Kaiser Aluminum Corporation — Q3 2021 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. Kaiser produces specialty semi-fabricated aluminum products for aerospace, automotive, general engineering, packaging and other markets. Results now include the Warrick rolling mill, acquired from Alcoa on March 31, 2021; prior-year reported results do not include Warrick.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $750.6 million | $255.7 million | $1,815.6 million | $900.7 million |
| Operating income | $19.8 million | $12.3 million | $47.8 million | $62.6 million |
| Net income (loss) | $(2.3) million | $0.4 million | $(20.2) million | $22.9 million |
| Diluted EPS | $(0.14) | $0.02 | $(1.28) | $1.44 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $33.3 million | $150.7 million |
| Adjusted EBITDA | $50.4 million | $31.5 million | $146.6 million | $125.3 million |
Q3 operating margin, calculated from reported figures, was approximately 2.6%, versus 4.8% in Q3 2020. Nine-month operating margin was approximately 2.6%, versus 7.0%. Adjusted EBITDA as a share of value added revenue (VAR) was approximately 16.5% in Q3 and 18.4% for nine months; corresponding 2020 figures were approximately 20.4% and 23.0%. VAR is a company-defined non-GAAP measure.
Q3 shipments were 315.2 million pounds versus 108.9 million, primarily reflecting 173.6 million pounds of Packaging shipments from Warrick. Nine-month shipments were 788.7 million pounds versus 383.1 million. Q3 VAR was $305.4 million, but VAR per pound declined to $0.97 from $1.42, mainly because Packaging carries lower VAR per pound. Nine-month VAR was $795.0 million versus $545.6 million; VAR per pound was $1.01 versus $1.42.
Cash, debt and liquidity. Cash and cash equivalents were $295.7 million at September 30, 2021, down from $780.3 million at year-end 2020. Total liquidity was $663.0 million, including $367.3 million available under the $375 million revolving facility; there were no revolver borrowings. Long-term debt carrying value was $1,035.9 million. The company issued $550 million of 4.50% notes due 2031 and redeemed its remaining 6.50% notes, recording a $35.9 million extinguishment loss. Nine-month investing cash use was $639.5 million, including $609.2 million paid for Warrick; financing cash inflow was $121.4 million.
Working capital absorbed cash: receivables increased $110.7 million and inventories increased $52.5 million, partly offset by a $105.8 million increase in accounts payable. Capital expenditures were $29.9 million for the nine months. The company declared a quarterly dividend of $0.72 per share; a further $0.72 dividend was declared after quarter-end.
Material changes and management commentary
- Revenue growth chiefly reflects the Warrick acquisition and higher aluminum prices and shipment volumes; it should not be read as like-for-like organic growth. Management attributed the increase in Q3 volume outside Packaging to stronger general engineering and aerospace demand, while automotive shipments were constrained by semiconductor shortages.
- Management cited labor constraints, inefficiencies, rapidly rising materials and other inflationary costs, and supply-chain disruptions. Nine-month Adjusted EBITDA improved by $21.3 million, with Packaging and improvement in automotive and general engineering partly offset by higher costs and Warrick integration redundancy costs.
- For Q4 2021, management expected VAR to increase by low single digits from Q3, with Adjusted EBITDA margin on VAR expected to remain similar. It anticipated continuing cost and supply-chain pressures and said disruption in magnesium and silicon markets remained uncertain.
- Longer term, management described end-market fundamentals as solid, expected commercial aerospace recovery to continue, and anticipated automotive production and program launches would recover as semiconductor shortages ease. It highlighted potential margin expansion and growth in Packaging, while noting near-term execution challenges.
- The company began a $150 million Warrick roll-coat line investment, expected to add coated-product capacity by early 2024. It forecast 2021 capital spending, excluding the acquisition, of approximately $70–$80 million.
Risks, contingencies and unusual items
- The $35.9 million debt-extinguishment loss materially affected nine-month results. The company also reported $22.2 million of acquisition-related costs for the nine months and a $10.9 million non-run-rate plant-level LIFO adjustment.
- Environmental remediation accruals were $17.2 million. The company estimated reasonably possible additional costs of up to $11.6 million over the remediation period; remediation and monitoring may continue for 30 years or more. Warrick asbestos-related conditional asset-retirement obligations remained under evaluation, with no liability recorded because the amount was indeterminable.
- Risks include aluminum and alloying-metal prices, energy costs, supply interruptions, labor and operating constraints, demand cyclicality, and packaging competition from substitute materials. The filing also identifies reliance on Alcoa for Warrick molten metal and transition/support services, with transition services scheduled to extend no later than June 30, 2024.
- Receivables financing is significant: customer financial institutions purchased $706.2 million of receivables during the nine months, and such programs represented approximately 52% of Q3 net sales. Termination or increased financing costs could affect cash flows and liquidity.
- The Q3 income-tax provision was $8.4 million despite pretax income of $6.1 million; the reported effective tax rate was 137%. For the nine months, a $7.4 million tax benefit accompanied a pretax loss of $27.6 million. Tax rates were affected by forecast earnings and other items.
Important facts for investors to verify
- How much of reported growth and earnings contribution is attributable to Warrick, and whether its margins and integration performance meet management’s expectations.
- Whether Q4 VAR and margin expectations were achieved, particularly amid cost inflation and magnesium, silicon and broader supply-chain disruptions.
- Cash conversion and working-capital trends, including receivables sold through customer financing programs and the sustainability of available liquidity.
- Debt-service capacity after the note issuance and redemption, and the funding and returns expected from Warrick’s roll-coat line and other capital spending.
- Potential changes to environmental remediation estimates and any liability arising from the Warrick asbestos evaluation or Alcoa service-transition arrangements.