KALU 10-Q
Kaiser Aluminum Corp (KALU)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of April 22, 2024, there were
COMMONLY USED OR DEFINED TERMS
Term |
Definition |
Adjusted EBITDA |
Earnings before interest, taxes, depreciation and amortization adjusted for non-run-rate items |
Aero/HS Products |
2000, 7000 and certain 6000 series alloys products used in the Aerospace, Defense, Space and other end markets requiring high strength applications |
Alloy(s) |
Certain metals such as copper, zinc, magnesium, manganese and silicon added to primary aluminum to obtain certain attributes |
AOCI |
Accumulated other comprehensive income (loss) |
ASU |
Accounting Standards Update |
Automotive Extrusions |
Extruded aluminum products used in automotive applications |
COGS |
Cost of products sold, excluding depreciation and amortization |
Form 10-Q |
This Quarterly Report on Form 10-Q |
GAAP |
United States Generally Accepted Accounting Principles |
GE Products |
6000 series alloys products used in the General Engineering end markets |
LME |
London Metal Exchange |
MWTP |
Midwest Transaction Price is equal to the LME aluminum price plus a Midwest premium |
Newark |
Kaiser Aluminum manufacturing facility located in Heath, Ohio, a suburb of Newark, Ohio |
OPEB |
Other Post Retirement Benefit Plan (Refer to Note 3 – Employee Benefits) |
Other products |
Cast and aluminum products used in various non-strategic end markets |
Packaging |
3000 and 5000 series alloy products used in the beverage and food packaging end markets |
Revolving Credit Facility |
Revolving credit facility with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto |
Salaried VEBA |
Salaried Voluntary Employees' Beneficiary Association (Refer to Note 3 – Employee Benefits) |
SEC |
Securities and Exchange Commission |
Senior Notes |
Collectively, the fixed-rate unsecured notes we issued during the years ended December 31, 2019 and 2021 at the following interest rates and aggregate principal amounts, respectively: (i) 4.625% and $500.0 million; and (ii) 4.50% and $550.0 million |
Term SOFR |
Forward looking term rate based on the Secured Overnight Financing Rate |
Trentwood |
Kaiser Aluminum manufacturing facility located in Spokane Valley, Washington |
Warrick |
Kaiser Aluminum manufacturing facility located in Newburgh, Indiana, in the county of Warrick |
TABLE OF CONTENTS
2
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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As of March 31, 2024 |
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As of December 31, 2023 |
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(In millions of dollars, except share |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables: |
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Trade receivables, net |
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Other |
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Contract assets |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease assets |
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Deferred tax assets, net |
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Intangible assets, net |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued salaries, wages and related expenses |
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Other accrued liabilities |
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Total current liabilities |
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Long-term portion of operating lease liabilities |
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Pension and other postretirement benefits |
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Net liabilities of Salaried VEBA |
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Deferred tax liabilities |
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Long-term liabilities |
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Long-term debt, net |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, |
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Common stock, par value $ |
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Additional paid in capital |
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Retained earnings |
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Treasury stock, at cost, |
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Accumulated other comprehensive income |
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Total stockholders’ equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes to interim consolidated financial statements are an integral part of these statements.
1
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
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Quarter Ended March 31, |
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2024 |
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2023 |
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(In millions of dollars, except share and per share amounts) |
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Net sales |
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$ |
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$ |
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Costs and expenses: |
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Cost of products sold, excluding depreciation and amortization |
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Depreciation and amortization |
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Selling, general, administrative, research and development |
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Restructuring costs |
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Other operating charges, net |
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— |
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Total costs and expenses |
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Operating income |
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Other (expense) income: |
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Interest expense |
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Other income, net – Note 9 |
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Income before income taxes |
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Income tax provision |
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Net income |
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$ |
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$ |
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Net income per common share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted-average number of common shares outstanding (in thousands): |
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Basic |
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Diluted |
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The accompanying notes to interim consolidated financial statements are an integral part of these statements.
2
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
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Quarter Ended March 31, |
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2024 |
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2023 |
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(In millions of dollars) |
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Net income |
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$ |
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$ |
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Other comprehensive (loss) income, net of tax – Note 8: |
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Defined benefit plans |
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Cash flow hedges |
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Other comprehensive loss, net of tax |
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Comprehensive income |
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$ |
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$ |
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The accompanying notes to interim consolidated financial statements are an integral part of these statements.
3
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY (UNAUDITED)
Quarter Ended March 31, 2024
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Common |
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Common |
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Additional |
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Retained |
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Treasury |
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Accumulated |
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Total |
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(In millions of dollars, except share and per share amounts) |
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BALANCE, December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive loss, net of tax |
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— |
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— |
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— |
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— |
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— |
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( |
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Common shares issued (including impacts from |
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— |
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— |
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Cancellation of shares to cover tax withholdings |
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— |
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— |
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— |
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Cash dividends declared2 |
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— |
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— |
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— |
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— |
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— |
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Amortization of unearned equity compensation |
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— |
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— |
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— |
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— |
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— |
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BALANCE, March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes to interim consolidated financial statements are an integral part of these statements.
