Forward-Looking Statements
This Quarterly Report on Form 10-Q ("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 and 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 of comparable terminology, or by discussions of strategy. Readers are cautioned that any such forwardlooking 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: (i) the effectiveness of management's strategies and decisions, including strategic investments, capital spending strategies and the execution of those strategies; (ii) general economic and business conditions, including the impact of the global outbreak of Coronavirus Disease 2019 ("COVID-19") and governmental and other actions taken in response, cyclicality, reshoring, supply interruptions, including the most recent disruptions resulting from the supply demand imbalances in the magnesium and silicon markets, and other conditions that impact demand drivers in the aerospace/high strength, automotive, general engineering, packaging and other end markets we serve; (iii) our ability to participate in mature and anticipated new automotive programs expected to launch in the future and successfully launch new automotive programs; (iv) changes or shifts in defense spending due to competing national priorities; (v) developments in technology; (vi) new or modified statutory or regulatory requirements; and (vii) changing prices and market conditions. This Item, Part II, Item 1A. "Risk Factors" included in this Report and Part I, Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 each identify other factors that could cause actual results to vary. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forwardlooking statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part I, Item 1. "Financial Statements" of this Report and our consolidated financial statements and related notes included in Part II, Item 8. "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Non-GAAP Financial Measures
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 (loss) income, balance sheets or statements of cash flows of the company. We have provided a reconciliation of nonGAAP 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 in the following discussions are value added revenue ("VAR"), adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") 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 Adjusted EBITDA to Net (loss) income, see "Results of Operations - Selected Operational and Financial Information" below. Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP measures are not provided because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted or provided without unreasonable effort.
Metal Pricing Policies
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 VAR 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 30 -------------------------------------------------------------------------------- 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. 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 semifabricated 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 VAR, 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 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 Transaction Price of aluminum reflects the primary aluminum supply/demand dynamics inNorth America . For a reconciliation of VAR to Net sales, see "Results of Operations - Selected Operational and Financial Information" below.
Business Overview
We manufacture and sell 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"); aluminum beverage and food packaging ("Packaging"), see "Warrick Acquisition" below; and other industrial ("Other products"). Our fabricated aluminum mill products include flat-rolled (plate, sheet and coil), 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 flat-rolled aluminum mill products, our heat treat plate and sheet focus is on 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) andGE products (which we predominantly sell withinNorth America ). In addition, we also produce flat-rolled aluminum products for the beverage and foodpackaging industry, primarily serving theNorth America can market. Our Packaging products require demanding attributes and can be further processed to include a coating and slitting depending on customer specifications. Similarly, in the areas of aluminum extrusions, we focus on demanding Aero/HS products, Automotive Extrusions andGE 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. Our rolling mill inSpokane, Washington ("Trentwood") produces heat treat plate and sheet for aerospace and general engineering end market applications and our rolling mill inWarrick County, Indiana ("Warrick") produces bare and coated aluminum coil used for can stock applications in the beverage and food packaging industry. Our 11 extrusion/drawing facilities, 10 of which are inthe United States and one of which is inCanada , serve aerospace, automotive or general engineering applications. Additionally, we have a facility inColumbia, New Jersey that focuses on multi-material advanced manufacturing methods and techniques, which include multi-axis computer numerical control ("CNC") machining, additive manufacturing ("3D Printing"), welding and fabrication for demanding aerospace and defense, automotive, high tech and general industrial applications. Our consolidated Net sales for the nine months endedSeptember 30, 2021 totaled$1,815.6 million on 788.7 million pounds shipped from our facilities. We employed approximately 3,900 people atSeptember 30, 2021 . 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, food and beverage packaging manufacturers and metal service centers. As ofSeptember 30, 2021 , approximately 69% of our shipments has been sold direct to manufacturers or tier one suppliers and approximately 31% has been 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. 31 --------------------------------------------------------------------------------
Warrick Acquisition
OnMarch 31, 2021 , after the close of business, we completed our purchase ofAlcoa Warrick LLC and certain assets comprising the aluminum casting and rolling mill facility located inWarrick County, Indiana from Alcoa Corporation ("Alcoa"). This acquisition will provide us re-entry into the North American aluminum beverage and food packaging industry, which is a strong and growing noncyclical end market driven by sustainability trends and the secular shift from plastic to aluminum. We believe the addition of this noncyclical end market will be highly complementary to our existing aerospace, automotive and general engineering cyclical end markets and will provide excellent opportunities for long-term growth. The acquisition ofWarrick further demonstrates our strategy to serve technically challenging end market 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.
