Kaiser Aluminum Corporation — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021. The company produces specialty semi-fabricated aluminum products. It acquired the Warrick Rolling Mill from Alcoa on March 31, after the close of business; consequently, the mill contributed no sales or earnings to reported Q1 results.
Financial performance
- Revenue and shipments: Net sales were $324.0 million, down 12% from $369.3 million; shipments declined 12% to 136.9 million pounds. Value added revenue (VAR), a non-GAAP measure, was $171.7 million versus $216.6 million, and VAR per pound fell to $1.25 from $1.39.
- End markets: Aerospace and high-strength sales fell to $111.7 million from $196.0 million. Automotive extrusions rose to $57.6 million from $47.4 million, while general engineering rose to $150.4 million from $121.7 million.
- Profitability: Operating income was $16.9 million, down from $45.6 million; net income was $4.5 million versus $29.1 million. Diluted EPS was $0.28 versus $1.81. Approximate operating margin was 5.2%, compared with 12.3%, and net margin was 1.4%, compared with 7.9%. Adjusted EBITDA, a non-GAAP measure, was $37.5 million versus $59.4 million.
- Cash flow: Operating activities used $11.4 million, compared with $52.4 million provided in Q1 2020. Investing activities used $626.6 million, including $617.5 million paid at acquisition close for Warrick. Financing activities used $14.5 million. Cash, cash equivalents and restricted cash ended at $141.8 million; balance-sheet cash and cash equivalents were $128.0 million.
- Liquidity and debt: Cash plus unused revolving-credit availability totaled $495.2 million, including $367.2 million of availability; there were no revolver borrowings. Long-term debt was $838.7 million. The company reported total assets of $2.15 billion and total liabilities of $1.42 billion at quarter-end.
- Margins and costs: Cost of products sold, excluding depreciation and other items, was 81% of sales versus 78%. SG&A and R&D increased to $31.8 million from $23.9 million, mainly due to $10.5 million of acquisition-related legal and consulting costs. Interest expense rose to $12.3 million from $6.1 million.
- Capital returns: The company paid $0.72 per share in quarterly dividends, totaling $11.7 million. It made no stock repurchases during the quarter.
Material changes and acquisition
- Lower commercial aerospace demand, associated with COVID-19, drove the decline in Aero/HS shipments. Automotive and general engineering benefited from new program launches, underlying demand and customer restocking.
- Warrick expands the company into beverage and food packaging. The contract purchase price was $670.0 million; preliminary consideration allocated was $604.8 million, subject to post-closing adjustments and valuation work. The acquisition added $385.4 million of property, plant and equipment, $56.5 million of intangible assets and $27.4 million of goodwill in the preliminary allocation.
- Pro forma results assuming Warrick had been acquired January 1 were sales of $635.9 million and net income of $9.9 million for Q1 2021; these are informational and do not reflect negotiated aluminum and power pricing.
- Cash declined from $780.3 million at year-end, principally reflecting the acquisition payment. Trade receivables and inventories also increased substantially, partly reflecting acquired balances and operating working capital.
Outlook, risks and other notable items
- Management updated its 2021 outlook to include approximately $375–$400 million of additional VAR from Warrick for the remainder of the year and reiterated an expectation for an EBITDA margin comparable to 2020. Before the acquisition, the outlook anticipated full-year VAR growth of 5%–10% year over year.
- Management expects improving Aero/HS demand, particularly from defense and business jets, while large commercial-aircraft demand is expected to recover through 2023–2024. Automotive demand remained robust, though semiconductor shortages could delay programs and reduce 2021 VAR. General engineering demand and packaging-market prospects were described as strong.
- Expected 2021 capital spending is approximately $75–$85 million. The previously planned $375 million Trentwood expansion and operational-security project remains deferred pending market and demand conditions.
- Warrick depends on Alcoa for certain operating support services during transition; Alcoa’s transition services are to extend no later than June 30, 2024. Failure or delay could raise costs or disrupt operations. Packaging products also face competition from substitute materials and utilization risk.
- Environmental accruals were $18.0 million. The company said reasonably possible additional undiscounted costs could be up to $11.6 million; estimates may change as remediation studies and plans progress. A potential asbestos-related conditional asset-retirement obligation at Warrick had not been quantified or recorded.
- Commodity, energy and foreign-exchange exposures are managed partly through hedges. A $0.10-per-pound decline in LME aluminum was estimated to cause an $11.3 million unrealized mark-to-market loss on relevant aluminum derivative positions, all else equal. The company also identified risks to receivable supply-chain financing arrangements, including termination and LIBOR-related cost changes.
- Management stated that available liquidity and expected operating resources should fund requirements for at least the next 12 months, subject to operating performance and broader conditions. Disclosure controls were assessed as effective; integration of Warrick into internal financial controls was underway.
Investor verification priorities
- Track Warrick’s post-close contribution, final purchase-price allocation, integration costs and realized operating performance against the pro forma figures.
- Verify progress toward the updated 2021 VAR and EBITDA-margin outlook, including the effects of aerospace recovery, semiconductor constraints and packaging demand.
- Monitor cash conversion and working capital, remaining liquidity, debt service and the planned $75–$85 million capital program.
- Assess Alcoa transition-service execution through the 2024 deadline and any costs or interruption risks associated with Warrick’s operating dependencies.
- Follow environmental remediation estimates, the potential Warrick asbestos obligation, and any changes to disclosed commodity, energy or receivables-financing risks.