4
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY CONTINUED (UNAUDITED)
Quarter Ended March 31, 2023
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Common |
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Common |
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Additional |
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Retained |
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Treasury |
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Accumulated |
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Total |
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(In millions of dollars, except share and per share amounts) |
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BALANCE, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive loss, net of tax |
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— |
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— |
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— |
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— |
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— |
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( |
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Common shares issued (including impacts from |
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— |
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— |
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— |
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— |
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— |
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— |
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Cancellation of shares to cover employees' tax |
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— |
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— |
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— |
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— |
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Cash dividends declared1 |
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— |
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— |
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— |
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— |
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— |
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( |
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Amortization of unearned equity compensation |
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— |
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— |
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— |
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— |
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— |
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BALANCE, March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes to interim consolidated financial statements are an integral part of these statements.
5
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
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Quarter Ended March 31, |
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2024 |
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2023 |
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(In millions of dollars) |
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Cash flows from operating activities1: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation of property, plant and equipment |
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Amortization of definite-lived intangible assets |
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Amortization of debt premium and debt issuance costs |
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Amortization of cloud computing implementation costs |
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Deferred income taxes |
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Non-cash equity compensation |
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Non-cash asset impairment charge2 |
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— |
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Loss (gain) on disposition of property, plant and equipment |
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Bad debt expense |
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— |
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Non-cash postretirement defined benefit plan cost |
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Changes in operating assets and liabilities: |
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Trade and other receivables |
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Contract assets |
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Inventories |
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Prepaid expenses and other current assets |
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Accounts payable |
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Accrued liabilities |
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Annual variable cash contributions to Salaried VEBA |
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Long-term assets and liabilities, net |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities1: |
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Capital expenditures |
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Proceeds from sale of equity securities |
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— |
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Proceeds from disposition of property, plant and equipment |
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— |
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Net cash used in investing activities |
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Cash flows from financing activities1: |
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Borrowings under the Revolving Credit Facility |
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— |
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Repayment of borrowings under the Revolving Credit Facility |
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— |
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Repayment of finance lease |
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Cancellation of shares to cover tax withholdings upon common shares issued |
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Cash dividends and dividend equivalents paid |
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Net cash (used in) provided by financing activities |
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( |
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Net increase (decrease) in cash, cash equivalents and restricted cash during the period |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period |
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$ |
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$ |
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The accompanying notes to interim consolidated financial statements are an integral part of these statements.
6
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTES INDEX
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Derivatives, Hedging Programs and Other Financial Instruments |
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7
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. Basis of Presentation and Recent Accounting Pronouncements
This Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Unless the context otherwise requires, references in these notes to interim consolidated financial statements - unaudited to “Kaiser,” “we,” “us,” “our,” “the Company” and “our Company” refer collectively to Kaiser Aluminum Corporation and its subsidiaries.
Principles of Consolidation and Basis of Presentation. The accompanying unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries and are prepared in accordance with GAAP and the rules and regulations of the SEC applicable for interim periods and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In management’s opinion, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. We have reclassified certain items in prior periods to conform to current classifications. The results of operations for our interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2024 fiscal year. The financial information as of December 31, 2023 is derived from our audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of our consolidated financial position and results of operations.
Accounting Pronouncements Issued But Not Yet Adopted
Disclosure Improvements. In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-06 (“ASU 2023-06”), Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The guidance amends GAAP to reflect updates and simplifications to certain disclosure requirements referred to the FASB by the SEC. The amendments in ASU 2023-06 will become effective on the date which the SEC’s removal of the related disclosure becomes effective. If by June 30, 2027, the SEC does not remove the related disclosure, the pending amendment will be removed from ASC 2023-06 and it will not be effective. We do not expect this ASU to have a material impact on our consolidated financial statements.
Segment Reporting. In November 2023, the FASB issued ASU No. 2023-07 (“ASU 2023-07”), Improvements to Reportable Segment Disclosures. The guidance primarily will require enhanced disclosures about significant segment expenses. All disclosure requirements under ASU 2023-07 and existing segment disclosures in ASC 280, Segment Reporting are also required for public entities with a single reportable segment. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted, and are to be applied on a retrospective basis. We are evaluating the impact of the standard on our reporting disclosures.
Income Taxes. In December 2023, the FASB issued ASU No. 2023-09 (“ASU 2023-09”), Improvements to Income Tax Disclosures. The guidance is intended to improve income tax disclosure requirements by requiring (i) consistent categories and greater disaggregation of information in the rate reconciliation and (ii) the disaggregation of income taxes paid by jurisdiction. The guidance makes several other changes to the income tax disclosure requirements. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and is required to be applied prospectively with the option of retrospective application. We are evaluating the impact of the standard on our income tax disclosures.