Highlights of the quarter ended
• Commercial aerospace recovery continues; • General engineering demand remains robust; • Packaging demand continues to demonstrate strong strategic growth opportunities;
• Automotive demand strong; recovery delayed due to semiconductor chip
shortage;
• Continued labor constraints and inefficiencies, rapidly rising material
and other inflationary costs, supply chain disruptions impacted efficiencies and production levels; and
• Paid cash dividends and dividend equivalents of
million during the quarter ended
Results of Operations
Consolidated Results of Operations
Net Sales . Net sales totaled$750.6 million and$255.7 million for the quarters endedSeptember 30, 2021 andSeptember 30, 2020 , respectively, reflecting a 206.3 million pound (189%) increase in shipment volume and a$0.03 /lb (1%) increase in average realized sales price per pound. The shipment volume increase reflected: (i) a 173.6 million pound addition in Packaging due to ourWarrick acquisition; (ii) a 21.1 million pound (39%) increase inGE products reflecting continued strength in underlying demand and restocking in the service center supply chain; and (iii) a 14.8 million pound (54%) increase in Aero/HS products compared to the quarter endedSeptember 30, 2020 , reflecting continued strength in demand for defense applications, increasing demand for business jets and improving demand for commercial aerospace as airline travel recovers, partially offset by a 5.1 million pound (21%) decrease in Automotive Extrusions driven by the shortage of semiconductor chips that has impacted North American production levels. The average realized sales price per pound reflected a$0.48 /lb (52%) increase in average Hedged Cost of Alloyed Metal price per pound offset by a$0.45 /lb (32%) decrease in VAR per pound due primarily to the introduction of lower VAR per pound Packaging products, as well as approximately$15.0 million of additional revenue recognized in the quarter endedSeptember 30, 2020 related to modifications to the 2020 customer declarations under multi-year contracts. See the table in "Selected Operational and Financial Information" below for further details. Net sales totaled$1,815.6 million and$900.7 million for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively, reflecting a 405.6 million pound (106%) increase in shipment volume and a$0.05 /lb (2%) decrease in average realized sales price per pound. The shipment volume increase primarily reflected: (i) a 359.5 million pound addition in Packaging due to ourWarrick acquisition; (ii) a 51.4 million pound (29%) increase inGE products reflecting strong underlying demand; and (iii) an 11.9 million pound (20%) increase in Automotive Extrusions primarily reflecting the recovery from the COVID19 pandemic related automotive supply chain shutdowns that occurred during the quarter endedSeptember 30, 2020 , partially offset by a 22.9 million pound (16%) decrease in Aero/HS products reflecting COVID19 pandemic related lower demand for our commercial aerospace products. The decrease in average realized sales price per pound reflected a$0.36 /lb (39%) increase in average Hedged Cost of Alloyed Metal prices per pound offset by a$0.41 /lb (29%) decrease in VAR per pound due primarily to the introduction of lower VAR per pound Packaging 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 for the quarter endedSeptember 30, 2021 totaled$677.8 million , or 90% of Net sales, compared to$208.4 million , or 82% of Net sales, for the quarter endedSeptember 30, 2020 . The increase of$469.4 million was largely attributable to the addition of Packaging and reflected a$343.9 million increase in Hedged Cost of Alloyed Metal and a$125.5 million increase in net manufacturing conversion and other. Of the$343.9 million increase in Hedged Cost of Alloyed Metal,$191.7 million was due to 32 -------------------------------------------------------------------------------- higher shipment volume, as discussed above in "Net Sales ," and$152.2 million was due to higher hedged metal prices. The$125.5 million increase in net manufacturing conversion and other costs was primarily due to the addition of Packaging and additional overhead associated with the related increase in volume. See "Selected Operational