KAISER ALUMINUM CORPORATION 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, processes and countermeasures implemented to address operational and
supply chain challenges 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) pricing, market conditions and our ability to
effectively execute commercial and labor strategies, pass through cost
increases, including the institution of surcharges, and flex costs in response
to changing economic conditions and inflation; (vi) developments in technology;
(vii) the impact of our future earnings, cash flows, financial condition,
capital requirements and other factors on our financial strength and
flexibility; (viii) new or modified statutory or regulatory requirements; and
(ix) the successful integration of acquired operations and technologies continue
to drive innovative solutions and further advance our capabilities. This Item
and Part I, Item 1A. "Risk Factors" included in our Annual Report on Form 10-K
for the year ended
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 ended
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 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 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 and certain alloys, 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, and alloys at prices that fluctuate on a monthly basis, and our pricing policies generally allow us to pass the underlying cost of aluminum and alloys
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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 and alloy 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 aluminum and alloy prices increase, and a favorable impact to us when aluminum and alloy 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 aluminum and alloy price pass through and firm-price sales agreements create 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 price of
primary and scrap, or recycled, aluminum, our main raw material, and alloys 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 aluminum and alloy 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
aluminum at the average Midwest Transaction Price ("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 of
aluminum reflects the primary aluminum supply/demand dynamics in
Business Overview
We manufacture and sell semi-fabricated specialty aluminum mill products for the
following end market applications: (i) aerospace and high strength ("Aero/HS
products"); (ii) aluminum beverage and food packaging ("Packaging"); (iii)
automotive ("Automotive Extrusions"); (iv) general engineering ("
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, which are produced at our rolling mill in
In the areas of aluminum extrusions, we focus on demanding Aero/HS products,
Automotive Extrusions and
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 of
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Highlights of the quarter ended
• Strong demand forGE products and Packaging; • Steadily increasing demand for Aero/HS products; • Flat demand for Automotive Extrusions due to continued shortage of semiconductor chips; • Higher freight costs due to rail and port shipping constraints; • Lingering supply chain issues related to metal and magnesium impacted results; and • Cash dividends and dividend equivalents of$0.77 per share or$12.5 million paid during the quarter endedMarch 31, 2022 .
Results of Operations
Consolidated Results of Operations
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 ended
Selling, General, Administrative, Research and Development ("SG&A and R&D").
SG&A and R&D expense totaled
Restructuring Cost (Benefit). Restructuring cost (benefit) was a benefit of
Interest Expense. Interest expense represents cash and non-cash interest expense
incurred on our unsecured senior notes and our credit agreement with
Other Expense, Net. See Note 8 of Notes to Interim Consolidated Financial Statements included in this Report for details.
Income Tax (Provision) Benefit. See Note 9 of Notes to Interim Consolidated Financial Statements included in this Report for disclosure regarding our income tax (provision) benefit.
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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.
The table below provides selected operational and financial information (in
millions of dollars):
Quarter Ended March 31,
2022 2021
Net income $ 8.1 $ 4.5
Interest expense 12.2 12.3
Other expense, net 1.6 0.4
Income tax provision (benefit) 3.3 (0.3 )
Depreciation and amortization 27.5 13.5
Non-run-rate items:
Restructuring cost (benefit) - (0.7 )
Adjustments to plant-level LIFO1 2.7 (2.9 )
Mark-to-market gain on derivative instruments2 (1.0 ) (0.3 )
Acquisition costs3 0.6 11.0
Total non-run-rate items 2.3 7.1
Adjusted EBITDA $ 55.0 $ 37.5
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 line item 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 gain on derivative instruments represented: (i) for 2022 and
2021, the gain on non-designated commodity hedges and (ii) for 2021, the
reversal of mark-to-market (gain) loss 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. Adjusted EBITDA reflects the realized gains and losses related to
these derivatives upon settlement.
3 Acquisition costs are non-run-rate acquisition-related transaction costs,
which include professional fees, as well noncash hedging charges recorded in
connection with our Warrick acquisition.