8
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
2. Supplemental Balance Sheet Information
|
|
As of March 31, 2024 |
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|
As of December 31, 2023 |
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||
|
|
(In millions of dollars) |
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|||||
Trade Receivables, Net |
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|
|
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|
||
Billed trade receivables |
|
$ |
|
|
$ |
|
||
Allowance for doubtful receivables |
|
|
( |
) |
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|
( |
) |
Trade receivables, net |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Inventories1 |
|
|
|
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||
Finished products |
|
$ |
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|
$ |
|
||
Work-in-process |
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Raw materials |
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|
||
Operating supplies |
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|
||
Inventories |
|
$ |
|
|
$ |
|
||
|
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|
|
|
|
||
Property, Plant and Equipment, Net |
|
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|
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|
||
Land and improvements |
|
$ |
|
|
$ |
|
||
Buildings and leasehold improvements |
|
|
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|
||
Machinery and equipment |
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||
Construction in progress |
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||
Property, plant and equipment, gross |
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|
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|
||
Accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Land held for sale |
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|
|
|
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|
||
Property, plant and equipment, net |
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$ |
|
|
$ |
|
||
|
|
|
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|
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|
||
Other Assets |
|
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|
|
|
||
Assets to be conveyed associated with Warrick acquisition |
|
$ |
|
|
$ |
|
||
Restricted cash – Note 12 |
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|
|
|
|
||
Long-term replacement parts |
|
|
|
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|
||
Other |
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|
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|
||
Other assets |
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$ |
|
|
$ |
|
||
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|
||
Other Accrued Liabilities |
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|
|
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|
||
Uncleared cash disbursements |
|
$ |
|
|
$ |
|
||
Accrued income taxes and other taxes payable |
|
|
|
|
|
|
||
Accrued annual contribution to Salaried VEBA |
|
|
— |
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|
|
Accrued interest |
|
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|
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|
||
Short-term environmental accrual – Note 7 |
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|
||
Current operating lease liabilities |
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|
||
Current finance lease liabilities |
|
|
|
|
|
|
||
Other – Note 5 |
|
|
|
|
|
|
||
Other accrued liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Long-Term Liabilities |
|
|
|
|
|
|
||
Workers' compensation accrual |
|
$ |
|
|
$ |
|
||
Long-term environmental accrual – Note 7 |
|
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
|
||
Long-term liabilities |
|
$ |
|
|
$ |
|
||
9
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
3. Employee Benefits
Deferred Compensation Plan
Assets of our deferred compensation plan are included in Other assets, classified within Level 1 of the fair value hierarchy and are measured and recorded at fair value based on their quoted market prices. The fair value of these assets at March 31, 2024 and December 31, 2023 was $
Short-Term Incentive Plans (“STI Plans”)
As of March 31, 2024, we had a liability of $
Postretirement Benefit Plans
The following table presents the total expense related to all postretirement benefit plans (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Defined contribution plans1 |
|
$ |
|
|
$ |
|
||
Deferred compensation plan2 |
|
|
|
|
|
|
||
Multiemployer pension plans1 |
|
|
|
|
|
|
||
Net periodic postretirement benefit cost relating to defined benefit plans2,3 |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Components of Net Periodic Postretirement Benefit Cost. Our results of operations included the following impacts associated with the defined benefit plans: (i) a charge for service rendered by employees; (ii) a charge for accretion of interest; (iii) a benefit for the expected return on plan assets; (iv) amortization of prior service costs (credits) associated with plan amendments; and (v) amortization of net actuarial differences.
10
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
The following table presents the components of Net periodic postretirement benefit cost (credit) relating to the defined benefit plans (in millions of dollars):
|
|
Pension Plans |
|
|
OPEB |
|
|
Salaried VEBA |
|
|||||||||||||||
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|||||||||||||||
|
|
March 31 |
|
|
March 31 |
|
|
March 31 |
|
|||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Amortization of prior service cost (credit)1 |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Amortization of net actuarial gain |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Total net periodic postretirement benefit cost (credit) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Pension Plan Contributions. During the quarter ended March 31, 2024, we contributed $
4. Restructuring
2022 Restructuring Plan. During 2022, we relocated our corporate headquarters from Foothill Ranch, California (“Foothill Ranch”) to Franklin, Tennessee (“Franklin”). In conjunction with the relocation, we initiated a restructuring plan during the quarter ended December 31, 2022, which consisted primarily of employee retention benefits aimed at incentivizing Foothill Ranch employees to assist with the buildout of the new corporate function in Franklin (“2022 Restructuring Plan”). We incurred total restructuring costs of $
The following table summarizes activity relating to the 2022 Restructuring Plan liabilities (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|
|
|
2024 |
|
|
Beginning Balance |
|
$ |
|
|
Restructuring costs |
|
|
|
|
Costs paid or otherwise settled1 |
|
|
( |
) |
Ending Balance |
|
$ |
|
|
5. Derivatives, Hedging Programs and Other Financial Instruments
Overview. In conducting our business, we enter into derivative transactions, including forward contracts and options, to limit our exposure to: (i) metal price risk related to our sale of fabricated aluminum products and the purchase of metal, including primary, rolling ingot and scrap, or recycled, aluminum, our main raw material, and certain alloys used as raw material for our fabrication operations; (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in our production processes; and (iii) foreign currency requirements with respect to cash commitments for equipment purchases and/or other agreements denominated in foreign currency. We do not use derivative financial instruments for trading or other speculative purposes. Hedging transactions are executed centrally on behalf of all of our operations to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors.
