Kaiser Aluminum Corporation — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter ended March 31, 2023, compared with the quarter ended March 31, 2022. Kaiser produces specialty semi-fabricated aluminum products for aerospace/high strength, packaging, general engineering, automotive and other industrial markets. It reported one operating segment, 299.3 million pounds shipped, and approximately 4,000 employees.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $807.6 million | $948.8 million |
| Operating income | $19.1 million | $25.2 million |
| Net income | $15.9 million | $8.1 million |
| Diluted EPS | $0.99 | $0.51 |
| Adjusted EBITDA | $46.7 million | $52.3 million |
| Operating cash flow | $(20.3) million | $1.4 million |
| Capital expenditures | $41.1 million | $28.3 million |
Sales declined 14.9%, with shipments down 10.8% to 299.3 million pounds and average realized price per pound down 5%. Reported operating margin was approximately 2.4% versus 2.7%; net margin was approximately 2.0% versus 0.9%. Adjusted EBITDA was 12.6% of Conversion Revenue, down from 14.8%. Conversion Revenue, a company-defined non-GAAP measure, increased to $369.3 million from $353.9 million, and per-pound Conversion Revenue rose to $1.23 from $1.06.
Cash and cash equivalents were $31.5 million at quarter-end, down from $57.4 million at year-end 2022. Including $18.6 million of restricted cash, cash-flow-statement cash totaled $50.1 million. Total liquidity, including $514.0 million of revolver availability, was $545.5 million versus $615.2 million at year-end. Current assets were $1,059.9 million and current liabilities $405.9 million. Long-term debt carrying value was $1,077.9 million; this included $1.05 billion principal of senior notes and $39.4 million of revolver borrowings. Senior notes mature in 2028 and 2031. The company reported no covenant concerns and said it expects liquidity sources to cover requirements for at least the next 12 months.
Material changes and drivers
- Net sales fell $141.2 million. Packaging sales declined to $354.2 million from $448.0 million and general engineering sales to $162.1 million from $251.2 million, primarily amid customer destocking and softer demand. Aerospace/high-strength sales increased to $214.0 million from $176.6 million; automotive extrusions increased to $70.8 million from $63.8 million.
- Cost of products sold fell with lower metal costs and volumes, but net manufacturing conversion and other costs rose $21.8 million. Management cited lower manufacturing efficiencies, increased planned furnace maintenance, inflation in packaging coatings and energy, partly offset by lower freight and shipment-related costs.
- Net income increased despite lower operating income, largely reflecting a $15.0 million gain on disposition of property, plant and equipment, included in other income. The filing reports $15.2 million in proceeds from the disposition.
- Operating cash flow turned negative, reflecting working-capital outflows, including a $36.9 million increase in trade and other receivables, a $22.6 million decline in accounts payable and a $12.3 million inventory increase. Revolver borrowings and repayments during the quarter were $119.5 million and $80.1 million, respectively.
Outlook, risks and contingencies
- Management expects commercial aerospace demand to strengthen toward pre-pandemic levels; business jet, defense and space demand to remain strong; and continued destocking in packaging. General engineering demand is expected to be similar to Q1, with some plate softness; automotive extrusions are not expected to recover meaningfully until mid-to-late 2023.
- For Q2 2023, management expects consolidated Adjusted EBITDA margin to be flat to slightly higher than Q1. It is cautiously optimistic that Adjusted EBITDA and margin will strengthen during 2023 through cost reductions, efficiency improvements and commercial pricing actions.
- Planned 2023 capital spending is approximately $170 million to $190 million, primarily supporting growth projects including a fourth roll-coat line at Warrick. The board declared a $0.77-per-share quarterly dividend after quarter-end, expected to total approximately $12.6 million.
- Risks include demand and economic cyclicality, supply-chain disruptions, labor challenges, volatile metal and energy prices, inflation, and the timing of passing through costs. The company uses derivatives to manage certain aluminum, alloy, energy and currency exposures; it does not use them for speculation.
- Environmental remediation accruals totaled $17.5 million. The company said reasonably possible costs could exceed accruals by up to an estimated $11.6 million over the remediation period; estimates may change as studies and regulatory processes proceed. The Newark feasibility study was expected to be submitted in the quarter ending September 30, 2023. Management said pending other legal matters were not expected to materially affect financial position, results or liquidity.
- The 2022 headquarters-relocation restructuring plan had $1.9 million of accrued costs at quarter-end; total expected costs were $4.9 million, with completion intended by year-end 2023. Management identified no material changes to risk factors or internal controls; disclosure controls were considered effective.
Important facts for investors to verify
- Whether packaging and general engineering destocking eases, and whether aerospace and automotive demand develops as management expects.
- Whether manufacturing efficiency, maintenance, inflation and cost pass-through improve enough to support the projected margin recovery.
- Whether operating cash flow and working capital improve while the company funds its $170 million–$190 million capital program and dividend.
- The sustainability of reported earnings: Q1 included a $15.0 million asset-disposal gain, while Adjusted EBITDA declined year over year.
- Progress and potential cost changes in Trentwood and Newark environmental remediation, including the estimated possible excess exposure.
- Customer-based receivables financing: receivables sold totaled $303.2 million, and related customer-financing arrangements represented approximately 38% of net sales; confirm fee reimbursement and ongoing program terms.