and Financial Information" below for a further discussion of the comparative results of operations for the quarters endedSeptember 30, 2021 andSeptember 30, 2020 . Cost of products sold, excluding depreciation and amortization and other items for the nine months endedSeptember 30, 2021 totaled$1,613.6 million , or 89% of Net sales, compared to$719.5 million , or 80% of Net sales, for the nine months endedSeptember 30, 2020 . The increase of$894.1 million was largely attributable to the addition of Packaging and reflected a$665.4 million increase in Hedged Cost of Alloyed Metal and a$228.7 million increase in net manufacturing conversion and other costs. Of the$665.4 million increase in Hedged Cost of Alloyed Metal,$375.9 million was due to higher shipment volume and$289.5 million was due to higher hedged metal prices, as discussed above in "Net Sales ." The$228.7 million increase in net manufacturing conversion and other costs was primarily due to the addition of Packaging and additional overhead associated with the related increase in volume. See "Selected Operational and Financial Information" below for a further discussion of the comparative results of operations for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 . Selling, General, Administrative, Research and Development ("SG&A and R&D"). SG&A and R&D expense totaled$28.1 million and$21.3 million for the quarters endedSeptember 30, 2021 andSeptember 30, 2020 , respectively and$90.8 million and$67.9 million for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. The increase during the quarter endedSeptember 30, 2021 was primarily due to a$4.0 million increase in costs related to the addition ofWarrick operations and related transition service agreements ("TSAs") with Alcoa to facilitate the integration and a$2.4 million increase in salaries, benefits and incentives. The increase for the nine months endedSeptember 30, 2021 compared withSeptember 30, 2020 was due primarily to: (i) a$13.7 million increase in acquisition related costs, which were primarily comprised of professional fees; (ii) an$8.1 million increase in costs related to the addition ofWarrick operations and related TSAs with Alcoa to facilitate the integration; and (iii) a$4.2 million increase in salaries and benefits, partially offset by a$1.7 million reduction in legacy environmental expenses.
Restructuring (Benefit) Cost. See Note 10 of Notes to Interim Consolidated Financial Statements included in this Report for further information regarding the restructuring plan.
Other Operating Charges (Income), net. Other operating charges (income), net, was$0.3 million of charges for the quarter endedSeptember 30, 2020 and$0.8 million of income for the nine months endedSeptember 30, 2020 . During the quarter and nine months endedSeptember 30, 2020 , we recognized$0.4 million and$0.5 million of impairment charges related to property, plant and equipment, which in both periods were offset by government grants received (see Note 1 of Notes to Interim Consolidated Financial Statements included in this Report for details of government grants received). Interest Expense. Interest expense represents cash and non-cash interest expense incurred on our unsecured senior notes and our credit agreement withWells Fargo Bank, National Association , as administrative agent, and the other financial institutions party thereto ("Revolving Credit Facility"), net of capitalized interest. Interest expense was$12.5 million and$12.1 million for the quarters endedSeptember 30, 2021 andSeptember 30, 2020 , respectively, and$37.2 million and$28.7 million for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. See Note 7 of Notes to Interim Consolidated Financial Statements included in this Report for a discussion of our debt and credit facilities that were in effect during the quarters and nine months endedSeptember 30, 2021 andSeptember 30, 2020 and interest expense capitalized as part of construction in progress.
Other Expense, Net. See Note 11 of Notes to Interim Consolidated Financial Statements included in this Report for details.
Income Tax (Provision) Benefit. See Note 12 of Notes to Interim Consolidated Financial Statements included in this Report for disclosure regarding our income tax (provision) benefit.