Our derivative activities are overseen by a committee (“Hedging Committee”), which is composed of our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer, Executive Vice President of Manufacturing and other officers and
11
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
employees selected by the Chief Executive Officer. The Hedging Committee meets regularly to review commodity price exposures, derivative positions and strategy. Management reviews the scope of the Hedging Committee’s activities with our Board of Directors.
We are exposed to counterparty credit risk on all of our derivative instruments, which we manage by monitoring the credit quality of our counterparties and allocating our hedging positions among multiple counterparties to limit exposure to any single entity. Our counterparties are major investment grade financial institutions or trading companies, and our hedged transactions are governed by negotiated International Swaps and Derivatives Association Master Agreements, which generally require collateral to be posted by our counterparties above specified credit thresholds which may adjust up or down, based on increases or decreases in counterparty credit ratings. As a result, we believe the risk of loss is remote and contained. The aggregate fair value of our derivative instruments that were in a net liability position was $
In addition, our firm-price customer sales commitments create incremental customer credit risk related to metal price movements. Under certain circumstances, we mitigate this risk by periodically requiring cash collateral to be posted by our customers, which we classify as deferred revenue and include as a component of Other accrued liabilities. We had
Cash Flow Hedges
We designate as cash flow hedges forward swap contracts for aluminum and energy. Additionally, in the fourth quarter of 2023, we adopted this treatment for Alloying Metals used in our fabrication operations. We also designate as cash flow hedges foreign currency forward contracts for equipment and services for which payments are due in foreign currency. Unrealized gains and losses associated with our cash flow hedges are deferred in Other comprehensive loss, net of tax, and reclassified to COGS when such hedges settle or when it is probable that the original forecasted transactions will not occur by the end of the originally specified time period. See Note 8 for the total amount of gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments that was reported in AOCI, as well as the related reclassifications into earnings and tax effects. Cumulative gains and losses related to cash flow hedges are reclassified out of AOCI and recorded within COGS when the associated hedged commodity purchases impact earnings.
Aluminum Hedges. Our pricing of fabricated aluminum products is generally intended to lock in our Conversion Revenue (representing our value added from the fabrication process) and to pass through aluminum price fluctuations to our customers. For some of our higher margin products sold on a spot basis, the pass through of aluminum price movements can sometimes lag by as much as several months, with a favorable impact to us when aluminum prices decline and an adverse impact to us when aluminum prices increase. Additionally, in certain instances, we enter into firm-price arrangements with our customers for stipulated volumes to be delivered in the future. Because we generally purchase primary and secondary aluminum on a floating price basis, the lag in passing through aluminum price movements to customers on some of our higher margin products sold on a spot basis and the volume that we have committed to sell to our customers under a firm-price arrangement create aluminum price risk for us. We use third-party hedging instruments to limit exposure to aluminum price risk related to the aluminum pass through lag on some of our products and firm-price customer sales contracts.
Alloying Metals Hedges. We are exposed to the risk of fluctuating prices for alloying metals used as raw materials in our fabrication operations. We, from time to time, in the ordinary course of business, enter into hedging transactions and/or physical delivery commitments with third parties to mitigate our risk from fluctuations in certain alloying metals prices that are not passed through pursuant to the terms of our customer contracts.
Energy Hedges. We are exposed to the risk of fluctuating prices for natural gas and electricity. We, from time to time, in the ordinary course of business, enter into hedging transactions and/or firm price physical delivery commitments with third parties to mitigate our risk from fluctuations in natural gas and electricity prices that are not passed through pursuant to the terms of our customer contracts.
Foreign Currency Hedges. We are exposed to foreign currency exchange risk related to certain equipment and service agreements with vendors for which payments are due in foreign currency. We, from time to time, in the ordinary course of business, use foreign currency forward contracts in order to mitigate the exposure to currency exchange rate fluctuations related to these purchases.
