Kaiser Aluminum Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The company manufactures semi-fabricated specialty aluminum products and reports one operating segment.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $743.6 | $748.9 | $2,365.3 | $2,651.9 |
| Operating income | $19.1 | $3.0 | $74.1 | $26.2 |
| Net income (loss) | $5.4 | $2.5 | $39.6 | $(3.2) |
| Diluted EPS | $0.34 | $0.16 | $2.46 | $(0.20) |
| Adjusted EBITDA (non-GAAP) | $47.6 | $28.7 | $158.0 | $112.2 |
| Cash from operating activities | Not separately provided for quarter | Not separately provided for quarter | $137.6 | $(58.6) |
| Capital expenditures | Not separately provided for quarter | Not separately provided for quarter | $120.0 | $82.4 |
- Q3 operating margin was approximately 2.6%, versus 0.4% a year earlier; net margin was approximately 0.7%, versus 0.3%.
- Nine-month operating margin was approximately 3.1%, versus 1.0%; net margin was approximately 1.7%, versus a net loss.
- Q3 shipments rose 6% to 299.3 million pounds, while average realized sales price per pound fell 7% to $2.48. Nine-month shipments fell 4% to 912.7 million pounds; average realized price declined 7% to $2.59.
- Conversion Revenue, a company-defined non-GAAP measure, increased to $357.1 million in Q3 from $321.8 million, and to $1,104.9 million for nine months from $1,027.1 million. Adjusted EBITDA was about 6.4% of sales in Q3 and 6.7% for the nine-month period.
- Nine-month operating cash flow less capital expenditures was positive $17.6 million, compared with negative $141.0 million in 2022. Cash flow improved substantially as inventory declined, including a $36.8 million cash benefit, though accounts payable fell by $53.9 million.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $44.6 million; total reported cash, cash equivalents and restricted cash were $62.7 million. Total liquidity, including $529.5 million of available revolving credit, was $574.1 million, down from $615.2 million at year-end 2022.
- Long-term debt carrying value was $1,039.4 million, representing $1.05 billion principal in senior notes. The company had no revolver borrowings at quarter-end; $26.6 million of letters of credit reduced availability. The facility matures in April 2027.
- Capital expenditures were $120.0 million in the first nine months. Management expects 2023 capital spending of approximately $170 million to $180 million.
- The Warrick fourth roll-coat-line project estimate increased from $150 million to approximately $250 million, citing inflationary labor and material costs and scope changes.
- The quarterly dividend was $0.77 per share. A further $0.77 dividend was declared on October 12, payable around November 15, 2023. Share repurchases remained suspended; $93.1 million remained authorized.
Changes, outlook and notable items
- Q3 sales were nearly flat year over year: increased shipments, particularly Aero/HS products, were largely offset by lower metal-related selling prices. For nine months, lower volumes in GE and Packaging outweighed growth in Aero/HS and Automotive Extrusions.
- Aero/HS demand strengthened, with Q3 shipments up 69% year over year. Packaging and GE markets continued to experience customer destocking. Higher conversion pricing and surcharges contributed to improved conversion revenue, while labor, benefits, incentive and maintenance costs pressured manufacturing costs.
- Management expects commercial aerospace demand to continue strengthening and reach or exceed pre-pandemic 2019 levels by year-end 2023. It expects Q4 declines in Packaging and GE due to destocking and seasonality; Automotive Extrusions are expected to be broadly consistent with Q3, subject to seasonality and UAW-strike uncertainty.
- Management expects Q4 2023 adjusted EBITDA to be in line with or slightly above adjusted Q4 2022, and expects full-year 2023 adjusted EBITDA and margin to improve from 2022. It cited pricing actions, cost reductions and manufacturing-efficiency improvements. The filing provides no specific full-year 2023 adjusted EBITDA target.
- Q3 other expense was $2.2 million, versus $12.7 million of other income in Q3 2022. The prior-year quarter included an $8.4 million gain on asset dispositions and $6.0 million of post-acquisition funding from Alcoa. Nine-month 2023 other income included a $14.0 million gain on asset dispositions.
- The company recorded $4.2 million of restructuring costs in the first nine months related to its headquarters relocation; total expected plan costs are approximately $8 million, with substantial completion expected by December 31, 2023.
- Environmental accruals were $17.8 million. The company says reasonably possible additional undiscounted costs could reach $11.6 million over the remediation period; estimates may change, including after a Newark remediation feasibility study expected to be submitted in Q4 2023.
- Key risks cited include demand and economic cyclicality, destocking, inflation and commodity-price volatility, labor challenges, supply interruptions, automotive program execution, and environmental remediation. The company uses hedges to manage aluminum, alloy, energy and currency exposures. Management stated liquidity sources should cover expected needs for at least 12 months, subject to operating performance and other factors.
Important facts for investors to verify
- Whether Q4 and full-year adjusted EBITDA expectations are borne out, and how they compare with reported GAAP results.
- Progress on Packaging and GE destocking, aerospace demand, automotive volumes and the potential effects of the UAW strike.
- Updated cost, schedule and expected returns for the Warrick project, given its increased estimate to approximately $250 million.
- Operating cash conversion, capital spending, liquidity and the company’s ability to sustain dividends alongside substantial debt obligations.
- Changes in environmental remediation estimates and the outcome of the Newark feasibility study; the filing says actual costs could exceed recorded accruals.
- Reliance on customer receivables financing: receivables sold through these programs were approximately 44% of Q3 net sales.