminum can reduce our borrowing availability and cause our liquidity to decline.
Lower aluminum prices reduce the market value of our inventory and generally cause a reduction in our accounts receivable as we pass through a lower underlying metal price to our customers. Because the amount we can borrow under our revolving credit facility is determined by the value of our receivables and inventory, which serve as collateral for the facility, a reduction in aluminum prices can reduce our borrowing availability and our liquidity, which could have an adverse effect on our financial position, results of operations and cash flows.
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Our hedging programs may limit the income and cash flows we would otherwise expect to receive if our hedging program were not in place and may otherwise affect our business.
In the ordinary course of business, we enter into hedging transactions to limit our exposure to risks relating to changes in the market prices of primary aluminum, certain alloying metals, natural gas and electricity, as well as fluctuations in foreign currency exchange rates. To the extent that market prices or exchange rates at the expiration of these hedging transactions would have been more favorable to us than the fixed prices or rates established by these hedging transactions, our income and cash flows will be lower than they otherwise would have been. Our liquidity could also be adversely affected to the extent we incur margin calls from our hedging counterparties due to the market price of the underlying commodity or the foreign currency exchange rates deviating adversely from fixed, floor or ceiling prices or rates established by our outstanding hedging transactions. Our failure to satisfy certain covenants in the underlying hedging documents or the occurrence of an event of default thereunder could also trigger margin calls that could adversely impact our liquidity, financial position, results of operations and cash flows. Our hedging programs also expose us to the creditworthiness of our hedging counterparties, which is inherently difficult to assess and can change quickly and dramatically. Non-performance by a hedging counterparty could have an adverse effect on our financial position, results of operations and cash flows.
Covenants and events of default in our debt instruments could limit our ability to undertake certain types of transactions and adversely affect our liquidity.
Our revolving credit facility and the indenture governing our 5.875% Senior Notes due 2024 ("5.875% Senior Notes") contain a number of restrictive covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
•incur additional indebtedness and guarantee indebtedness;
•pay dividends or make other distributions or repurchase or redeem capital stock;
•prepay, redeem or repurchase certain debt;
•issue certain preferred stock or similar equity securities;
•make loans and investments;
•sell assets;
•incur liens;
•enter into transactions with affiliates;
•alter the businesses we conduct;
•enter into agreements restricting our subsidiaries' ability to pay dividends; and
•consolidate, merge or sell all or substantially all of our assets.
In addition, restrictive covenants in our revolving credit facility require us in certain circumstances to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control and we may be unable to meet them.
A breach of the covenants or restrictions under our revolving credit facility or under the indenture governing the 5.875% Senior Notes could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt. A payment default or an acceleration following an event of default under our revolving credit facility or our indenture for our 5.875% Senior Notes could trigger an event of default under the other indebtedness obligation, as well as any other debt to which a cross-acceleration or cross-default provision applies, which could result in the principal of and the accrued and unpaid interest on all such debt becoming due and payable. In addition, an event of default under our revolving credit facility could permit the lenders under our revolving credit facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay any amounts due and payable under our revolving credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
As a result of these restrictions, we may be:
•limited in how we conduct our business and grow in accordance with our strategy;
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•unable to raise additional debt or equity financing to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
In addition, our financial results, our level of indebtedness and our credit ratings could adversely affect the availability and terms of any additional or replacement financing.
More detailed descriptions of our revolving credit facility and the indenture governing our 5.875% Senior Notes are included in filings made by us with the SEC, along with the documents themselves, which provide the full text of these covenants.
Restrictive covenants in our debt instruments contain significant qualifications and exceptions.
While our revolving credit facility and the indenture governing the 5.875% Senior Notes place limitations on our ability to pay dividends or make other distributions, repurchase or redeem capital stock, make loans and investments and incur additional indebtedness, investors should be aware that these limitations are subject to significant qualifications and exceptions. The aggregate amount of payments made or incremental debt incurred in compliance with these limitations could be substantial.
As indicated above, more detailed descriptions of our revolving credit facility and the indenture governing our 5.875% Senior Notes are included in filings made by us with the SEC, along with the documents themselves, which provide the full text of these covenants.
Servicing our debt requires a significant amount of cash and we may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled interest and principal payments on our debt obligations or to refinance such obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the interest, principal and premium, if any, on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, dispose of material assets or operations, restructure or refinance our indebtedness or seek additional debt or equity capital. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our revolving credit facility and the indenture governing the 5.875% Senior Notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or certain forms of equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate asset dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
If we cannot make scheduled payments on our debt, we will be in default and holders of the 5.875% Senior Notes could declare all outstanding principal and interest to be due and payable, the lenders under our revolving credit facility could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.
We are a holding company and depend on our subsidiaries for cash to meet our obligations and pay any dividends.
We are a holding company and conduct all of our operations through our subsidiaries, certain of which are not guarantors of our 5.875% Senior Notes or our revolving credit facility. Accordingly, repayments of our 5.875% Senior Notes and amounts due under our revolving credit facility are dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, loan, debt repayment or otherwise. Our subsidiaries that are not guarantors of our revolving credit facility or the 5.875% Senior Notes have no obligation to pay amounts due on the revolving credit facility or the 5.875% Senior Notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required interest and principal payments on our revolving credit facility, the 5.875% Senior Notes or other indebtedness.
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Our inability to receive distributions from our subsidiaries, otherwise generate sufficient cash flows to satisfy our debt obligations or refinance our indebtedness on commercially reasonable terms, or at all, would adversely affect our financial position and results of operations.
Our failure to maintain satisfactory labor relations could adversely affect our business.
At December 31, 2018, approximately 62% of our employees were represented by labor unions under labor contracts with varying durations and expiration dates. Employees at Trentwood and our Newark, Ohio facility are represented by the USW under a single contract that extends through September 2020. The USW also represents employees at five other facilities, two of which have contracts expiring in 2020. As part of any labor negotiation, the future wages, healthcare benefits and excise taxes that may result therefrom, and other benefits that we agree to, could adversely affect our future financial position, results of operations and cash flows. In addition, negotiations could divert management attention, result in unsatisfactory terms and conditions, fail in coming to any agreement at all or result in strikes, work stoppages or other union-initiated work actions, any of which could have an adverse effect on our financial position, results of operations and cash flows. Moreover, the existence of labor agreements may not prevent such union-initiated work actions.
Our participation in multi-employer union pension plans may have an adverse effect on our financial performance.
We participate in several multi-employer pension plans pursuant to our collective bargaining agreements. Our contribution amounts to these plans were established by collective bargaining and, along with benefit levels and related items, will be issues in our future collective bargaining negotiations. Based on the most recent information available to us, we believe some of these plans are underfunded and may require increased contributions from participating employers to fill the funding shortfall in the future. An employer that withdraws or partially withdraws from a multi-employer pension plan may incur a withdrawal liability for the portion of the plan's underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. The failure of a withdrawing employer to fund these obligations can increase the burden of the remaining participating employers to make up the funding shortfall, which could have an adverse effect on our financial position, results of operations and cash flows. The increase or decrease in our contributions to these multi-employer pension plans will depend on our future collective bargaining, actions taken by trustees who manage the plans, actions of other participating employers, government regulations and the actual return on assets held in the plans, among other factors.
The USW has director nomination rights through which it may influence us, and interests of the USW may not align with our interests or the interests of our stockholders, debt holders and other stakeholders.
Pursuant to agreements we have with the USW, the USW has the right, subject to certain limitations, to nominate candidates which, if elected, would constitute 40% of our Board of Directors through December 31, 2020. As a result, the directors nominated by the USW have a significant voice in the decisions of our Board of Directors. It is possible that the USW may seek to extend the term of the agreement and its right to nominate board members beyond 2020.