12
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
Non-Designated Hedges of Operational Risks
From time to time, we enter into commodity and foreign currency forward contracts that are not designated as hedging instruments to mitigate certain short‑term impacts, as identified. The gain or loss on these commodity and foreign currency derivatives is recognized within COGS and Other income, net, respectively. There were
Notional Amount of Derivative Contracts
The following table summarizes our derivative positions at March 31, 2024:
Aluminum |
|
Maturity Period |
|
Notional Amount of Contracts (mmlbs) |
|
|
Fixed price purchase contracts for LME |
|
through |
|
|
|
|
Fixed price sale contracts for LME |
|
|
|
|
||
Fixed price purchase contracts for MWTP |
|
through |
|
|
|
|
Fixed price sale contracts for MWTP |
|
through |
|
|
|
|
Alloying Metals |
|
Maturity Period |
|
Notional Amount of Contracts (mmlbs) |
|
|
Fixed price purchase contracts |
|
through |
|
|
|
|
Natural Gas |
|
Maturity Period |
|
Notional Amount of Contracts (mmbtu) |
|
|
Fixed price purchase contracts |
|
through |
|
|
|
|
Electricity |
|
Maturity Period |
|
Notional Amount of Contracts (Mwh) |
|
|
Fixed price purchase contracts |
|
through |
|
|
|
|
Euro |
|
Maturity Period |
|
Notional Amount of Contracts (EUR) |
|
|
Fixed price forward purchase contracts |
|
through |
|
|
|
|
British Pounds |
|
Maturity Period |
|
Notional Amount of Contracts (GBP) |
|
|
Fixed price forward purchase contracts |
|
through |
|
|
|
|
13
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
Loss (Gain) on Derivative Contracts
The following table summarizes the amount of loss (gain) on derivative contracts recorded within our Statements of Consolidated Income in (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Total of income and expense line items presented in our Statements of Consolidated Income in which the effects of hedges are recorded: |
|
|
|
|
|
|
||
Cash flow hedges |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Loss (gain) recognized in our Statements of Consolidated Income related to cash flow hedges: |
|
|
|
|
|
|
||
Aluminum |
|
$ |
|
|
$ |
|
||
Natural gas |
|
|
|
|
|
( |
) |
|
Electricity |
|
|
( |
) |
|
|
— |
|
Total loss recognized in our Statements of Consolidated Income related to cash flow hedges |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Gain recognized in our Statements of Consolidated Income related to non-designated hedges: |
|
|
|
|
|
|
||
Alloying Metals – Unrealized gain |
|
$ |
— |
|
|
$ |
( |
) |
Fair Values of Derivative Contracts
The fair values of our derivative contracts are based upon trades in liquid markets. Valuation model inputs can be verified, and valuation techniques do not involve significant judgment. The fair values of such financial instruments are classified within Level 2 of the fair value hierarchy.
All of our derivative contracts with counterparties are subject to enforceable master netting arrangements. We reflect the fair value of our derivative contracts on a gross basis on our Consolidated Balance Sheets.
|
|
As of March 31, 2024 |
|
|
As of December 31, 2023 |
|
||||||||||||||||||
|
|
Assets |
|
|
Liabilities |
|
|
Net Amount |
|
|
Assets |
|
|
Liabilities |
|
|
Net Amount |
|
||||||
Aluminum – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed price purchase contracts for LME |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Fixed price sale contracts for LME |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Fixed price purchase contracts for MWTP |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Fixed price sale contracts for MWTP |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Alloying Metals – Fixed price purchase contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Natural gas – Fixed price purchase contracts |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Electricity – Fixed price purchase contracts |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Foreign currency – Fixed price forward contracts |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
14
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
The following table presents the total amounts of derivative assets and liabilities on our Consolidated Balance Sheets (in millions of dollars):
|
|
As of March 31, 2024 |
|
|
As of December 31, 2023 |
|
||
Derivative assets: |
|
|
|
|
|
|
||
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|||
|
$ |
|
|
$ |
|
|||
Derivative liabilities: |
|
|
|
|
|
|
||
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
( |
) |
|
|
( |
) |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Fair Value of Other Financial Instruments
All Other Financial Assets and Liabilities. We believe that the fair values of our accounts receivable, contract assets, accounts payable and accrued liabilities approximate their respective carrying values due to their short maturities and nominal credit risk.
6. Debt and Credit Facility
Senior Notes
At March 31, 2024 and December 31, 2023, we had outstanding fixed-rate unsecured Senior Notes with varying maturity dates. The stated interest rates and aggregate principal amounts of our Senior Notes were, respectively: (i)
|
|
|
|
|
|
Outstanding (in millions of dollars) |
|
|||||||
|
|
Issuance Date |
|
Maturity |
|
Effective Interest Rate |
|
As of March 31, 2024 |
|
|
As of December 31, 2023 |
|
||
|
|
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
||||||
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
||
Unamortized issuance costs |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Total carrying amount |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||
The following table presents the fair value of our outstanding Senior Notes, which are Level 1 liabilities (in millions of dollars):
|
|
|
|
|
|
As of March 31, 2024 |
|
|
As of December 31, 2023 |
|
||
4.625% Senior Notes |
|
|
|
|
|
$ |
|
|
$ |
|
||
4.50% Senior Notes |
|
|
|
|
|
$ |
|
|
$ |
|
||
Revolving Credit Facility
In October 2019, we entered into a Revolving Credit Facility. Joining us as borrowers under the Revolving Credit Facility are four of our wholly owned domestic operating subsidiaries: (i) Kaiser Aluminum Investments Company; (ii) Kaiser Aluminum Fabricated Products, LLC; (iii) Kaiser Aluminum Washington, LLC; and (iv) Kaiser Aluminum Warrick, LLC.
