Kaiser Aluminum Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in millions of dollars, except per-share data and where otherwise noted. Kaiser manufactures specialty semi-fabricated aluminum products for aerospace, packaging, general engineering, automotive and other industrial markets.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $814.1 | $954.2 | $1,621.7 | $1,903.0 |
| Operating income (loss) | $35.9 | $(2.0) | $55.0 | $23.2 |
| Net income (loss) | $18.3 | $(13.8) | $34.2 | $(5.7) |
| Diluted EPS | $1.14 | $(0.87) | $2.12 | $(0.36) |
| Adjusted EBITDA, non-GAAP | $63.7 | $31.2 | $110.4 | $83.5 |
| Operating cash flow | Not separately presented for quarter | $47.8 | $7.0 |
Q2 operating margin was approximately 4.4%, compared with a loss-making operating result in Q2 2022. Six-month adjusted EBITDA margin was approximately 6.8%, versus 4.4% a year earlier. Sales and cost of products sold declined partly with lower metal prices and shipments; conversion revenue, management’s non-GAAP measure of sales excluding hedged metal cost, rose to $378.5 million in Q2 from $351.4 million.
- Demand and shipments: Q2 shipments declined 21.0 million pounds to 314.1 million pounds. Aerospace/high-strength shipments increased 32% and automotive extrusions 16%; general engineering fell 30% and packaging fell 9%, principally reflecting customer destocking.
- Cash and investment: Six-month investing cash outflow was $67.7 million, including $82.6 million of capital expenditures. Operating cash flow less capital expenditures was negative $34.8 million. Cash and cash equivalents were $19.8 million at June 30, down from $57.4 million at year-end; the cash-flow statement also includes $18.6 million of restricted cash.
- Debt and liquidity: Long-term debt carrying value was $1,053.9 million on the balance sheet; senior note principal totaled $1.05 billion. Revolver borrowings were $15.0 million at June 30, with $537.7 million of remaining availability. Reported total liquidity was $557.5 million. The company reported no revolver borrowings at July 24.
- Other balance-sheet items: Current assets were $996.6 million and current liabilities $354.7 million. Retained earnings were $22.4 million. The company declared quarterly dividends of $0.77 per share for both Q1 and Q2.
Material changes versus the prior comparable period
- Q2 sales decreased 15% year over year, reflecting lower shipment volume and a 9% decline in average realized sales price per pound. Lower average hedged metal cost reduced reported sales and cost of sales; conversion revenue per pound increased 15%.
- Q2 net income improved from a loss of $13.8 million to income of $18.3 million. Adjusted EBITDA increased by $32.5 million, with management citing better pricing and mix, lower freight, energy and maintenance costs, partly offset by higher overhead, benefits and incentive costs.
- For the first half, sales declined 15%, while adjusted EBITDA rose $26.9 million. Net income was $34.2 million versus a $5.7 million loss. Operating cash flow improved to $47.8 million from $7.0 million.
- Capital expenditures increased to $82.6 million from $45.5 million in the first half of 2022. The company borrowed and repaid amounts under its revolver during the half, ending with $15.0 million outstanding.
Outlook, commentary and risks
- Management expects commercial aerospace demand to strengthen and approach pre-pandemic levels by year-end 2023; business jet, defense and space demand remained strong. It expects continued, though slower, packaging destocking, and lower general engineering demand from destocking and typical Q3 seasonality. Automotive is expected to recover into 2024.
- Management expects Q3 2023 adjusted EBITDA and margin to be more in line with adjusted Q1 2023 results. It remains cautiously optimistic that full-year 2023 adjusted EBITDA and margin will improve from 2022, citing pricing actions, cost reductions and manufacturing efficiencies. No numeric full-year earnings guidance is provided.
- Planned 2023 capital spending is approximately $170–$190 million, with most focused on growth, including a fourth roll-coat line at Warrick. The company says available cash, revolver availability and operating cash flow should fund requirements for at least the next 12 months, subject to operating performance and other factors.
- Key exposures include cyclical and mixed end-market demand, customer destocking, inflation and labor costs, supply interruptions, metal and energy prices, and the timing and effectiveness of customer price pass-throughs and hedges. Derivatives had a net liability fair value of $5.6 million at June 30.
- Environmental accruals were $18.2 million; the company said reasonably possible additional undiscounted costs could reach $11.7 million over the remediation period. Long-term remediation estimates may change, and the Newark feasibility study was expected to be submitted in Q4 2023. The Warrick pension amendment increased the projected benefit obligation by $7.2 million.
- The 2022 headquarters-relocation restructuring plan is expected to cost approximately $6.0 million in total; $4.7 million had been incurred through June 30, with substantial completion expected by year-end 2023. The filing reports no material change in risk factors or material legal-proceeding developments from the 2022 Form 10-K.
Most important facts for investors to verify
- Whether aerospace growth and automotive recovery can offset continued packaging and general engineering destocking, and whether shipments and conversion revenue improve as management expects.
- Q3 and full-year adjusted EBITDA performance versus the stated outlook; review the non-GAAP reconciliation and assumptions behind pricing, cost savings and manufacturing-efficiency plans.
- Cash conversion and funding needs as capital spending proceeds; monitor cash, revolver usage, working capital and the $170–$190 million 2023 capex plan.
- Environmental remediation developments, particularly Trentwood and Newark, and whether costs exceed the $18.2 million accrual or the disclosed possible additional $11.7 million.
- Customer-based receivables financing: it represented approximately 41% of Q2 net sales, and the company sold $626.6 million of receivables under these arrangements in the first half.
- Debt service, covenant and dividend capacity; the company paid or declared $0.77-per-share quarterly dividends, while future dividends remain subject to board discretion and financial conditions.