Kaiser Aluminum(KALU) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Financial statements for Q3 2021 show increased assets and sales due to the Warrick acquisition, resulting in a net loss of $20.2 million Consolidated Balance Sheet Highlights (Unaudited) | (In millions of dollars) | As of Sep 30, 2021 | As of Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $295.7 | $780.3 | | Total current assets | $1,223.3 | $1,121.4 | | Property, plant and equipment, net | $948.7 | $627.2 | | Total assets | $2,437.2 | $1,864.7 | | Liabilities & Equity | | | | Total current liabilities | $444.8 | $158.3 | | Long-term debt | $1,035.9 | $838.1 | | Total liabilities | $1,716.2 | $1,132.3 | | Total stockholders' equity | $721.0 | $732.4 | Consolidated Income Statement Highlights (Unaudited) | (In millions of dollars) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net sales | $1,815.6 | $900.7 | | Operating income | $47.8 | $62.6 | | Net (loss) income | $(20.2) | $22.9 | | Diluted (loss) income per share | $(1.28) | $1.44 | Consolidated Cash Flow Highlights (Unaudited) | (In millions of dollars) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $33.3 | $150.7 | | Net cash (used in) provided by investing activities | $(639.5) | $41.6 | | Net cash provided by financing activities | $121.4 | $293.2 | - On March 31, 2021, the company acquired the Warrick rolling mill for a purchase price of $670.0 million, diversifying into the beverage and food packaging end market[48] - The company participates in supply chain financing arrangements, selling trade accounts receivable without recourse. In the nine months ended September 30, 2021, $706.2 million of receivables were sold under these programs[33] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q3 2021 sales growth to the Warrick acquisition and strong demand, with Adjusted EBITDA increasing to $50.4 million Results of Operations Q3 2021 net sales surged to $750.6 million due to the Warrick acquisition, with Adjusted EBITDA reaching $50.4 million - Q3 2021 net sales increased to $750.6 million from $255.7 million YoY, reflecting a 189% increase in shipment volume, mainly from the Warrick acquisition (Packaging) and a 39% increase in GE products[138] - SG&A expenses increased in Q3 2021 primarily due to costs related to the Warrick acquisition, including transition service agreements with Alcoa, and higher salaries and incentives[143] Adjusted EBITDA Reconciliation (Unaudited) | (In millions of dollars) | Quarter Ended Sep 30, 2021 | Quarter Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net (loss) income | $(2.3) | $0.4 | | Interest expense | 12.5 | 12.1 | | Other expense, net | 1.2 | 0.5 | | Income tax provision (benefit) | 8.4 | (0.7) | | Depreciation and amortization | 24.9 | 12.9 | | Non-run-rate items | 5.7 | 6.3 | | Adjusted EBITDA | $50.4 | $31.5 | Value Added Revenue (VAR) by End Market - Q3 2021 vs Q3 2020 | End Market | Q3 2021 VAR ($M) | Q3 2021 VAR ($/lb) | Q3 2020 VAR ($M) | Q3 2020 VAR ($/lb) | | :--- | :--- | :--- | :--- | :--- | | Aero/HS Products | $81.5 | $1.94 | $73.3 | $2.68 | | Packaging | $126.0 | $0.73 | - | - | | Automotive Extrusions | $21.1 | $1.08 | $24.2 | $0.98 | | GE Products | $75.4 | $0.99 | $55.4 | $1.01 | | Total | $305.4 | $0.97 | $154.4 | $1.42 | Liquidity and Capital Resources Total liquidity stood at $663.0 million as of September 30, 2021, with cash from operations decreasing due to the Warrick acquisition Liquidity Summary | (In millions of dollars) | As of Sep 30, 2021 | As of Dec 31, 2020 | | :--- | :--- | :--- | | Available cash and cash equivalents | $295.7 | $780.3 | | Borrowing availability under Revolving Credit Facility | $367.3 | $251.5 | | Total liquidity | $663.0 | $1,031.8 | - In May 2021, the company issued $550.0 million of 4.50% Senior Notes due 2031 and used the proceeds to redeem its outstanding 6.50% Senior Notes, resulting in a $35.9 million loss on debt extinguishment[86][91] - Anticipated capital spending for 2021 is approximately $70.0 million to $80.0 million, with a significant investment in a new $150.0 million roll coat line at the Warrick facility[172][173] - The company has consistently paid a quarterly cash dividend since 2007 and declared a dividend of $0.72 per share for Q3 2021[123][174] Outlook Q4 2021 outlook projects low single-digit VAR growth and stable Adjusted EBITDA margins, with continued supply chain disruptions expected - VAR for Q4 2021 is anticipated to increase by a low single-digit percentage compared to Q3 2021[155] - Adjusted EBITDA margin for Q4 2021 is expected to be similar to Q3 2021[155] - The company anticipates continued cost issues and supply chain disruptions in Q4 2021, with uncertainty around the impact of magnesium and silicon market imbalances[155][156] - Long-term, the company is well-positioned for growth with a diversified portfolio and strong secular trends in its served end markets, including aerospace, automotive, and packaging[157] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from commodity and currency fluctuations using derivatives, with a hypothetical $9.7 million loss from aluminum price decreases - The company uses derivative contracts to hedge risks related to aluminum, alloying metals, energy, and foreign currency[189] - A hypothetical $0.10 per pound decrease in the LME aluminum price as of September 30, 2021, would have resulted in an unrealized mark-to-market loss of $9.7 million on derivative positions[192] - A hypothetical $1.00 per mmbtu decrease in natural gas prices as of September 30, 2021, would have resulted in an unrealized mark-to-market loss of $5.2 million[195] Controls and Procedures Disclosure controls were effective as of September 30, 2021, with integration of Warrick facility internal controls ongoing for the 2022 annual report - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of September 30, 2021[197] - The company is in the process of incorporating the Warrick acquisition's operations into its internal control over financial reporting and expects to complete this process for the December 31, 2022 annual report[198] PART II – OTHER INFORMATION Legal Proceedings There have been no material developments in the company's legal proceedings since the end of the fiscal year 2020 - There have been no material developments in legal proceedings since December 31, 2020[201] Risk Factors New risk factors include climate regulations, competition from substitute packaging materials, and operational dependency on Alcoa for the Warrick facility - A new risk factor highlights that climate-related regulations could impact the supply chain, leading to higher costs and disruptions[203] - The company's new packaging business faces competition from substitute products (glass, plastic, etc.), and shifts in consumer preference could negatively impact profits[204] - A key risk is the dependency on Alcoa to provide molten metal and essential support and transition services for the Warrick facility until mid-2024. A failure by Alcoa could lead to substantial costs or operational shutdowns[205] - The company is exposed to risks from its receivables supply chain financing arrangements, including termination of programs or increases in the LIBOR rate[207] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the plan in Q3 2021, with $93.1 million remaining available for future repurchases as of September 30, 2021 Share Repurchase Activity - Q3 2021 | Period | Total Shares Purchased | Average Price per Share | Shares Purchased (Stock Repurchase Plan) | | :--- | :--- | :--- | :--- | | July 2021 | 61 | $121.68 | 0 | | August 2021 | 518 | $121.28 | 0 | | September 2021 | 0 | - | 0 | | Total | 579 | $121.32 | 0 | - As of September 30, 2021, $93.1 million remained available for share repurchases under the company's stock repurchase program[209]