In April 2022, we entered into Amendment No. 3 to our Revolving Credit Facility.
15
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
The following table summarizes availability and usage of our Revolving Credit Facility as determined by a borrowing base calculated as of March 31, 2024 (in millions of dollars):
Revolving Credit Facility borrowing commitment |
|
$ |
|
|
Borrowing base availability |
|
$ |
|
|
Less: Outstanding borrowings under Revolving Credit Facility |
|
|
— |
|
Less: Outstanding letters of credit under Revolving Credit Facility |
|
|
( |
) |
Remaining borrowing availability |
|
$ |
|
Interest Expense
The following table presents interest expense relating to our Senior Notes and Revolving Credit Facility (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Senior Notes interest expense, including debt issuance cost amortization |
|
$ |
|
|
$ |
|
||
Revolving Credit Facility interest expense, including commitment fees and finance cost amortization |
|
|
|
|
|
|
||
Interest expense on finance lease liabilities |
|
|
|
|
|
|
||
Interest expense capitalized as construction in progress |
|
|
( |
) |
|
|
( |
) |
Total interest expense |
|
$ |
|
|
$ |
|
||
7. Commitments and Contingencies
Commitments. We have a variety of financial commitments, including purchase agreements, forward foreign exchange and forward sales contracts, indebtedness and letters of credit (see Note 5 and Note 6).
Environmental Contingencies. We are subject to a number of environmental laws and regulations, potential fines or penalties assessed for alleged breaches of such laws and regulations and potential claims based upon such laws and regulations. We are also subject to legacy environmental contingencies related to activities that occurred at operating facilities prior to July 6, 2006, which represent the majority of our environmental accruals. The status of these environmental contingencies are discussed below. We have established procedures for regularly evaluating environmental loss contingencies. Our environmental accruals represent our undiscounted estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing requirements, existing technology and our assessment of the likely remediation actions to be taken.
We continue to pursue remediation activities, primarily to address the historical use of oils containing polychlorinated biphenyls (“PCBs”) at our Trentwood facility. Our remediation efforts are in collaboration with the Washington State Department of Ecology (“Ecology”), to which we submitted a feasibility study in 2012 of remediation alternatives and from which we received permission to begin certain remediation activities pursuant to a signed work order. We have completed a number of sections of the work plan and have received satisfactory completion approval from Ecology on those sections. In cooperation with Ecology, we constructed an experimental treatment facility to determine the treatability and evaluate the feasibility of removing PCBs from ground water under the Trentwood facility. In 2015, we began treatment operations involving a walnut shell filtration system, which we optimized for maximum PCB capture during 2020. Furthermore, based on advancements in technology, we signed an Amended Agreed Order with Ecology in 2020 to evaluate and implement new technologies for PCB removal from groundwater on a pilot basis. The primary technology we are evaluating is Ultraviolet Light Advanced Oxidation Process (the “UV Process”). As the long-term success of the UV Process cannot be reasonably determined at this time, it is possible we may need to make upward adjustments to our related accruals and cost estimates as the long-term results become available.
Pursuant to a consent agreement with the Ohio Environmental Protection Agency (“OEPA”), we initiated an investigational study of our Newark facility related to historical on-site waste disposal. During the quarter ended December 31, 2018, we submitted our remedial investigation study to the OEPA for review and approval. The final remedial investigation report was approved by the OEPA during the quarter ended December 31, 2020. We have submitted the Alternate Arrays Document (“AAD”) to the OEPA for review during the quarter ended December 31, 2023. Once the AAD is reviewed and accepted by the OEPA, we plan to submit our feasibility study to the OEPA and the selected remediation design work plans are completed, which we expect to occur in
16
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
At March 31, 2024, our environmental accrual of $
As additional facts are developed, feasibility studies are completed, remediation plans are modified, necessary regulatory approvals for the implementation of remediation are obtained, alternative technologies are developed and/or other factors change, there may be revisions to management’s estimates and actual costs may exceed the current environmental accruals. We believe at this time that it is reasonably possible that undiscounted costs associated with these environmental matters may exceed current accruals by amounts that could be, in the aggregate, up to an estimated $
Other Contingencies. We are party to various lawsuits, claims, investigations and administrative proceedings that arise in connection with past and current operations. We evaluate such matters on a case-by-case basis and our policy is to vigorously contest any such claims we believe are without merit. We accrue for a legal liability when it is both probable that a liability has been incurred and the amount of the loss is reasonably estimable. Quarterly, in addition to when changes in facts and circumstances require it, we review and adjust these accruals to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual cost that may ultimately be incurred, we believe that we have sufficiently accrued for such matters and that the ultimate resolution of pending matters will not have a material impact on our consolidated financial position, operating results or liquidity.