Selected Operational and Financial Information
The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Part I, Item 1. "Financial Statements" of this Report. Interim results are not necessarily indicative of those for a full year. 33
-------------------------------------------------------------------------------- The table below provides selected operational and financial information (in millions of dollars): Quarter Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net (loss) income$ (2.3 ) $ 0.4 $ (20.2 ) $ 22.9 Interest expense 12.5 12.1 37.2 28.7 Other expense, net 1.2 0.5 38.2 0.8 Income tax provision (benefit) 8.4 (0.7 ) (7.4 ) 10.2 Depreciation and amortization 24.9 12.9 64.2 39.1 Non-run-rate items: Restructuring cost (benefit) - 0.5 (0.8 ) 12.4 Adjustments to plant-level LIFO1 (0.3 ) 1.2 10.9 3.2 Mark-to-market loss (gain) on derivative instruments2 2.0 (1.7 ) 2.1 (1.1 ) Workers' compensation cost due to discounting - 0.7 - 1.4 Non-cash asset impairment charge - 0.5 - 0.5 Environmental expenses3 0.2 3.8 0.2 5.9 Acquisition costs4 3.8 1.3 22.2 1.3 Total non-run-rate items 5.7 6.3 34.6 23.6 Adjusted EBITDA$ 50.4 $ 31.5 $ 146.6 $ 125.3
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 line item represents the conversion
from GAAP LIFO applied on a consolidated basis to monthly LIFO applied on a
plant-by-plant basis. For the quarter and nine months ended
benefit and a
resulted from a purchase accounting adjustment to step-up
to fair value. 2 Mark-to-market loss (gain) on derivative instruments for 2021 and 2020 represents: (i) the reversal of mark-to-market loss (gain) on commodity
hedges entered into prior to the adoption of Accounting Standards Update
("ASU") No. 2017-12, Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities ("ASU 2017-12") and settled
in the periods presented above; (ii) loss (gain) on non-designated commodity
hedges; and (iii) reclassifications out of Accumulated other comprehensive
loss due to forecasted transactions no longer probable of occurring. Adjusted
EBITDA reflects the realized gains and losses related to these derivatives
upon settlement. 3 Non-run-rate environmental expenses are related to legacy activities at
operating facilities prior to
Consolidated Financial Statements included in this Report for additional
information relating to the environmental expenses.
4 Acquisition costs are non-run-rate acquisition-related transaction costs,
which include legal and consulting fees, as well noncash hedging charges
recorded in connection with our
quarter and nine months ended
Adjusted EBITDA for the quarter endedSeptember 30, 2021 was$18.9 million higher than Adjusted EBITDA for the quarter endedSeptember 30, 2020 , which was inclusive of the additional$15.0 million of revenue as discussed in "Net sales" above. Adjusted EBITDA for the quarter endedSeptember 30, 2021 reflected the addition of Packaging and improvement in our Aero/HS products andGE products, partially offset by higher costs as discussed in "Consolidated Results of Operations" above. Adjusted EBITDA for the nine months endedSeptember 30, 2021 was$21.3 million higher than Adjusted EBITDA for the nine months endedSeptember 30, 2020 , which had the benefit of the additional$15.0 million of revenue as discussed in "Net sales" above. Adjusted EBITDA for the nine months 2021 reflected the benefit of Packaging in addition to improvement in our Automotive Extrusions andGE products, partially offset by higher costs related to labor, materials and supply chain disruptions and approximately$1.5 million of redundancy costs associated with theWarrick integration. 34 --------------------------------------------------------------------------------
The table below provides our shipment and VAR information (in millions of dollars, except shipments and VAR per pound) by end market applications:
