Kaiser Aluminum Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. This is an annual filing, and the supplied text does not provide a clear standalone fourth-quarter income statement.
Business context
Kaiser manufactures specialty semi-fabricated aluminum products for aerospace and high strength (Aero/HS), automotive, general engineering (GE), and other industrial markets. It reported one operating segment. The COVID-19 pandemic materially disrupted demand, especially commercial aerospace. In November 2020, Kaiser agreed to acquire Alcoa’s Warrick Rolling Mill, expanding into North American beverage and food packaging.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,172.7 million | $1,514.1 million |
| Shipments | 502.4 million pounds | 625.0 million pounds |
| Operating income | $81.1 million | $125.7 million |
| Net income | $28.8 million | $62.0 million |
| Diluted EPS | $1.81 | $3.83 |
| Adjusted EBITDA | $153.8 million | $212.7 million |
| Operating cash flow | $206.9 million | $232.3 million |
| Capital expenditures | $51.9 million | $60.2 million |
Net sales declined about 23%, shipments 20%, and Adjusted EBITDA 28% year over year. Net margin was approximately 2.5%; management reported Adjusted EBITDA equal to 22% of value added revenue (VAR), versus $697.1 million of VAR in 2020 and $855.5 million in 2019. The filing describes metal-price pass-through and hedging as intended to keep the business largely neutral to aluminum price movements.
At year-end, cash and cash equivalents were $780.3 million; total liquidity, including net revolver availability, was $1,031.8 million. The $375 million revolving facility had no borrowings and $251.5 million available after letters of credit. Long-term debt was $838.1 million, net of issuance costs and premiums, comprising $500 million of 4.625% notes due 2028 and $350 million of 6.50% notes due 2025. The 2020 notes issuance strengthened liquidity but increased interest expense to $40.9 million from $24.6 million.
Cash flow from investing was positive $26.9 million, reflecting investment maturities as well as capital spending. Cash flow from financing was positive $281.9 million, largely reflecting the new notes issuance. Cash dividends paid were $43.4 million; the company suspended share repurchases in March 2020.
Material changes versus FY2019
- Aero/HS shipments fell 37% to 173.3 million pounds; related VAR declined to $369.3 million from $511.2 million. Commercial aerospace weakness reflected pandemic-related travel declines, Boeing 737 MAX recertification delays, and supply-chain destocking.
- Automotive Extrusions shipments fell 11% to 84.1 million pounds, affected by temporary supply-chain shutdowns, while demand recovered in the second half. GE shipments were nearly flat; GE VAR increased to $238.6 million from $232.0 million.
- Other Products shipments fell 55%, reflecting the planned exit from non-strategic applications.
- Net income and operating income declined substantially. Interest expense rose following the 2020 debt issuance. 2019 comparisons included a $25.2 million goodwill impairment and a $20.3 million loss on debt extinguishment; 2020 included $7.5 million of reported restructuring costs and $5.5 million of Warrick acquisition costs.
- Year-end cash and cash equivalents increased from $264.3 million to $780.3 million, while short-term investments fell from $78.7 million to zero.
Outlook, risks, and contingencies
For 2021, management projected VAR growth of 5%–10% year over year and an EBITDA margin comparable to 2020. It expected Aero/HS VAR to decline 5%–8%, Automotive Extrusions VAR and shipments to rise 35%–45%, and GE VAR and shipments to rise 10%–15%. Management anticipated full commercial aerospace demand recovery in 2023–2024. It projected 2021 capital spending of approximately $50–$60 million and deferred a planned $375 million multi-year Trentwood expansion pending market recovery.
The Warrick acquisition was expected to close around March 31, 2021, for approximately $670 million: about $587 million cash plus $83 million of assumed post-employment benefit liabilities. Management expected it to be immediately accretive to earnings and cash flow, but closing remained subject to conditions and was not assured. The acquisition’s financing and integration are important execution considerations.
Key risks include continuing pandemic effects on aerospace and other customers, cyclical end-market demand and customer destocking, significant customer concentration, competitive pricing and cost pressures, disruptions at the concentrated Trentwood plate operation, commodity and hedge exposure, labor negotiations and multi-employer pension obligations, and environmental remediation. The top five customers represented about 54% of 2020 net sales; Reliance represented 26% and Boeing 11%. The environmental accrual was $18.7 million; the company said costs could reasonably exceed the accrual by up to an estimated $11.6 million over the remediation period, and the estimate could change within 12 months. The auditor issued unqualified opinions on the financial statements and internal controls; revenue recognition over time and environmental contingencies were identified as critical audit matters.
Important facts for investors to verify
- Whether the Warrick acquisition closed on the anticipated terms and timing, and its actual funding, integration costs, and contribution to earnings and cash flow.
- Whether 2021 VAR and end-market guidance was achieved, particularly the automotive and GE growth assumptions and commercial aerospace recovery timeline.
- Whether liquidity remains adequate after acquisition funding, planned capital spending, dividends, and debt service; note that revolver availability depends partly on eligible receivables and inventory.
- How customer concentration, aerospace destocking, and operations at Trentwood affect sales, margins, and cash generation.
- Whether environmental remediation costs exceed the recorded $18.7 million accrual, and how labor contracts and multi-employer pension contributions develop.
- How much of reported operating cash flow reflects sustainable earnings versus working-capital movements, including receivables and inventory reductions.