8. Accumulated Other Comprehensive Income
The following table presents the changes in the accumulated balances for each component of AOCI (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Defined Benefit Plans: |
|
|
|
|
|
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Amortization of net actuarial gain1 |
|
|
( |
) |
|
|
( |
) |
Amortization of prior service (credit) cost1 |
|
|
( |
) |
|
|
|
|
Less: income tax benefit (expense)2 |
|
|
|
|
|
( |
) |
|
Other comprehensive (loss) income, net of tax |
|
|
( |
) |
|
|
|
|
Ending balance |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Cash Flow Hedges: |
|
|
|
|
|
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Unrealized loss on cash flow hedges |
|
|
( |
) |
|
|
( |
) |
Less: income tax benefit |
|
|
|
|
|
|
||
Net unrealized loss on cash flow hedges |
|
|
( |
) |
|
|
( |
) |
Reclassification of unrealized loss upon settlement of cash flow hedges |
|
|
|
|
|
|
||
Less: income tax expense2 |
|
|
( |
) |
|
|
— |
|
Net loss reclassified from AOCI to Net income |
|
|
|
|
|
|
||
Other comprehensive loss, net of tax |
|
|
( |
) |
|
|
( |
) |
Ending balance3 |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
||
Total AOCI ending balance |
|
$ |
|
|
$ |
|
||
17
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
9. Other Income, Net
The following table presents the components of Other income, net (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Interest income |
|
$ |
|
|
$ |
|
||
Net periodic postretirement benefit cost |
|
|
( |
) |
|
|
( |
) |
Unrealized gain on equity securities |
|
|
|
|
|
|
||
(Loss) gain on disposition of property, plant and equipment |
|
|
( |
) |
|
|
|
|
Gain on business interruption insurance recoveries1 |
|
|
|
|
|
|
||
All other, net |
|
|
( |
) |
|
|
|
|
Other income, net |
|
$ |
|
|
$ |
|
||
Supply Chain Financing. We are party to several supply chain financing arrangements, in which we may sell certain of our customers’ trade accounts receivable to such customers’ financial institutions without recourse. During the quarters ended March 31, 2024 and March 31, 2023, we sold trade accounts receivable totaling $
10. Income Tax Matters
The following table presents the income tax provision by region (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Domestic |
|
$ |
( |
) |
|
$ |
( |
) |
Foreign |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
The income tax provision for the quarters ended March 31, 2024 and March 31, 2023 was $
Our gross unrecognized benefits relating to uncertain tax positions were $
We do not expect our gross unrecognized tax benefits to significantly change within the next 12 months.
11. Net Income Per Share
18
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
The following table sets forth the computation of basic and diluted net income per share (in millions of dollars, except share and per share amounts):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net income available to common shareholders1 |
|
$ |
|
|
$ |
|
||
Denominator – Weighted-average common shares outstanding (in thousands): |
|
|
|
|
|
|
||
Basic |
|
|
|
|
|
|
||
Add: dilutive effect of non-vested common shares, restricted stock units and performance shares2 |
|
|
|
|
|
|
||
Diluted |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Net income per common share, Basic: |
|
$ |
|
|
$ |
|
||
Net income per common share, Diluted: |
|
$ |
|
|
$ |
|
||
12. Supplemental Cash Flow Information
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(In millions of dollars) |
|
|||||
Interest paid |
|
$ |
|
|
$ |
|
||
Non-cash investing and financing activities (included in Accounts payable): |
|
|
|
|
|
|
||
Unpaid purchases of property and equipment |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental lease disclosures: |
|
|
|
|
|
|
||
Operating lease liabilities arising from obtaining operating lease assets |
|
$ |
|
|
$ |
|
||
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
|
|
$ |
|
||
Finance lease liabilities arising from obtaining finance lease assets |
|
$ |
|
|
$ |
|
||
|
|
As of March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(In millions of dollars) |
|
|||||
Components of cash, cash equivalents and restricted cash: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash included in Other assets1 |
|
|
|
|
|
|
||
Total cash, cash equivalents and restricted cash presented on our Statements of Consolidated Cash Flows |
|
$ |
|
|
$ |
|
||
13. Business, Product, and Geographical Area Information
Our primary line of business is the production of semi-fabricated specialty aluminum mill products, such as plate and sheet, bare and coated coils, and extruded and drawn products, primarily used in our Aero/HS Products, Packaging, GE Products, Automotive Extrusions, and Other products end markets. We operate
19
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
The following table presents Net sales by end market applications and by timing of control transfer (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net sales: |
|
|
|
|
|
|
||
Aero/HS Products |
|
$ |
|
|
$ |
|
||
Packaging |
|
|
|
|
|
|
||
GE Products |
|
|
|
|
|
|
||
Automotive Extrusions |
|
|
|
|
|
|
||
Other products |
|
|
|
|
|
|
||
Total net sales |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Timing of revenue recognition: |
|
|
|
|
|
|
||
Products transferred at a point in time |
|
$ |
|
|
$ |
|
||
Products transferred over time |
|
|
|
|
|
|
||
Total net sales |
|
$ |
|
|
$ |
|
||
The following table presents geographic information for income taxes paid (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Income taxes paid: |
|
|
|
|
|
|
||
Domestic |
|
$ |
— |
|
|
$ |
|
|
Foreign |
|
|
|
|
|
|
||
Total income taxes paid |
|
$ |
|
|
$ |
|
||
14. Subsequent Events
Dividend Declaration. On