Quarter Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Aero/HS Products: Shipments (mmlbs) 42.1 27.3 119.0 141.9 $ $ / lb $ $ / lb $ $ / lb $ $ / lb Net sales$ 142.0 $ 3.37 $ 100.9 $ 3.70 $ 387.6 $ 3.26 $ 441.5 $ 3.11 Less: Hedged Cost of Alloyed Metal (60.5 ) (1.43 ) (27.6 ) (1.02 ) (155.2 ) (1.31 ) (135.8 ) (0.96 ) VAR1$ 81.5 $ 1.94 $ 73.3 $ 2.68 $ 232.4 $ 1.95 $ 305.7 $ 2.15 Packaging: Shipments (mmlbs) 173.6 - 359.5 - $ $ / lb $ $ / lb $ $ / lb $ $ / lb Net sales$ 367.3 $ 2.12 $ - $ -$ 726.1 $ 2.02 $ - $ - Less: Hedged Cost of Alloyed Metal (241.3 ) (1.39 ) - - (468.2 ) (1.30 ) - - VAR$ 126.0 $ 0.73 $ - $ -$ 257.9 $ 0.72 $ - $ - Automotive Extrusions: Shipments (mmlbs) 19.6 24.7 70.4 58.5 $ $ / lb $ $ / lb $ $ / lb $ $ / lb Net sales$ 50.1 $ 2.56 $ 46.2 $ 1.87 $ 163.3 $ 2.32 $ 110.3 $ 1.89 Less: Hedged Cost of Alloyed Metal (29.0 ) (1.48 ) (22.0 ) (0.89 ) (89.7 ) (1.27 ) (53.1 ) (0.91 ) VAR$ 21.1 $ 1.08 $ 24.2 $ 0.98 $ 73.6 $ 1.05 $ 57.2 $ 0.98 GE Products: Shipments (mmlbs) 75.8 54.7 226.7 175.3 $ $ / lb $ $ / lb $ $ / lb $ $ / lb Net sales$ 187.1 $ 2.47 $ 105.1 $ 1.92 $ 518.4 $ 2.29 $ 337.6 $ 1.93 Less: Hedged Cost of Alloyed Metal (111.7 ) (1.48 ) (49.7 ) (0.91 ) (294.3 ) (1.30 ) (159.7 ) (0.92 ) VAR$ 75.4 $ 0.99 $ 55.4 $ 1.01 $ 224.1 $ 0.99 $ 177.9 $ 1.01 Other Products: Shipments (mmlbs) 4.1 2.2 13.1 7.4 $ $ / lb $ $ / lb $ $ / lb $ $ / lb Net sales$ 4.1 $ 1.00 $ 3.5 $ 1.59 $ 20.2 $ 1.54 $ 11.3 $ 1.53 Less: Hedged Cost of Alloyed Metal (2.7 ) (0.66 ) (2.0 ) (0.91 ) (13.2 ) (1.01 ) (6.5 ) (0.88 ) VAR$ 1.4 $ 0.34 $ 1.5 $ 0.68 $ 7.0 $ 0.53 $ 4.8 $ 0.65 Total: Shipments (mmlbs) 315.2 108.9 788.7 383.1 $ $ / lb $ $ / lb $ $ / lb $ $ / lb Net sales$ 750.6 $ 2.38 $ 255.7 $ 2.35 $ 1,815.6 $ 2.30 $ 900.7 $ 2.35 Less: Hedged Cost of Alloyed Metal (445.2 ) (1.41 ) (101.3 ) (0.93 ) (1,020.6 ) (1.29 ) (355.1 ) (0.93 ) VAR$ 305.4 $ 0.97 $ 154.4 $ 1.42 $ 795.0 $ 1.01 $ 545.6 $ 1.42
1 Included in the VAR per pound calculations for the quarter and nine months
ended
of additional revenue recognized related to modifications to the 2020
customer declarations under multi-year contracts.
Outlook
VAR for the quarter endedDecember 31, 2021 is anticipated to increase low single digits on a percentage basis from the quarter endedSeptember 30, 2021 with EBITDA margin (Adjusted EBITDA as a percentage of VAR) to remain similar to the quarter endedSeptember 30, 2021 . While our end market demand remains positive, we anticipate cost issues and supply chain disruptions will 35 -------------------------------------------------------------------------------- continue during the quarter endedDecember 31, 2021 . In addition, the most recent industry wide disruptions in the magnesium and silicon markets and resulting supply demand imbalances are continuing to evolve and remain uncertain at this time. Although our outlook contemplates the anticipated impact to our costs and operations, the situation is fluid and could further impact our results for the quarter endedDecember 31, 2021 . Longer-term, our strategy remains unchanged, and we are well positioned for continued long-term growth with a diversified portfolio and strong secular growth trends in each of our served end markets. Notwithstanding near-term challenges, the fundamentals of our Aero/HS products, Automotive Extrusions andGE products end markets are solid and we are increasingly optimistic in our ability to deliver significant margin expansion and long-term profitability for our Packaging end market where we have a significant market position. We remain confident around the timing of the recovery in commercial aerospace and we are optimistic that as semiconductor chip shortages are alleviated, automotive production will ramp back up and, our program launches will resume.
Liquidity and Capital Resources
Summary
The following table summarizes our liquidity (in millions of dollars):
As of September As of December 30, 2021 31, 2020 Available cash and cash equivalents $ 295.7 $
780.3
Borrowing availability under Revolving Credit Facility, net of letters of credit1 367.3 251.5 Total liquidity $ 663.0$ 1,031.8
1 Borrowing availability under the Revolving Credit Facility as determined by a
borrowing base calculated as of
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.