Environmental compliance, clean up and damage claims may decrease our cash flow and adversely affect our business.
We are subject to numerous environmental laws and regulations with respect to, among other things: air and water emissions and discharges; the generation, storage, treatment, transportation and disposal of solid and hazardous waste; and the release of hazardous or toxic substances, pollutants and contaminants into the environment. Compliance with these environmental laws is and will continue to be costly.
We have accrued and will accrue for costs that are reasonably expected to be incurred based on available information with respect to fines, penalties and expenses for alleged breaches of environmental laws and investigations and environmental clean up activities with respect to our continuing operations and certain of our former operations. However, actual costs could exceed accrued amounts, perhaps significantly, and such expenditures could occur sooner than anticipated, which could adversely affect our financial position, results of operations and cash flows.
Additionally, we may be subject to new claims from governmental authorities or third parties related to alleged injuries to the environment, human health or natural resources, including claims with respect to waste disposal sites, the clean up of sites currently or formerly used by us or exposure of individuals to hazardous materials. New laws or regulations or changes to existing laws and regulations may also be enacted, including government mandated green initiatives and limitations on carbon emissions that increase the cost or complexity of compliance. Costs related to any new investigation, clean-up or other remediation, fines or penalties, resolution of third-party claims or compliance with new or amended laws and regulations may be significant and could have an adverse effect on our financial position, results of operations and cash flows.
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Governmental regulation relating to greenhouse gas emissions may subject us to significant new costs and restrictions on our operations.
Laws enacted by the U.S. Congress or policies of the EPA could regulate greenhouse gas emissions through cap-and-trade systems, carbon taxes or other programs under which emitters would be required to buy allowances to offset emissions of greenhouse gas, pay carbon based taxes, make significant capital investments, alter manufacturing practices or curtail production. In addition, several states, including the state of Washington, in which we have manufacturing operations, have considered and continue to consider various greenhouse gas regulation and reduction programs through legislative proposals, executive orders and ballot initiatives. Certain of our manufacturing plants use significant amounts of electricity and natural gas and certain of our plants emit amounts of greenhouse gas above certain minimum thresholds that have or may be imposed. Greenhouse gas regulations could restrict our access to natural gas and limit our ability to use natural gas and increase the price we pay for natural gas and electricity, any one of which could significantly increase our costs, reduce our competitiveness in the global economy or otherwise adversely affect our business, operations or financial results.
We may be subject to risks relating to our information technology systems.
We rely on information technology networks and systems to process, transmit and store electronic information, operate our business and communicate among our locations and with our customers, suppliers and other interested parties. Such information technology systems are subject to interruption or damage from power outages, cyber security breaches and other types of unauthorized access and/or use, and cyberattacks in the form of computer viruses, worms, malicious computer programs, denial-of-service attacks and other illegal or illicit means. Cyberattack and security breach strategies and methods continue to evolve and become more sophisticated. Accordingly, preventing intrusions and detecting successful intrusions and defending against them continues to be more difficult and requires ever-increasing vigilance.
A breach in cyber security could result in manipulation and destruction of sensitive data, cause critical systems to malfunction, be damaged or shut down, and lead to disruption to our operations and production downtimes, potentially for lengthy periods of time. Theft of personal or other confidential data and sensitive proprietary information could also occur as a result of a breach in cyber security, exposing us to costs and liabilities associated with privacy and data security laws in the jurisdictions in which we operate. Additionally, a breach could expose us, our customers, our suppliers and our employees to risks of misuse of such information. Such negative consequences of cyberattacks or security breaches could adversely affect our reputation, competitive position, business or results of operations. The lost profits and increased costs related to cyber or other security threats or disruptions may not be fully insured against or indemnified by other means.
In addition, from time to time we may implement new technology systems or replace and/or upgrade our current information technology systems. These upgrades or replacements may not improve our productivity to the levels anticipated and may subject us to inherent costs and risks associated with implementing, replacing and updating these systems, including potential disruption of our internal control structure, substantial capital expenditures, demands on management time and other risks of delays or difficulties in transitioning to new systems or of integrating new systems into other existing systems. Our inability to prevent information technology system disruptions or to mitigate the impact of such disruptions could have an adverse effect on us.
We may not be able to utilize all of our net operating loss carryforwards.
Our ability to utilize our net operating loss carryforwards and other tax attributes could be limited to the extent they expire before we fully utilize them or if changes in federal or certain state tax laws reduce or eliminate our ability to use them to offset income taxes. Additionally, a change in our ownership, specifically a change in ownership of more than 50% during any period of 36 consecutive months ("ownership change"), as determined under the Internal Revenue Code of 1986 ("Code"), could reduce our ability to fully use our net operating loss carryforwards and other significant tax attributes.
To prevent an unintended ownership change that could compromise our tax attributes, our stockholders have (a) approved an amendment to our certificate of incorporation to implement stock transfer restrictions ("Transfer Restrictions") that will expire in accordance with their terms on May 26, 2019 and (b) ratified a tax asset protection rights plan ("Tax Asset Rights Plan"), which will expire in accordance with its terms on April 7, 2019. While both were designed to preserve our ability to fully utilize our net operating loss carryforwards and other significant tax attributes to offset future taxable income, neither the Transfer Restrictions nor the Tax Asset Rights Plan completely protects us from an ownership change that could limit our use of our net operating loss carryforwards and other valuable tax attributes. Furthermore, as indicated above, both the Transfer Restrictions and the Tax Asset Rights Plan will expire in 2019 and are not expected to be replaced.
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After our net operating loss carryforwards and other significant tax attributes are fully utilized or if they become unavailable to us before we fully utilize them, our future income will not be shielded from federal and state income taxation and the funds otherwise available for general corporate purposes would be reduced.
We could engage in or approve transactions involving our common shares that impair the use of our federal income tax attributes.
Section 382 of the Code affects our ability to use our federal income tax attributes, including our net operating loss carryforwards, following a more than 50% change in ownership during any period of 36 consecutive months, an ownership change, as determined under the Code. Certain transactions may be included in the calculation of an ownership change, including transactions involving our repurchase or issuance of our common shares. When we engage in or approve any transaction involving our common shares that may be included in the calculation of an ownership change, our practice is to first perform the calculations necessary to confirm that our ability to use our federal income tax attributes will not be affected. These calculations are complex and reflect certain necessary assumptions. Accordingly, it is possible that we could approve or engage in a transaction involving our common shares that causes an ownership change and inadvertently impairs the use of our federal income tax attributes. Furthermore, we may intentionally pursue a transaction that impairs the use of our federal income tax attributes if our strategy changes.
The Tax Asset Rights Plan and Transfer Restrictions implemented by us to protect our tax attributes could hinder the market for our common stock.
To reduce the risk that an ownership change would jeopardize the preservation of our U.S. federal income tax attributes, including net operating loss carryforwards, for purposes of Sections 382 and 383 of the Code, we adopted the Tax Asset Rights Plan and implemented the Transfer Restrictions as discussed above. The Tax Asset Rights Plan and the Transfer Restrictions may make our stock less attractive to large institutional holders, discourage potential acquirers from attempting to take over our company, limit the price that investors might be willing to pay for shares of our common stock and otherwise hinder the market for our common stock. As discussed above, each of the Tax Asset Rights Plan and the Transfer Restrictions will expire in 2019 and are not expected to be replaced.
The Transfer Restrictions implemented by us to protect our tax attributes may void transactions in our common stock effected by 5% stockholders.