Adjusted EBITDA for the quarter ended
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The following table provides our shipment and VAR information (in millions of dollars, except shipments and VAR per pound) by end market applications:
Quarter Ended March 31,
2022 2021
Aero/HS Products:
Shipments (mmlbs) 45.5 36.1
$ $ / lb $ $ / lb
Net sales $ 176.6 $ 3.88 $ 111.7 $ 3.09
Less: Hedged Cost of Alloyed Metal (81.3 ) (1.79 ) (40.9 ) (1.13 )
VAR $ 95.3 $ 2.09 $ 70.8 $ 1.96
Packaging:
Shipments (mmlbs) 174.7 -
$ $ / lb $ $ / lb
Net sales $ 448.0 $ 2.56 $ - $ -
Less: Hedged Cost of Alloyed Metal (301.8 ) (1.72 ) - -
VAR $ 146.2 $ 0.84 $ - $ -
Automotive Extrusions:
Shipments (mmlbs) 23.3 27.2
$ $ / lb $ $ / lb
Net sales $ 63.8 $ 2.74 $ 57.6 $ 2.12
Less: Hedged Cost of Alloyed Metal (40.2 ) (1.73 ) (29.9 ) (1.10 )
VAR $ 23.6 $ 1.01 $ 27.7 $ 1.02
GE Products:
Shipments (mmlbs) 87.6 71.2
$ $ / lb $ $ / lb
Net sales $ 251.2 $ 2.87 $ 150.4 $ 2.11
Less: Hedged Cost of Alloyed Metal (149.1 ) (1.70 ) (78.9 ) (1.11 )
VAR $ 102.1 $ 1.17 $ 71.5 $ 1.00
Other Products:
Shipments (mmlbs) 4.3 2.4
$ $ / lb $ $ / lb
Net sales $ 9.2 $ 2.14 $ 4.3 $ 1.79
Less: Hedged Cost of Alloyed Metal (6.0 ) (1.40 ) (2.6 ) (1.08 )
VAR $ 3.2 $ 0.74 $ 1.7 $ 0.71
Total:
Shipments (mmlbs) 335.4 136.9
$ $ / lb $ $ / lb
Net sales $ 948.8 $ 2.83 $ 324.0 $ 2.37
Less: Hedged Cost of Alloyed Metal (578.4 ) (1.73 ) (152.3 ) (1.12 )
VAR $ 370.4 $ 1.10 $ 171.7 $ 1.25
Outlook
While we continue to navigate through an inflationary cost environment and
manage supply chain challenges, we remain confident in the initiatives we are
taking to further improve manufacturing efficiencies and operating performance.
As we look to the remainder of the year, we reiterate our outlook and continue
to anticipate a year-over-year increase in VAR of 20% to 25% and a consolidated
EBITDA margin (Adjusted EBITDA as a percentage of VAR) of 17% to 20% for the
full year 2022. In line with the outlook provided for our full year major
maintenance spending, we expect major maintenance expense for the quarter ended
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Liquidity and Capital Resources
Summary
The following table summarizes our liquidity (in millions of dollars):
As of December
As of March 31, 2022 31, 2021
Available cash and cash equivalents $ 261.0 $ 303.2
Borrowing availability under Revolving Credit
Facility, net of letters of credit1 562.5 367.3
Total liquidity $ 823.5 $ 670.5
1 Borrowing availability under the Revolving Credit Facility as determined by a
borrowing base calculated as of
Revolving Credit Facility (see "Sources of Liquidity" below for discussion of
amendment made to our Revolving Credit Facility on
as of that date.
We place our cash in bank deposits and money market funds with high credit quality financial institutions. Cash equivalents primarily consist of money market funds, which are highly liquid.
See Note 11 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 as of both
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in millions of dollars):
Quarter Ended March 31,
2022 2021
Total cash provided by (used in):
Operating activities $ 1.4 $ (11.4 )
Investing activities $ (28.3 ) $ (626.6 )
Financing activities $ (14.9 ) $ (14.5 ) Cash provided by operating activities for the quarter ended
Cash used in operating activities for the quarter ended
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 quarters ended
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,
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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. On
See Note 9 of Notes to Consolidated Financial Statements included in our Annual
Report on Form 10-K for the year ended
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 ended
Debt
See Note 9 of Notes to Consolidated Financial Statements included in Part II,
Item 8. "Financial Statements and Supplementary Data" in our Annual Report on
Form 10-K for the year ended
We do not believe that covenants in the indentures governing the 4.50% Senior Notes due 2031 ("4.50% Senior Notes") and 4.625% Senior Notes due 2028 ("4.625% 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. 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 and
Our capital investment plans remain focused on supporting demand growth through
capacity expansion, sustaining our operations, enhancing product quality and
increasing operating efficiencies. We anticipate total capital spending in 2022
of approximately
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Capital investments will be funded using cash generated from operations, available cash and cash equivalents, 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 4.50% Senior Notes and 4.625% 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 ended
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 13 of Notes to
Interim Consolidated Financial Statements included in this Report for
information regarding dividends paid during the quarters ended
Repurchases of Common Stock
We suspended share repurchases as of
See our Statements of Consolidated Stockholders' Equity included in this Report
for information regarding: (i) repurchases of common stock during the quarters
ended
Environmental Commitments and Contingencies
See Note 6 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 quarter ended
Future commitment fees on our Revolving Credit Facility are calculated based on
0.250% of the unused credit under the facility. Future commitment fees are
expected to increase beginning in the quarter ended
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 since
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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 ended
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 "Adoption of New Accounting Pronouncements" in Note 1 of Notes to Interim Consolidated Financial Statements included in this Report.
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, including
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