Kaiser Aluminum Corporation (KALU) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
Kaiser produces semi-fabricated specialty aluminum products for aerospace, packaging, automotive, general engineering and other industrial markets. It operates as one reportable segment. The nine-month comparison is affected by the March 2021 acquisition of the Warrick rolling mill, which contributed a full nine months of shipments in 2022 versus a partial period in 2021.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $748.9 | $750.6 | $2,651.9 | $1,815.6 |
| Operating income | $3.0 | $19.8 | $26.2 | $47.8 |
| Net income (loss) | $2.5 | $(2.3) | $(3.2) | $(20.2) |
| Adjusted EBITDA (non-GAAP) | $31.4 | $50.4 | $127.5 | $146.6 |
| Cash from operating activities | Not separately presented for the quarter | $(58.6) | $33.3 |
Q3 shipments fell 33.3 million pounds to 281.9 million; average realized sales price rose 12% to $2.66 per pound. Value-added revenue (VAR), a company-defined non-GAAP measure, increased to $355.7 million from $305.4 million. Cost of products sold was 93% of sales versus 90%; operating margin was approximately 0.4% versus 2.6%.
For the first nine months, shipments rose 21% to 952.4 million pounds and sales increased 46%, reflecting the acquisition and higher metal prices. VAR increased to $1,102.4 million from $795.0 million, while Adjusted EBITDA declined. The company attributed weaker earnings chiefly to supply-chain costs, inflation and manufacturing inefficiencies.
Cash, debt and liquidity
- Cash and cash equivalents were $129.3 at September 30, down from $303.2 at December 31, 2021. Cash, cash equivalents and restricted cash totaled $143.5.
- Nine-month operating cash use was $58.6, including a $133.5 inventory increase. Capital expenditures were $82.4; the company reported total cash outflows of $71.7 for investing and $43.2 for financing.
- Long-term debt carrying value was $1,037.6, representing $1,050.0 in senior-note principal. No revolving-credit borrowings were outstanding.
- Total liquidity was $684.3, including $555.0 of revolver availability after letters of credit. The amended $575.0 revolver matures in April 2027.
- Stockholders’ equity was $642.0, down from $692.5 at year-end. Quarterly dividends declared were $0.77 per share.
Material changes, outlook and risks
- Warrick’s magnesium supply disruption led to a force majeure declaration in July; the company lifted it in September after qualifying additional suppliers. It said magnesium needs were sourced through 2023 and beyond, and molten-metal supply had improved.
- Management estimated Q3 Adjusted EBITDA was reduced by approximately $24 million by supply-chain issues, Warrick inefficiencies and the Trentwood planned outage. Nine-month results included approximately $54 million of incremental magnesium, metal and transportation costs.
- Management expected Q4 2022 Adjusted EBITDA and Adjusted EBITDA margin to be similar to the first half of 2022. It described end-market fundamentals as positive, while noting continuing inflationary challenges and economic uncertainty.
- 2022 capital spending was forecast at approximately $165–$175 million, with about 60% directed to growth initiatives, including Warrick’s new roll-coat line.
- Q3 other income included an $8.4 million gain on property and equipment disposition and $6.0 million of post-acquisition funding from Alcoa. Nine-month other income also benefited from those items; the 2021 comparison included a $35.9 million debt-extinguishment loss.
- Environmental accruals were $14.9 million; the company said reasonably possible additional costs could total up to $11.6 million over the remediation period. Warrick asbestos-removal obligations were $2.3 million. Management said pending legal matters were sufficiently accrued and not expected to materially affect results, financial position or liquidity.
- Risks include aluminum and alloy price exposure, energy costs, labor and supply constraints, demand cyclicality, and execution of capital projects and automotive programs. Management stated it believed liquidity sources would cover requirements for at least the next 12 months.
Important facts for investors to verify
- Whether recovered magnesium and molten-metal supply translated into sustained production, shipments and margins after quarter-end.
- Whether Q4 Adjusted EBITDA and margin met management’s stated comparison with the first half of 2022.
- How much of operating cash use and inventory buildup reversed, and whether planned capital spending remained within the forecast.
- How non-GAAP Adjusted EBITDA and VAR reconcile to GAAP results, including the effects of non-run-rate adjustments and unusual other income.
- Whether environmental estimates, remediation plans and the potential additional exposure changed as regulatory studies progressed.