Kaiser Aluminum Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in millions of dollars unless otherwise noted. Results include the Warrick rolling mill, acquired March 31, 2021; its first full quarter of results makes comparisons with 2020 less comparable.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $741.0 | $275.7 | $1,065.0 | $645.0 |
| Operating income | $11.1 | $4.7 | $28.0 | $50.3 |
| Net income (loss) | $(22.4) | $(6.6) | $(17.9) | $22.5 |
| Diluted EPS | $(1.42) | $(0.41) | $(1.13) | $1.41 |
| Adjusted EBITDA | $58.7 | $34.4 | $96.2 | $93.8 |
| Value added revenue (VAR) | $317.9 | $174.6 | $489.6 | $391.2 |
- Q2 operating margin was approximately 1.5% versus 1.7% in Q2 2020; net margin was approximately negative 3.0% versus negative 2.4%. For the first half, operating margin was approximately 2.6% versus 7.8%, and net margin approximately negative 1.7% versus 3.5%.
- Q2 cost of products sold was 91% of sales, compared with 81% a year earlier. Management attributed the increase mainly to acquired Packaging volume and higher metal prices, as well as manufacturing costs and integration-related inefficiencies.
- Q2 other expense included a $35.9 loss on extinguishing the 6.50% Senior Notes. The company reported a $15.5 income tax benefit for the quarter.
- Six-month operating cash flow was $4.9, investing cash flow $(635.9), and financing cash flow $133.6. Operating cash flow was pressured by working-capital growth, including receivables; investing outflow principally reflected the $617.5 cash payment for Warrick.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $283.1; revolving-credit availability, net of letters of credit, was $367.3; reported total liquidity was $650.4. There were no revolver borrowings.
- Long-term debt was $1,035.5. In May, Kaiser issued $550.0 of 4.50% unsecured notes due 2031 and redeemed the remaining 6.50% notes due 2025 for $382.2, including premium and accrued interest. Interest expense was $12.4 in Q2 and $24.7 for the first half.
- Cash fell from $780.3 at December 31, 2020 to $283.1 at June 30, 2021, chiefly reflecting the Warrick acquisition and debt redemption. The company paid $0.72 per share in Q2 dividends and declared another $0.72 dividend after quarter-end.
Changes, outlook and risks
- Sales growth chiefly reflects the Warrick acquisition: Packaging contributed $358.8 of Q2 sales. Outside Packaging, management cited stronger GE and automotive demand, while Aero/HS remained affected by the pandemic-related aerospace downturn. Higher aluminum costs and the acquired Packaging mix reduced average VAR per pound.
- Management said it expects improving trends across end markets. It forecast aerospace recovery to 2019 levels by 2023–2024, automotive volume recovery in the second half of 2021 as semiconductor constraints ease, and Packaging market growth of 3%–5% CAGR over the next several years. These are expectations, not a company earnings or revenue forecast.
- Planned capital spending for 2021, excluding the acquisition, was approximately $80–$90. The company began a $150.0 Warrick roll-coat-line investment, expected to be qualified and operational by early 2024.
- Management identified Warrick integration and manufacturing inefficiencies, semiconductor supply constraints, demand cyclicality, aluminum and energy price exposure, and competition from alternative packaging as risks. Warrick also depends on Alcoa support and transition services, scheduled to extend no later than June 30, 2024.
- Environmental accruals were $17.4; the company said reasonably possible additional costs could be up to $11.6 over the remediation period. A potential Warrick asbestos-removal obligation was still being evaluated and had no recorded liability because it was not yet reasonably estimable.
- Customer receivables supply-chain financing arrangements are a liquidity consideration: the company sold $316.0 of receivables through such arrangements during the quarter, and disclosed that program receivables represented approximately 40% of Q2 net sales.
Important facts for investors to verify
- How much Warrick integration inefficiency and acquisition-related cost persists, and whether the acquired mill achieves expected utilization and returns.
- Whether operating cash generation improves as receivables, inventory and payables normalize, and whether customer financing arrangements remain available on acceptable terms.
- Progress on aerospace recovery, automotive semiconductor constraints, GE demand and Packaging growth assumptions.
- Final Warrick purchase-price allocation and any asbestos-related retirement obligation, as well as changes to environmental remediation estimates.
- Debt-service capacity, planned capital spending, and the sustainability of dividends amid lower cash balances and elevated debt.