The Transfer Restrictions in our certificate of incorporation restrict the transfer of our equity securities if, as a result of the transfer, either any person would become the owner of 4.99% or more of our stock as determined under Section 382 of the Code ("5% stockholder") or the percentage stock ownership of any 5% stockholder would be increased. Any transfer that violates the Transfer Restrictions is void and will be unwound as provided in our certificate of incorporation. The Transfer Restrictions are subject to exceptions set forth in our certificate of incorporation and will expire in accordance with their terms on May 26, 2019. As discussed above, each of the Tax Asset Rights Plan and the Transfer Restrictions will expire in 2019 and are not expected to be replaced.
We could engage in or approve transactions involving our common shares that adversely affect significant stockholders.
Under the Transfer Restrictions in our certificate of incorporation, prior to May 26, 2019, our 5% stockholders are, in effect, required, and under the Tax Asset Rights Plan, prior to April 7, 2019, encouraged, to seek the approval of, or a determination by, our Board of Directors before they engage in certain transactions involving our common stock. We could engage in or approve transactions involving our common stock that limit our ability to approve future transactions involving our common stock by our 5% stockholders without impairing the use of our federal income tax attributes. In addition, we could engage in or approve transactions involving our common stock that cause stockholders owning less than 5% to become 5% stockholders, resulting in those stockholders having to seek the approval of, or a determination by, our Board of Directors before they could engage in certain future transactions involving our common stock. For example, share repurchases reduce the number of our common shares outstanding and could cause a stockholder holding less than 4.99% of our stock as determined under Section 382 of the Code to become a 5% stockholder even though it has not acquired any additional shares.
Payment of dividends may not continue in the future and our payment of dividends and stock repurchases are subject to restrictions.
Our Board of Directors has declared a cash dividend for each quarter since the summer of 2007. In addition, our Board of Directors has authorized a stock repurchase program. The future declaration and payment of dividends and the purchase of our shares under the repurchase program, if any, are at the discretion of the Board of Directors and will depend on a number of
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factors, including our financial and operating results, financial position and anticipated cash requirements. Additionally, our revolving credit facility and the indenture for our 5.875% Senior Notes impose limitations on our ability to pay dividends and repurchase our common shares. We can give no assurance that dividends will be declared and paid, that dividends will not be reduced or that purchases of our shares pursuant to our repurchase program will occur in the future.
Delaware law and our governing documents may impede or discourage a takeover, which could adversely affect the value of our common stock.
Provisions of Delaware law and our certificate of incorporation and bylaws may discourage a change of control of our company or deter tender offers for our common stock. We are currently subject to anti-takeover provisions under Delaware law. These anti-takeover provisions impose various impediments to the ability of a third party to acquire control of us. Additionally, provisions of our certificate of incorporation and bylaws impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions. For example, our certificate of incorporation authorizes our Board of Directors to determine the rights, preferences and privileges and restrictions of unissued shares of preferred stock without any vote or action by our stockholders. As a result, our Board of Directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of common stock. Our certificate of incorporation also divides our Board of Directors into three classes of directors who serve for staggered terms. A significant effect of a classified Board of Directors may be to deter hostile takeover attempts because an acquirer could experience delays in replacing a majority of directors. Moreover, stockholders are not permitted to call a special meeting.
In addition, while the Transfer Restrictions in our certificate of incorporation and the Tax Asset Rights Plan are designed to reduce the risk that an ownership change could limit our ability to fully utilize our net operating loss carryforwards and other significant tax attributes to offset future taxable income, both could have the effect of delaying or deterring a change of control of our company and may limit the price that investors might be willing to pay for shares of our common stock. The Tax Asset Rights Plan will expire in accordance with its terms on April 7, 2019, and the Transfer Restrictions will expire in accordance with their terms on May 26, 2019.
In addition to the risks discussed above, we are subject to a variety of other risks as a publicly traded U.S. manufacturing company.
As a publicly traded U.S. manufacturing company, we are subject to a variety of other risks, each of which could adversely affect our financial position, results of operations or cash flows, or the price of our common stock. These risks include but are not limited to:
• | the effects of global economic uncertainty; |
• | regulations that subject us to additional capital or margin requirements or other restrictions that make it more difficult to hedge risks associated with our business or increase the cost of our hedging activities; |
• | the ability to attract and retain key management and other personnel and develop effective succession plans; |
• | compliance with a wide variety of health and safety laws and regulations and changes to such laws and regulations; |
• | disputes, legal proceedings or investigations, whether meritorious or not, with respect to a variety of matters, including matters related to personal injury, employees, taxes, contracts and product liability; |
• | pursuing growth through acquisitions, including the ability to identify acceptable acquisition candidates, finance and consummate acquisitions on favorable terms and successfully integrate acquired assets or businesses; |
• | the exertion of influence over us, individually or collectively, by a few entities with concentrated ownership of our stock; |
• | protection of intellectual property, including patents, trademarks, trade secrets and copyrights, from infringement by others and the potential defense of claims, whether meritorious or not, alleging the unauthorized use of the intellectual property of others; |
• | taxation by multiple jurisdictions and the impact of such taxation on effective tax rate and the amount of taxes paid; |
• | changes in tax laws and regulations; |
• | new or modified legislation related to health care; |
• | compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including the potential impact of compliance failures; and |
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• | failure to meet the expectations of investors, including as a result of factors beyond the control of an individual company. |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Information regarding the location, size and ownership of our principal production facilities as of December 31, 2018 is below:
Location | Square footage | Owned or Leased | |||
Chandler, Arizona (Extrusion) | 115,000 | Leased1 | |||
Chandler, Arizona (Tube) | 101,700 | Leased1 | |||
Columbia, New Jersey | 27,200 | Owned | |||
Florence, Alabama | 252,000 | Owned | |||
Jackson, Tennessee | 310,000 | Owned | |||
Kalamazoo, Michigan | 465,000 | Leased2 | |||
London, Ontario (Canada) | 311,000 | Owned | |||
Los Angeles, California | 183,000 | Owned | |||
Newark, Ohio | 1,293,000 | Owned | |||
Richland, Washington | 45,000 | Leased3 | |||
Richmond, Virginia (Bellwood) | 449,000 | Owned | |||
Sherman, Texas | 360,000 | Owned | |||
Spokane, Washington (Trentwood) | 2,874,000 | Owned/Leased4 | |||
Total | 6,785,900 | ||||
___________________________________
1. | The Chandler, Arizona (Extrusion) and Chandler, Arizona (Tube) facilities are each subject to leases with terms that expire in 2023 and 2033, respectively, subject to certain extension rights held by us. |
2. | The Kalamazoo, Michigan facility is subject to a lease with a 2033 expiration date, subject to certain extension rights held by us. |
3. | The Richland, Washington facility is subject to a lease with a 2021 expiration date. |
4. | Trentwood consists of 2,753,000 square feet, which is owned by us, and 121,000 square feet, which is subject to a lease with a 2020 expiration date and a renewal option subject to certain terms and conditions. |
Production facilities and equipment are generally in good condition and suitable for their intended uses. For additional information regarding our production facilities, see the table under Item 1. Business "Business Operations - Manufacturing Processes" of this Report.
Our corporate headquarters located in Foothill Ranch, California consists of 36,000 square feet at December 31, 2018 and is subject to a lease that expires in 2019. In February 2019, we exercised our renewal option and extended the lease expiration to 2024.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our outstanding common stock is traded under the ticker symbol "KALU" on the Nasdaq Global Select Market.
Holders
As of February 15, 2019, there were approximately 552 holders of record of our common stock.