See Note 14 of Notes to Interim Consolidated Financial Statements included in
this Report for information regarding restricted cash at
There were no borrowings under our Revolving Credit Facility (see Note 7 of
Notes to Interim Consolidated Financial Statements included in this Report) as
of
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in millions of dollars):
Nine Months Ended September 30, 2021 2020 Total cash provided by (used in): Operating activities $ 33.3 $ 150.7 Investing activities $ (639.5 ) $ 41.6 Financing activities $ 121.4 $ 293.2 Cash provided by operating activities for the nine months endedSeptember 30, 2021 reflected results of business activity described within "Consolidated Results of Operations" above, as well as the following working capital changes: (i) an increase in trade and other receivables of$110.7 million , the majority of which was driven byWarrick receivables added during the nine months endedSeptember 30, 2021 and the remainder of which was due to the timing and mix of sales and an increase in metal price; (ii) an increase in accounts payable of$105.8 million , the majority of which was driven byWarrick payables added during the nine months endedSeptember 30, 2021 and the remainder of which was driven by the volume of metal purchases; and (iii) an increase in inventory of$52.5 million due primarily to higher inventory pounds to satisfy increased demand. 36
-------------------------------------------------------------------------------- Cash provided by operating activities for the nine months endedSeptember 30, 2020 reflected results of business activity described within "Consolidated Results of Operations" above, as well as the following working capital changes: (i) a decrease in trade and other receivables of$43.4 million driven primarily by lower Net sales; (ii) a decrease in accounts payable of$27.6 million driven predominantly by the volume of metal purchases; and (iii) a reduction in contract assets of$19.8 million driven primarily by timing and volume of shipments related to revenue on products recognized over-time. 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 nine months endedSeptember 30, 2021 andSeptember 30, 2020 .
Sources of Liquidity
We believe our available cash and cash equivalents, borrowing availability under the Revolving Credit Facility and funds generated from operations are our most significant sources of liquidity and that our Revolving Credit Facility and unsecured notes have covenants that allow us to operate our business with limited restrictions and significant flexibility for the foreseeable future. While we believe these sources will be sufficient to finance our working capital requirements, planned capital expenditures, investments, debt service obligations and other cash requirements for at least the next 12 months, and while we also believe that alternative sources of liquidity will remain available in the event we seek to add liquidity for opportunistic or other reasons in the future, 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. 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. AtOctober 18, 2021 , there were no borrowings under the Revolving Credit Facility. See Note 9 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a description of our Revolving Credit Facility. We engage in certain customer-based supply chain financing programs to accelerate the receipt of payment for outstanding accounts receivable from certain customers. Costs of these programs are typically reimbursed to us by the customer. Receivables transferred under these customer-based supply chain financing programs generally meet the requirements to be accounted for as sales resulting in the derecognition of such receivables from our consolidated balance sheets. Receivables involved with these customerbased supply chain finance programs for the quarter endedSeptember 30, 2021 constituted approximately 52% of our net sales. See Note 1 of Notes to Interim Consolidated Financial Statements included in this Report for further details with respect to these supply chain financing programs.
Debt
See "Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements - Contractual Obligations and Commercial Commitments" included in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for mandatory principal and cash interest payments on the outstanding borrowings. The following table provides an update to our contractual obligations and commercial commitments table in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10K for the year endedDecember 31, 2020 with respect to our 4.50% Senior Notes (as defined in Note 7 of Notes to Interim Consolidated Financial Statements included in this Report), consisting of mandatory principal and cash interest payments (in millions of dollars): Payments Due by Period Less than More than Total 1 year 1-3 years 3-5 years 5 years Principal and interest on 4.50% Senior Notes$ 798.3 $ 13.1 $
49.5
See Note 7 of Notes to Interim Consolidated Financial Statements included in this Report for further details with respect to the 4.50% Senior Notes.
We do not believe that covenants in the indentures governing the unsecured senior notes are likely to limit our ability to obtain additional debt or equity financing should we choose to do so during the next 12 months.
