Kaiser Aluminum Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Kaiser produces semi-fabricated specialty aluminum products for aerospace, packaging, automotive, general engineering and other markets. Results include the Warrick packaging operation, acquired in March 2021; therefore, the six-month comparison includes a full six months of Warrick shipments in 2022 versus only part of the comparable 2021 period.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $954.2 million | $741.0 million | $1,903.0 million | $1,065.0 million |
| Operating income (loss) | $(2.0) million | $11.1 million | $23.2 million | $28.0 million |
| Net loss | $(13.8) million | $(22.4) million | $(5.7) million | $(17.9) million |
| Diluted loss per share | $(0.87) | $(1.42) | $(0.36) | $(1.13) |
| Adjusted EBITDA | $41.1 million | $58.7 million | $96.1 million | $96.2 million |
- Q2 sales increased 29%, while shipments declined 1.5 million pounds to 335.1 million pounds. Higher realized price per pound, including higher metal costs passed through to customers, drove the sales increase.
- Q2 cost of products sold was 94% of sales, compared with 91% a year earlier. Adjusted EBITDA fell $17.6 million year over year; management cited supply-chain disruption, lower operating efficiency, inflation, maintenance and employee costs, partly offset by pricing and surcharges.
- Q2 Adjusted EBITDA was about 10.9% of value added revenue (VAR), versus about 18.5% a year earlier. VAR, a company-defined non-GAAP measure, was $376.3 million in Q2 2022 versus $317.9 million.
- Operating cash flow was $7.0 million for the first half, versus $4.9 million in 2021. Capital expenditures were $45.5 million; cash dividends paid were $25.1 million. Cash, cash equivalents and restricted cash declined $67.6 million to $249.4 million; balance-sheet cash and equivalents were $235.2 million.
- At June 30, cash plus remaining revolver availability totaled $786.6 million. The $575 million revolving facility had $551.4 million available after letters of credit and no borrowings. Senior-note principal totaled $1.05 billion; carrying debt was $1.037 billion.
- Current assets were $1.246 billion and current liabilities $547.5 million. Inventories increased to $468.6 million from $404.6 million at year-end 2021.
Changes, outlook and risks
- First-half sales rose 79% and shipments rose 42%, primarily reflecting a full six months of Warrick operations in 2022. First-half Adjusted EBITDA was essentially unchanged year over year despite the additional packaging volume and approximately $20 million of incremental supply-chain costs.
- Warrick faced magnesium shortages after its primary supplier stopped deliveries and operational problems at an adjacent aluminum smelter. Kaiser declared force majeure at Warrick on July 7, after quarter-end. Its initial estimate was production and deliveries 30%–40% lower in July and about 50% lower for the rest of Q3, assuming no further primary-supplier deliveries. Kaiser later reported additional deliveries and ongoing supplier qualification, and expected shipments to exceed those prior estimates; the filing provides no revised quantified production outlook.
- Management withdrew its previously anticipated 17%–20% Adjusted EBITDA margin target, stating the company would not achieve it in the near term. It said the business could perform at those levels or above as supply issues are resolved. Longer-term strategy and expectations for growth across served markets were unchanged.
- 2022 capital spending was estimated at $180–$200 million, with about 60% directed to growth initiatives. Planned work included a roughly $30 million Trentwood stretcher refurbishment and investment in a Warrick roll-coat line.
- Environmental accruals were $16.0 million. The company said costs could reasonably exceed recorded accruals by up to an estimated $11.6 million; remediation may continue for 30 or more years. A separate $2.3 million liability relates to asbestos removal at Warrick under certain future demolition or renovation scenarios.
- Other notable items: a $3.1 million impairment of a favorable magnesium contract intangible asset; derivative positions had a net fair-value liability of $2.6 million at quarter-end; and the company estimated $6.0 million of pre-tax hedge losses in accumulated other comprehensive income could be reclassified to earnings within 12 months. Management believed liquidity was sufficient for at least the next 12 months, subject to operating performance and economic conditions.
Important facts for investors to verify
- Whether magnesium supply diversification and Warrick’s operational recovery restore planned production, deliveries and profitability.
- Whether pricing and surcharges keep pace with inflation, metal costs, freight and labor expenses, and when margins may recover toward prior expectations.
- How inventory, contract assets and supplier/customer payment arrangements affect operating cash flow and liquidity.
- Whether planned capital spending remains within the $180–$200 million estimate and delivers expected capacity and efficiency benefits.
- Whether environmental remediation estimates change as Trentwood and Newark studies and regulatory processes progress.
- The effect on earnings and cash flows of commodity-price movements, hedge settlements and the potential reclassification of hedge losses.