Stock Performance Graph
The following graph compares the cumulative total shareholder return on our common stock with: (i) the Russell 2000 index; (ii) the S&P SmallCap 600 index; and (iii) the S&P SmallCap 600 Materials index. We are a component of each of these indices. The graph assumes: (i) an initial investment of $100 as of December 31, 2013 and (ii) reinvestment of all dividends. The performance graph is not necessarily indicative of the future performance of our stock price.
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Issuer Repurchases of Equity Securities
The following table provides information regarding our repurchases of our common shares during the quarter ended December 31, 2018:
Equity Incentive Plans | Stock Repurchase Plan | |||||||||||||||||
Total Number of Shares Purchased1 | Average Price per Share | Total Number of Shares Purchased2 | Average Price per Share | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (millions)2 | ||||||||||||||
October 1, 2018 - October 31, 2018 | 13 | $ | 96.69 | 82,680 | $ | 99.98 | $ | 170.0 | ||||||||||
November 1, 2018 - November 30, 2018 | — | — | 99,621 | 96.25 | $ | 160.4 | ||||||||||||
December 1, 2018 - December 31, 2018 | 16 | 97.73 | 130,410 | 90.23 | $ | 148.7 | ||||||||||||
Total | 29 | $ | 97.28 | 312,711 | $ | 94.73 | N/A | |||||||||||
____________________
1. | Under our equity incentive plans, participants may elect to have us withhold common shares to satisfy minimum statutory tax withholding obligations arising from the recognition of income and the vesting of restricted stock, restricted stock units and performance shares. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld by us on the date of withholding. The withholding of common shares by us could be deemed a purchase of such common shares. All such shares withheld by us were canceled on the applicable vesting dates or dates on which income to the employees was recognized, and the number of shares withheld was determined based on the closing price per common share as reported on the Nasdaq Global Select Market on such dates. |
2. | In April 2017, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $100.0 million. In September 2018, our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $100.0 million. The September 2018 authorization was in addition to the share repurchase amount authorized in April 2017. Neither authorization has an expiration date. |
Item 6. Selected Financial Data
The following table represents our selected financial data. The table should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8. "Financial Statements and Supplementary Data" of this Report (in millions of dollars, except shipments and per share amounts):
Year Ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Shipments (mm lbs) | 652.4 | 625.7 | 614.3 | 615.4 | 588.8 | |||||||||||||||
Net sales | $ | 1,585.9 | $ | 1,397.5 | $ | 1,330.6 | $ | 1,391.9 | $ | 1,356.1 | ||||||||||
Net income (loss)1 | $ | 91.7 | $ | 45.4 | $ | 91.7 | $ | (236.6 | ) | $ | 71.8 | |||||||||
Net income (loss) per share - Basic | $ | 5.53 | $ | 2.67 | $ | 5.15 | $ | (13.76 | ) | $ | 4.02 | |||||||||
Net income (loss) per share - Diluted | $ | 5.43 | $ | 2.63 | $ | 5.09 | $ | (13.76 | ) | $ | 3.86 | |||||||||
Cash dividends declared per common share | $ | 2.20 | $ | 2.00 | $ | 1.80 | $ | 1.60 | $ | 1.40 | ||||||||||
Capital expenditures | $ | 74.1 | $ | 75.5 | $ | 76.1 | $ | 63.1 | $ | 59.4 | ||||||||||
Depreciation and amortization expense | $ | 43.9 | $ | 39.7 | $ | 36.0 | $ | 32.4 | $ | 31.1 | ||||||||||
_____________________
1. | Net income (loss) for 2017 included goodwill impairment and the impact of the Tax Cuts and Jobs Act (see Note 3 and Note 13, respectively, of Notes to Consolidated Financial Statements included in this Report for further details). Net |
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income (loss) for 2015 included the impact of removing the net assets of the voluntary employees' beneficiary association that provides benefits for eligible retirees represented by certain unions and their surviving spouses and eligible dependents ("Union VEBA") and related deferred tax liabilities from our Consolidated Balance Sheets (see Note 4 of Notes to Consolidated Financial Statements included in this Report for further details).
December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Assets: | ||||||||||||||||||||
Total assets1 | $ | 1,419.3 | $ | 1,385.2 | $ | 1,443.5 | $ | 1,246.9 | $ | 1,739.0 | ||||||||||
Cash and short-term investments | $ | 162.3 | $ | 234.8 | $ | 286.2 | $ | 102.5 | $ | 291.7 | ||||||||||
Long-term borrowings (at face value), including amounts due within one year | $ | 375.0 | $ | 375.0 | $ | 375.0 | $ | 197.8 | $ | 400.0 | ||||||||||
_____________________
1. | The 2015 Total assets reflected the removal of the Union VEBA net assets from our Consolidated Balance Sheets during the first quarter of 2015. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis of financial condition and results of operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
• | Management Review of 2018 and Outlook for the Future; |
• | Results of Operations; |
• | Liquidity and Capital Resources; |
• | Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements; |
• | Critical Accounting Estimates and Policies; and |
• | New Accounting Pronouncements. |
Our MD&A should be read in conjunction with the consolidated financial statements and related notes included in Item 8. "Financial Statements and Supplementary Data" of this Report.
This information contains certain non-GAAP financial measures. A non-GAAP financial measure is defined as a numerical measure of a company's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles ("GAAP") in the statements of income, balance sheets or statements of cash flows of the company. We have provided a reconciliation of non-GAAP financial measures to the most directly comparable financial measure in the accompanying tables. We have also provided discussion of the reasons we believe that presentation of the non-GAAP financial measures provide useful information to investors, as well as any additional ways in which we use the non-GAAP financial measures. The non-GAAP financial measures used within this presentation are value added revenue, operating income excluding non-run-rate items and ratios related thereto. These measures are presented because management uses this information to monitor and evaluate financial results and trends and believes this information to also be useful for investors.
In the discussion of operating results below, we refer to certain items as "non-run-rate items." For purposes of such discussion, non-run-rate items are items that, while they may recur from period-to-period: (i) are particularly material to results; (ii) affect costs primarily as a result of external market factors; and (iii) may not recur in future periods if the same level of underlying performance were to occur. Non-run-rate items are part of our business and operating environment but are worthy of being highlighted for the benefit of readers of our financial statements. Our intent is to allow users of the financial statements to consider our results both in light of and separately from such items. For a reconciliation of operating income excluding non-run-rate items to operating income, see "Results of Operations - Selected Operational and Financial Information" below.
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Our pricing policies and hedging program are intended to significantly reduce or eliminate the impact on our profitability of fluctuations in underlying metal price so that our earnings are predominantly associated with the conversion of aluminum to semi-fabricated mill products. To allow users of our financial statements to consider the impact of metal cost on our Net sales, we disclose Net sales as well as "value added revenue," which is Net sales less the Hedged Cost of Alloyed Metal. As used in this discussion, "Hedged Cost of Alloyed Metal" is the cost of our metal inputs at the average Midwest Transaction Price of aluminum ("Midwest Price") plus the cost of alloying elements and any realized gains and/or losses on settled hedges related to the metal sold in the referenced period. The average Midwest Price reflects the primary aluminum supply/demand dynamics in North America. For a reconciliation of value added revenue to Net sales, see "Results of Operations - Selected Operational and Financial Information" below.
Management Review of 2018 and Outlook for the Future
Review
For the full year 2018, strong demand drove record shipments and value added revenue, up 4% and 5%, respectively, over the prior year. Record commercial airframe builds drove underlying demand growth, and aerospace supply chain destocking began moderating in the second half of 2018, further enhancing demand growth. Aluminum extrusion content continued to increase on solid North American automotive builds, and demand for general engineering ("GE products") and other industrial ("Other products") remained strong throughout the year with normal second half seasonal weakness. Operating income excluding non-run-rate items improved year-over-year as the favorable impact of sales volume and mix was partially offset by an adverse pricing impact due to unrecovered high contained metal and freight costs and Section 232 tariffs.