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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. A significant portion of our capital spending over the past several years related to the modernization project at our Trentwood facility, which 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 also focused on modernizing legacy equipment and the process flow for thin gauge plate to achieve KaiserSelect® quality enhancements for these Aero/HS andGE products. These improvements have allowed us to gain incremental manufacturing capacity to enable future sales growth. Our capital investment plans remain focused on supporting demand growth. The$150.0 million investment in a new roll coat line at ourWarrick packaging facility that we initiated during the quarter endedJune 30, 2021 is proceeding as planned, and by early 2024 is expected to provide additional capacity to support further growth in our higher margin coated products. In addition, we continue to deploy our capital thoughtfully to ensure that our investment decisions are aligned with our demand expectations in order to maximize the earnings potential of our business. Deploying our capital thoughtfully has allowed us to create value and maintain our financial strength and flexibility over time, and we will continue to manage our business with a long-term focus. Excluding our cash payment for the acquisition ofWarrick , we anticipate that total capital spending in 2021 will be approximately$70.0 million to$80.0 million . Capital investments will be funded using cash generated from operations, available cash and cash equivalents, shortterm 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 unsecured 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. See Note 9 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as well as Note 7 of Notes to Interim Consolidated Financial Statements included in this Report for additional information about restrictions on dividend payments contained in the Revolving Credit Facility and in the indenture for our unsecured senior notes. 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 our Statements of Consolidated Stockholders' Equity and Note 16 of Notes to Interim Consolidated Financial Statements included in this Report for information regarding dividends paid during the quarters endedSeptember 30, 2021 andSeptember 30, 2020 , and declared subsequent toSeptember 30, 2021 .
Repurchases of Common Stock
In response to prevailing economic conditions, we suspended repurchases of
common stock as of
See our Statements of Consolidated Stockholders' Equity included in this Report for information regarding repurchases of common stock during the quarters endedSeptember 30, 2021 andSeptember 30, 2020 and the amount authorized and available for future repurchases of common stock under our stock repurchase program. 38 -------------------------------------------------------------------------------- See our Statements of Consolidated Stockholders' Equity included in this Report for information regarding minimum statutory tax withholding obligations arising during the quarters and nine months endedSeptember 30, 2021 andSeptember 30, 2020 , in connection with the vesting of non-vested shares, restricted stock units and performance shares.
Environmental Commitments and Contingencies
See Note 8 of Notes to Interim Consolidated Financial Statements included in this Report for information regarding our environmental commitments and contingencies.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements
During the nine months endedSeptember 30, 2021 , we granted additional stock-based awards to executive officers, certain key employees and non-employee directors under our equity incentive plan. Additional awards are expected to be made in future years. BeginningMarch 31, 2021 , we assumed$500.0 million to$550.0 million of contractual obligations and commercial commitments ofWarrick , for which the majority of spending will be completed byDecember 31, 2021 . These commitments related primarily to the purchase of aluminum and related alloys used in their production process in the ordinary course of business. For updated maturities of lease liabilities, as well as net benefits expected to be paid for pension and other postretirement benefit obligations that includeWarrick , see Note 3 and Note 5, respectively, of Notes to Interim Consolidated Financial Statements included in this Report. Except as otherwise disclosed in this Report, there has been no material change in our contractual obligations, commercial commitments or off-balance sheet arrangements other than in the ordinary course of business sinceDecember 31, 2020 .
Critical Accounting Estimates and Policies
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates and such differences could be material. Our significant accounting policies are discussed in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . We discuss our critical accounting estimates in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
There have been no other material changes in our critical accounting estimates
and policies since
New Accounting Pronouncements
For a discussion of recently adopted and recently issued but not yet adopted accounting pronouncements, see "New Accounting Pronouncements" in Note 1 of Notes to Interim Consolidated Financial Statements included in this Report.
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Available Information
Our website is located at www.kaiseraluminum.com. The website includes a section for investor relations under which we provide notifications of news or announcements regarding our financial performance, includingSecurities and Exchange Commission ("SEC") filings, investor events and press and earnings releases. In addition, allKaiser Aluminum Corporation filings submitted to theSEC , including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements for our annual meeting of stockholders, as well as otherKaiser Aluminum Corporation reports and statements, are available on theSEC's web site at www.sec.gov. Such filings are also available for download free of charge on our website. In addition, we provide and archive on our website webcasts of our quarterly earnings calls and certain events in which management participates or hosts with members of the investment community, and related investor presentations. The contents of the website are not intended to be incorporated by reference into this Report or any other report or document filed by us, and any reference to the websites are intended to be inactive textual references only.
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