Our results from the second half of 2018 were a record for the last six months of a year. Aerospace supply chain destocking began to moderate, and underlying commercial airframe demand was strong as build rates continued to grow. In addition, we realized the full impact of proactive price increases implemented during the second quarter of 2018. We have initiated additional price increases in 2019 for certain non-contract GE products and aerospace and high strength products ("Aero/HS products") and, with growing demand and improving prices, we have positive momentum as we begin 2019.
Outlook
As we look to our outlook for Aero/HS products, we expect growing build rates and further moderation in commercial aerospace supply chain destocking as airframe manufacturers continue to address the ongoing greater than eight-year order backlog. In addition, the recent increase in defense spending from U.S. allies strengthens the outlook for the F-35 Joint Strike Fighter program, the F/A-18 Super Hornet and other military applications.
For automotive extrusion applications ("Automotive Extrusions"), we expect 2019 will be a transition year as many of our existing programs are reaching end of life and we have a number of new program launches throughout the year. New program launches are inherently unpredictable due to timing in the launch of the new vehicle for which we are a supplier as there a multitude of other suppliers and processes for the automotive manufacturers to qualify, in addition to uncertainty of market sentiment and consumer acceptance of the new vehicles. While aluminum extrusion content on automotive platforms is expected to continue to increase, 2019 North American build rates are expected to be slightly lower than 2018.
We are cautiously optimistic about underlying demand for our GE products, despite uncertainty around global trade negotiations and economic conditions. As we look forward, we expect continuing strong demand and pricing for our applications.
We are planning significant maintenance activity for the casting complex, hot line and large stretcher at our Trentwood facility in the second quarter of 2019. Based on previous experience involving similar maintenance outages, we estimate an impact to earnings of approximately $15.0 million from incremental maintenance costs and lost production and sales compared to steady-state operations.
Overall, for the full year 2019, we expect strong demand to support a low to mid-single digit percent increase in both shipments and value added revenue year-over-year. We also expect Operating income excluding non-run-rate items as a percentage of Net sales to improve slightly in 2019, with higher shipments and improved pricing more than offsetting the impact of our Trentwood facility maintenance outage. Total capital spending in 2019 is expected to be approximately $80.0 million to $90.0 million.
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Results of Operations
Fiscal 2018 Summary
• | Our reported operating income for 2018 was $143.6 million, including a net charge of $17.3 million related to items that we considered to be non-run-rate. See "Selected Operational and Financial Information" below for further discussion of our operating income before non-run-rate items. |
• | Our liquidity was approximately $454.3 million as of December 31, 2018, comprised of our cash balances, short-term investments and net borrowing availability under our revolving credit facility (on which there were no outstanding borrowings). |
• | We invested $74.1 million in capital spending for further capacity expansion, manufacturing cost efficiency, product quality and operational security. See "Liquidity and Capital Resources - Capital Expenditures and Investments" below. |
• | We acquired IMT, a leader in multi-material additive manufacturing and machining technologies, for $43.2 million in cash, net of cash received. |
• | We paid a total of approximately $37.7 million, or $2.20 per common share, in cash dividends to stockholders, including holders of restricted stock, and dividend equivalents to holders of certain restricted stock units. |
• | We repurchased 617,151 shares of common stock in 2018 for a total cost of $61.9 million pursuant to a stock repurchase program authorized by our Board of Directors. |
Consolidated Selected Operational and Financial Information
The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8. "Financial Statements and Supplementary Data" of this Report.
Net Sales. We reported Net sales for 2018 of $1,585.9 million, compared to $1,397.5 million for 2017 and $1,330.6 million for 2016. The increase in Net sales during 2018 compared to 2017 reflected a 26.7 million pound (4%) increase in shipment volume and a $0.20/lb (9%) increase in average realized sales price per pound caused primarily by a 0.19/lb (20%) increase in average Hedged Cost of Alloyed Metal prices per pound. The shipment volume increase reflected: (i) a 15.8 million pound (7%) increase in Aero/HS products due to growing underlying demand, aerospace supply chain destocking and the benefit of incremental capacity from recent investments at our Trentwood facility; (ii) a 3.4 million pound (3%) increase in Automotive Extrusions primarily related to higher crash management system shipments; (iii) a 2.2 million pound (1%) increase in GE products; and (iv) a 5.3 million pound (20%) increase in Other products primarily driven by higher truck and trailer shipments. See the table in "Selected Operational and Financial Information" below for further details.
The increase in Net sales during 2017 compared to 2016 primarily reflected an 11.4 million pound (2%) increase in shipment volume and $0.06/lb (3%) increase in average realized sales price per pound. Shipment volume increased due primarily to: (i) an 8.1 million pound (9%) increase in Automotive Extrusions primarily related to significantly higher crash management system shipments and (ii) a 14.8 million pound (6%) increase in GE products reflecting the continued solid underlying demand for our general engineering applications, partially offset by a 10.2 million pound (4%) decrease in Aero/HS products due to: (i) aerospace supply chain destocking and (ii) temporary plate capacity constraints due to the installation of upgraded equipment and controls at our Trentwood facility. The increase in average realized sales price per pound reflected a 0.12/lb (14%) increase in average Hedged Cost of Alloyed Metal prices per pound, partially offset by a 0.06/lb (5%) decrease in average value added revenue per pound. The decrease in average value added revenue per pound reflected competitive price pressure on spot sales of Aero/HS and GE products and a leaner value added product mix with less volume of Aero/HS products and more volume of Automotive Extrusions and GE products. See the table in "Selected Operational and Financial Information" below for further details.
Cost of Products Sold, Excluding Depreciation and Amortization and Other Items. Cost of products sold, excluding depreciation and amortization and other items ("Cost of Products Sold") for 2018 totaled $1,300.7 million, or 82% of Net sales, compared to $1,085.9 million, or 78% of Net sales, in 2017 and $1,000.8 million, or 75% of Net sales, in 2016. The increase during 2018 compared to 2017 of $214.8 million was comprised of: (i) a $146.7 million increase in Hedged Cost of Alloyed Metal; (ii) an unfavorable impact of $37.1 million related to our adoption of Accounting Standards Update ("ASU") No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") (see Note 1 of Notes to Consolidated Financial Statements included in this Report); (iii) $10.4 million of higher freight costs due to new federal regulations; (iv) a $17.6 million increase in net manufacturing conversion and other costs due to higher shipment volume, as discussed in "Net Sales" above; and (v) $3.0 million of higher tariff costs on our cross border transactions within our internal supply chain. Of the $146.7 million increase in Hedged Cost of Alloyed Metal, $120.7 million was due to
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higher hedged metal prices and $26.0 million was due to higher shipment volume, as discussed in "Net Sales" above. The $37.0 million unfavorable impact reflected our adoption of ASU 2017-12 (see Note 1 of Notes to Consolidated Financial Statements included in this Report) as unrealized gain or loss on derivative instruments beginning January 1, 2018 was recognized within Other comprehensive loss, net of tax. See "Selected Operational and Financial Information" below for a further discussion of the comparative results of operations for 2018 and 2017.
The increase during 2017 compared to 2016 of $85.1 million was comprised of a $93.6 million increase in Hedged Cost of Alloyed Metal, partially offset by a $7.8 million reduction in net manufacturing conversion and other costs and a favorable impact of $0.7 million related to our adoption of ASU 2017-12. The reduction in net manufacturing conversion and other costs reflected: (i) a $10.9 million favorable impact from efficient raw material usage, primarily due to favorable scrap aluminum pricing and (ii) $1.6 million of lower energy pricing, partially offset by: (i) $3.2 million of higher planned major maintenance expense and (ii) a net $1.5 million manufacturing cost increase as incremental conversion costs associated with higher shipment volume in 2017 were mitigated by favorable manufacturing cost efficiency. Of the $93.6 million increase in Hedged Cost of Alloyed Metal, $83.9 million was due to higher hedged metal prices and $9.7 million was due to higher shipment volume, as discussed in "Net Sales" above. See "Selected Operational and Financial Information" below for a further discussion of the comparative results of operations for 2017 and 2016.
Lower of Cost or Market Inventory Write-Down. See Note 1 of Notes to Consolidated Financial Statements included in this Report for information on our inventory lower of cost or market value adjustment.
Depreciation and Amortization. Depreciation and amortization for 2018 was $43.9 million compared to $39.7 million for 2017 and $36.0 million for 2016. The $4.2 million increase in Depreciation and amortization in 2018 compared to 2017 was due to various construction-in-progress projects being placed in service during 2018 and the second half of 2017 related primarily to the Trentwood modernization initiative and other manufacturing cost efficiency and product quality initiatives. The $3.7 million increase in Depreciation and amortization in 2017 compared to 2016 was due primarily to various construction-in-progress projects being placed in service during 2017 and the second half of 2016 related to capital upgrades at several of our extrusion facilities to support automotive programs that launched over the next few years and other manufacturing cost efficiency and product quality initiatives.
Selling, General, Administrative, Research and Development ("SG&A and R&D"). SG&A and R&D expense totaled $96.3 million in 2018 compared to $97.5 million in 2017 and $105.0 million in 2016. The decrease during 2018 was due primarily to: (i) a $3.0 million decrease in long-term incentive compensation expense and (ii) a $2.1 million decrease in short-term incentive compensation expense based on performance factors and modifiers, partially offset by a $3.3 million increase in salaries and benefits.
The decrease during 2017 compared to 2016 was due primarily to: (i) a $6.2 million decrease in short-term incentive compensation expense based on performance factors and modifiers; (ii) a $2.0 million decrease in salaries and benefits; and (iii) a $0.6 million decrease in professional fees and services, partially offset by an increase of $1.3 million in long-term incentive compensation expense.
Goodwill Impairment. See Note 3 of Notes to Consolidated Financial Statements included in this Report for further details.
Other Operating Charges, Net. See Note 3 of Notes to Consolidated Financial Statements included in this Report for further details.
Interest Expense. Interest expense represents cash and non-cash interest expense incurred on our revolving credit facility, our 5.875% unsecured senior notes due May 15, 2024 ("5.875% Senior Notes") and our 8.25% senior notes due 2020 ("8.25% Senior Notes"), which were redeemed on June 1, 2016, net of capitalized interest. Interest expense was $22.7 million, $22.2 million and $20.3 million for 2018, 2017 and 2016, respectively, net of $1.7 million, $2.2 million and $2.9 million of interest expense capitalized as part of construction-in-progress, respectively, for the three periods.
Other Expense, Net. See Note 12 of Notes to Consolidated Financial Statements included in this Report for details.
Income Tax Provision. The income tax provision for 2018 was $28.3 million, resulting in an effective tax rate of 23.6%. There was no material difference between the effective tax rate and the projected blended statutory tax rate for 2018.
The income tax provision for 2017 was $87.6 million, resulting in an effective tax rate of 65.9%. The difference between the effective tax rate and the projected blended statutory tax rate for 2017 was primarily due to the passage of H.R.1, commonly referred to as the Tax Cuts and Jobs Act ("Tax Act"). Incremental income tax expense related to the Tax Act included: (i) $29.0 million (or 21.8% of taxable income) related to the write down of deferred tax assets to reflect the new 21% federal corporate tax rate; (ii) $5.9 million (or 4.5% of taxable income) for transition and withholding tax associated with foreign undistributed
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earnings, including $2.2 million of foreign withholding tax since our earnings in Canada are no longer permanently reinvested; and (iii) $2.3 million (or 1.7% of taxable income) for certain executive compensation that can no longer be deducted under the Tax Act (see Note 13 of Notes to Consolidated Financial Statements included in this Report for further discussion on the Tax Act).
The income tax provision for 2016 was $55.5 million, resulting in an effective tax rate of 37.7%. There was no material difference between the effective tax rate and the projected blended statutory tax rate for 2016.
As a result of the Tax Act, our long-term effective tax rate is estimated to be in the mid 20% range on a go-forward basis.
Selected Operational and Financial Information
The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Part II, Item 8. "Financial Statements and Supplementary Data" of this Report.
The table below provides selected operational and financial information for each period presented (in millions of dollars):
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Operating income | $ | 143.6 | $ | 155.2 | $ | 181.1 | ||||||
Impact to operating income of non-run-rate items: | ||||||||||||
Adjustments to plant-level LIFO1 | 3.1 | (3.8 | ) | (0.6 | ) | |||||||
Mark-to-market (loss) gain on derivative instruments2 | (17.7 | ) | 19.4 | 18.7 | ||||||||
Non-cash lower of cost or market inventory write-down3 | — | — | (4.9 | ) | ||||||||
Workers' compensation benefit due to discounting | 0.5 | — | 0.3 | |||||||||
Goodwill impairment4 | — | (18.4 | ) | — | ||||||||
Non-cash asset impairment charges | (1.4 | ) | (0.8 | ) | (2.8 | ) | ||||||
Net periodic post retirement service cost relating to Salaried VEBA | (0.1 | ) | — | — | ||||||||
Environmental expenses5 | (1.7 | ) | (0.3 | ) | (0.1 | ) | ||||||
Total non-run-rate items | (17.3 | ) | (3.9 | ) | 10.6 | |||||||
Operating income excluding non-run-rate items | $ | 160.9 | $ | 159.1 | $ | 170.5 | ||||||
_____________________
1. | We manage our business on a monthly last-in, first-out ("LIFO") basis at each plant, but report inventory externally on an annual LIFO basis in accordance with GAAP on a consolidated basis. This amount represents the conversion from GAAP LIFO applied on a consolidated basis to monthly LIFO applied on a plant-by-plant basis. |
2. | Mark-to-market (loss) gain on derivative instruments for 2018 represents the reversal of mark-to-market (loss) gain on hedges entered into prior to the adoption of ASU 2017-12 and settled in 2018. Operating income excluding non-run-rate items reflects the realized (loss) gain of such settlements. |
3. | The $4.9 million lower of cost or market inventory write-down in 2016 was due primarily to a decrease in our net realizable value of inventory (less a normal profit margin). |
4. | See Note 3 of Notes to Consolidated Financial Statements included in this Report for additional information relating to the impairment in 2017 of goodwill and one of our customer relationship intangible assets. |
5. | Non-run-rate environmental expenses are related to legacy activities at operating facilities prior to July 6, 2006. See Note 9 of Notes to Consolidated Financial Statements included in this Report for additional information relating to the environmental expenses. |
As noted above, operating income excluding non-run-rate items for 2018 was $1.8 million higher than operating income excluding such items for 2017 due to: (i) a $21.4 million favorable sales impact driven by higher shipments and product mix; and (ii) a $3.2 million improvement in net manufacturing conversion and other costs, partially offset by: (i) $10.4 million of higher freight costs due to new federal regulations; (ii) $5.2 million of higher overhead and benefit costs; (iii) $3.0 million of higher tariff costs; and (iv) $4.2 million of increased depreciation and amortization expense.
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Operating income excluding non-run-rate items for 2017 was $11.4 million lower than operating income excluding such items for 2016. Lower operating income excluding non-run-rate items reflected: (i) a $20.5 million unfavorable sales impact due primarily to a leaner product mix and compressed sales margins, partially offset by favorable price spreads for scrap raw material purchases; (ii) $3.7 million of higher depreciation and amortization expense; and (iii) $3.2 million of higher planned major maintenance expense, partially offset by: (i) a $3.7 million improvement in net manufacturing conversion and other costs; (ii) a $6.3 million decrease in overhead and other benefits and costs; (iii) a $4.4 million decrease in incentive compensation expense; and (iv) $1.6 million of lower energy pricing.
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The table below provides our shipment and value added revenue information (in millions of dollars, except shipments and value added revenue per pound) by end market applications for each period presented:
Year Ended December 31, | ||||||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||||||
Aero/HS Products: | ||||||||||||||||||||||||
Shipments (mmlbs) | 248.8 | 233.0 | 243.2 | |||||||||||||||||||||
$ | $ / lb | $ | $ / lb | $ | $ / lb | |||||||||||||||||||
Net sales | $ | 739.4 | $ | 2.97 | $ | 653.7 | $ | 2.81 | $ | 675.4 | $ | 2.78 | ||||||||||||
Less: Hedged Cost of Alloyed Metal | (284.4 | ) | (1.14 | ) | (223.4 | ) | (0.96 | ) | (208.5 | ) | (0.86 | ) | ||||||||||||
Value added revenue | $ | 455.0 | $ | 1.83 | $ | 430.3 | $ | 1.85 | $ | 466.9 | $ | 1.92 | ||||||||||||
Automotive Extrusions: | ||||||||||||||||||||||||
Shipments (mmlbs) | 104.4 | 101.0 | 92.9 | |||||||||||||||||||||
$ | $ / lb | $ | $ / lb | $ | $ / lb | |||||||||||||||||||
Net sales | $ | 239.3 | $ | 2.29 | $ | 217.3 | $ | 2.15 | $ | 188.8 | $ | 2.03 | ||||||||||||
Less: Hedged Cost of Alloyed Metal | (122.6 | ) | (1.17 | ) | (99.6 | ) | (0.98 | ) | (77.0 | ) | (0.83 | ) | ||||||||||||
Value added revenue | $ | 116.7 | $ | 1.12 | $ | 117.7 | $ | 1.17 | $ | 111.8 | $ | 1.20 | ||||||||||||
GE Products: | ||||||||||||||||||||||||
Shipments (mmlbs) | 266.9 | 264.7 | 249.9 | |||||||||||||||||||||
$ | $ / lb | $ | $ / lb | $ | $ / lb | |||||||||||||||||||
Net sales | $ | 546.0 | $ | 2.05 | $ | 476.2 | $ | 1.80 | $ | 420.1 | $ | 1.68 | ||||||||||||
Less: Hedged Cost of Alloyed Metal | (313.5 | ) | (1.18 | ) | (261.2 | ) | (0.99 | ) | (208.9 | ) | (0.83 | ) | ||||||||||||
Value added revenue | $ | 232.5 | $ | 0.87 | $ | 215.0 | $ | 0.81 | $ | 211.2 | $ | 0.85 | ||||||||||||
Other Products: | ||||||||||||||||||||||||
Shipments (mmlbs) | 32.3 | 27.0 | 28.3 | |||||||||||||||||||||
$ | $ / lb | $ | $ / lb | $ | $ / lb | |||||||||||||||||||
Net sales | $ | 61.2 | $ | 1.89 | $ | 50.3 | $ | 1.86 | $ | 46.3 | $ | 1.64 | ||||||||||||
Less: Hedged Cost of Alloyed Metal | (37.5 | ) | (1.16 | ) | (27.0 | ) | (1.00 | ) | (23.2 | ) | (0.82 | ) | ||||||||||||
Value added revenue | $ | 23.7 | $ | 0.73 | $ | 23.3 | $ | 0.86 | $ | 23.1 | $ | 0.82 | ||||||||||||
Total: | ||||||||||||||||||||||||
Shipments (mmlbs) | 652.4 | 625.7 | 614.3 | |||||||||||||||||||||
$ | $ / lb | $ | $ / lb | $ | $ / lb | |||||||||||||||||||
Net sales | $ | 1,585.9 | $ | 2.43 | $ | 1,397.5 | $ | 2.23 | $ | 1,330.6 | $ | 2.17 | ||||||||||||
Less: Hedged Cost of Alloyed Metal | (758.0 | ) | (1.16 | ) | (611.2 | ) | (0.97 | ) | (517.6 | ) | (0.85 | ) | ||||||||||||
Value added revenue | $ | 827.9 | $ | 1.27 | $ | 786.3 | $ | 1.26 | $ | 813.0 | $ | 1.32 | ||||||||||||
For 2018, Net sales increased by $188.4 million to $1,585.9 million, as compared to 2017, primarily reflecting a 9% increase in total average realized sales price per pound and a 4% increase in shipments. See "Selected Operational and Financial Information" above for further discussion.
For 2017, Net sales increased by $66.9 million to $1,397.5 million, as compared to 2016, primarily reflecting a 3% increase in total average realized sales price per pound and a 2% increase in shipments. See "Selected Operational and Financial Information" above for further discussion.
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Liquidity and Capital Resources
Summary
The following table summarizes our liquidity as of the periods presented (in millions of dollars):
December 31, 2018 | December 31, 2017 | ||||||
Available cash and cash equivalents | $ | 125.6 | $ | 51.1 | |||
Short-term investments | 36.7 | 183.7 | |||||
Borrowing availability under Revolving Credit Facility, net of letters of credit | 292.0 | 291.9 | |||||
Total liquidity | $ | 454.3 | $ | 526.7 | |||
We place our cash in bank deposits and money market funds with high credit quality financial institutions. Cash equivalents consist primarily of investment-grade commercial paper, money market accounts and investments which, when purchased, have a maturity of 90 days or less. Short-term investments represent holdings in investment-grade commercial paper with a maturity at the time of purchase of greater than 90 days.
In addition to our unrestricted cash and cash equivalents described above, we had restricted cash of $14.0 million at December 31, 2018 that was pledged or held as collateral in connection with workers' compensation requirements and certain other agreements. From time to time, such restricted funds could be returned to us or we could be required to pledge additional cash (see Note 15 of Notes to Consolidated Financial Statements included in this Report).
We and certain of our subsidiaries have a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions party thereto ("Revolving Credit Facility") (see Note 8 of Notes to Consolidated Financial Statements included in this Report). There were no borrowings under our Revolving Credit Facility as of December 31, 2018 or December 31, 2017.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for each period presented (in millions of dollars):
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Total cash provided by (used in): | ||||||||||||
Operating activities | $ | 150.2 | $ | 141.5 | $ | 165.6 | ||||||
Investing activities | $ | 31.1 | $ | (25.5 | ) | $ | (276.4 | ) | ||||
Financing activities | $ | (106.0 | ) | $ | (119.4 | ) | $ | 94.8 | ||||
Cash provided by operating activities for the year ended December 31, 2018 included: (i) an increase in accounts payable of $29.2 million driven predominantly by the timing of metal purchases and increase in metal price; (ii) a $21.9 million change in other non-cash changes in assets and liabilities due primarily to a $17.7 million unfavorable impact which reflected our adoption of ASU 2017-12 (see Note 1 of Notes to Consolidated Financial Statements included in this Report) as unrealized gain or loss on derivative instruments beginning January 1, 2018 was recognized within Other comprehensive loss, net of tax; (iii) an increase in trade and other receivables of $22.3 million driven primarily by timing and mix of sales with extended terms and an increase in metal price; and (iv) an increase in inventory of $45.0 million due primarily to higher inventory pounds to satisfy increased demand.
Cash provided by operating activities for the year ended December 31, 2017 reflected: (i) an increase in trade and other receivables of $30.9 million due primarily to the timing of sales and increase in metal price; (ii) an increase in accounts payable of $13.0 million driven predominantly by the timing of metal purchases and increase in metal price; and (iii) a $15.5 million change in other non-cash changes in assets and liabilities due primarily to a $19.4 million favorable impact which reflected our adoption of ASU 2017-12 (see Note 1 of Notes to Consolidated Financial Statements included in this Report) as unrealized gain or loss on derivative instruments beginning January 1, 2018 was recognized within Other comprehensive loss, net of tax.
Cash provided by operating activities for the year ended December 31, 2016 reflected: (i) an increase in trade and other receivables of $26.8 million due primarily to the timing of sales and increase in metal price and (ii) a $17.5 million change in
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other non-cash changes in assets and liabilities due primarily to an $18.7 million favorable impact which reflected our adoption of ASU 2017-12 (see Note 1 of Notes to Consolidated Financial Statements included in this Report) as unrealized gain or loss on derivative instruments beginning January 1, 2018 was recognized within Other comprehensive loss, net of tax.
See Statements of Consolidated Cash Flows included in this Report for further details on our cash flows from operating, investing and financing activities for the year ended December 31, 2018, December 31, 2017 and December 31, 2016.
Sources of Liquidity
We believe our available cash and cash equivalents, short-term investments, borrowing availability under the Revolving Credit Facility and funds generated from operations are our most significant sources of liquidity. While we believe these sources will be sufficient to finance our working capital requirements, planned capital expenditures and investments, debt service obligations and other cash requirements for at least the next twelve months, our ability to fund such cash requirements will depend upon our future operating performance (which will be affected by prevailing economic conditions) and financial, business and other factors, some of which are beyond our control.
The table below summarizes recent availability and usage of our Revolving Credit Facility (in millions of dollars except for borrowing rate):
February 15, 2019 | December 31, 2018 | ||||||
Revolving Credit Facility borrowing commitment | $ | 300.0 | $ | 300.0 | |||
Borrowing base availability | $ | 300.0 | $ | 300.0 | |||
Less: Outstanding borrowings under Revolving Credit Facility | — | — | |||||
Less: Outstanding letters of credit under Revolving Credit Facility | (8.0 | ) | (8.0 | ) | |||
Remaining borrowing availability | $ | 292.0 | $ | 292.0 | |||
Borrowing rate (if applicable)1 | 5.75 | % | 5.75 | % | |||
_______________________
1. | Such borrowing rate, if applicable, represents the interest rate for any overnight borrowings under the Revolving Credit Facility. |
We do not believe that covenants contained in the Revolving Credit Facility are reasonably likely to limit our ability to raise additional debt or equity should we choose to do so during the next 12 months, nor do we believe it is likely that during the next 12 months we will trigger the availability threshold that would require measuring and maintaining a fixed charge coverage ratio.
See Note 8 of Notes to Consolidated Financial Statements included in this Report for a description of our Revolving Credit Facility.
Debt
See "Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements - Contractual Obligations and Commercial Commitments" below for mandatory principal and cash interest payments on the outstanding borrowings under the 5.875% Senior Notes. See Note 8 of Notes to Consolidated Financial Statements included in this Report for further details with respect to the 5.875% Senior Notes and the redemption of our 8.25% Senior Notes.
We do not believe that covenants in the indenture governing the 5.875% Senior Notes are reasonably likely to limit our ability to obtain additional debt or equity financing should we choose to do so during the next 12 months.
Capital Expenditures and Investments
We strive to strengthen our competitive position across our end markets through strategic capital investment. Significant investments over the past decade have positioned us well with increased capacity and expanded manufacturing capabilities while more recent capital projects have focused on further enhancing manufacturing cost efficiency, improving product quality and promoting operational security, which we believe are critical to maintaining and strengthening our position in an increasingly competitive market environment.
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See Note 3 of Notes to Consolidated Financial Statements included in this Report for a discussion of our acquisition of IMT on September 19, 2018 for $43.2 million, net of cash received.
Total capital expenditures were $74.1 million, $75.5 million and $76.1 million for 2018, 2017 and 2016, respectively. A significant portion of our capital spending over the past several years related to the Trentwood modernization project, which has focused on equipment upgrades throughout the process flow to reduce conversion costs, increase efficiency and further improve our competitive cost position on all products produced at our Trentwood facility. In addition, a significant portion of the investment has also focused on modernizing legacy equipment and the process flow for thin gauge plate to achieve KaiserSelect® quality enhancements for these Aero/HS and GE products. As a byproduct of the efficiency improvements completed during 2017, we gained incremental manufacturing capacity to enable sales growth in 2018 and beyond. In all three years, we have also invested to support our automotive growth initiative, including upgrades to existing extrusion presses at several of our automotive-focused facilities. The remainder of our capital spending in all three years was allocated among our manufacturing locations on projects expected to reduce operating costs, improve product quality, expand capacity or enhance operational security.
We anticipate our capital spending in 2019 will be approximately $80.0 million to $90.0 million and include continued spending on the Trentwood modernization and spending at multiple locations for efficiency improvements and operational security. Capital investments will be funded using cash generated from operations, available cash and cash equivalents, short-term investments, borrowings under the Revolving Credit Facility and/or other third-party financing arrangements. The level of anticipated capital expenditures may be adjusted from time to time depending on our business plans, our price outlook for fabricated aluminum products, our ability to maintain adequate liquidity and other factors. No assurance can be provided as to the timing of any such expenditures or the operational benefits expected therefrom.
Dividends
We have consistently paid a quarterly cash dividend since the second quarter of 2007 to holders of our common stock, including holders of restricted stock, and have increased the dividend in each year since 2011. Nevertheless, as in the past, the future declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on a number of factors, including our financial and operating results, financial position and anticipated cash requirements and contractual restrictions under our Revolving Credit Facility, the indenture for our 5.875% Senior Notes or other indebtedness we may incur in the future. We can give no assurance that dividends will be declared and paid in the future.
We also pay quarterly dividend equivalents to the holders of certain restricted stock units. Holders of performance shares are not paid a quarterly dividend equivalent, but instead are entitled to receive, in connection with the issuance of underlying shares of common stock for performance shares that ultimately vest, a one-time payment equal to the dividends such holder would have received if the number of such shares of common stock so issued had been held of record by such holder from the date of grant of such performance shares through the date of such issuance.
See Note 14 and Note 19 of Notes to Consolidated Financial Statements included in this Report for information regarding dividends paid during 2018, 2017 and 2016, and declared subsequent to December 31, 2018.
Repurchases of Common Stock
See Note 14 of Notes to Consolidated Financial Statements included in this Report for information regarding repurchases of common stock in 2018, 2017 and 2016 and the amounts authorized and available for future repurchases of common stock under our stock repurchase program.
See Note 6 of Notes to Consolidated Financial Statements included in this Report for information regarding minimum statutory tax withholding obligations arising during 2018, 2017 and 2016 in connection with the vesting of non-vested shares, restricted stock units and performance shares.
Restrictions Related to Equity Capital
As discussed elsewhere in this Report, to preserve our a