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Report and can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates,” or the negative of the foregoing or other variations of comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward‑looking statements are not guarantees of future performance and involve significant risks and uncertainties and that actual results may vary from those in the forward-looking statements as a result of various factors. These factors include: (i) the effectiveness of management’s strategies and decisions, including strategic investments, capital spending strategies, cost reduction initiatives, sourcing strategies, processes and countermeasures implemented to address operational and supply chain challenges and the execution of those strategies; (ii) general economic and business conditions, including the impact of geopolitical factors and governmental and other actions taken in response, cyclicality, reshoring, labor challenges, supply interruptions, customer disruptions, and other conditions that impact demand drivers in the Aero/HS Products, Packaging, GE Products, Automotive Extrusions and other end markets we serve; (iii) our ability to participate in mature and anticipated new automotive programs expected to launch in the future and successfully launch new automotive programs; (iv) changes or shifts in defense spending due to competing national priorities; (v) pricing, market conditions and our ability to effectively execute commercial and labor strategies, pass through cost increases, including the institution of surcharges, and flex costs in response to inflation, volatile commodity costs and changing economic conditions; (vi) developments in technology; (vii) the impact of our future earnings, cash flows, financial condition, capital requirements and other factors on our financial strength and flexibility; (viii) new or modified statutory or regulatory requirements; (ix) the successful integration of acquired operations and technologies and (x) stakeholders’, including regulators’, views regarding our sustainability goals and initiatives and the impact of factors outside of our control on such goals and initiatives. This Item and Part I, Item 1A. “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2023, each identify other factors that could cause actual results to vary. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward looking statements.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part I, Item 1. “Financial Statements” of this Report and our consolidated financial statements and related notes included in Part II, Item 8. “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2023.
Non-GAAP Financial Measures
This information contains certain non-GAAP financial measures. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the statements of income, balance sheets or statements of cash flows of the company. We have provided a reconciliation of non‑GAAP financial measures to the most directly comparable financial measure in the accompanying tables. We have also provided discussion of the reasons we believe that presentation of the non-GAAP financial measures provides useful information to investors, as well as any additional ways in which we use the non-GAAP financial measures. The non-GAAP financial measures used in the following discussions are Conversion Revenue (defined as Net sales less the Hedged Cost of Alloyed Metal, see below in “Metal Pricing Policies” discussion), Adjusted EBITDA and ratios related thereto. These measures are presented because management uses this information to monitor and evaluate financial results and trends and believes this information to also be useful for investors.
In the discussion of operating results below, we refer to certain items as “non-run-rate items.” For purposes of such discussion, non-run-rate items are items that, while they may recur from period-to-period: (i) are particularly material to results; (ii) affect costs primarily as a result of external market factors; and (iii) may not recur in future periods if the same level of underlying performance were to occur. Non-run-rate items are part of our business and operating environment but are worthy of being highlighted for the benefit of readers of our financial statements. Our intent is to allow users of the financial statements to consider our results both in light of and separately from such items. For a reconciliation of Adjusted EBITDA to Net income, see below in “Results of Operations - Selected Operational and Financial Information.” Reconciliations of certain forward‑looking non-GAAP financial measures to comparable GAAP measures are not provided because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted or provided without unreasonable effort.
Metal Pricing Policies
A fundamental part of our business model is to remain neutral to the impact from fluctuations in the market price for aluminum and certain alloys, thereby earning profit predominantly from the conversion of aluminum into semi-fabricated mill products. We refer to this as “metal price neutrality.” We purchase primary, rolling ingot and scrap, or recycled, aluminum, our main raw material, and alloys at prices that fluctuate on a monthly basis, and our pricing policies generally allow us to pass the underlying index cost of
21
aluminum and certain alloys through to our customers so that we remain neutral to metal pricing. However, for some of our higher margin products sold on a spot basis, competitive dynamics may limit the amount and/or delay the timing of selling price increases to recover our increased aluminum and alloy costs, resulting in a lag up to several months during which we may be exposed to metal price risk. As a result, we can experience an adverse impact when aluminum and alloy prices increase, and a favorable impact to us when aluminum and alloy prices decline, as we and our competitors tend to defer adjusting pricing unless market dynamics require such in a declining metal cost environment. We may also enter into firm-price customer sales agreements that specify a firm underlying metal price plus a conversion price. Spot sales with lagged aluminum and alloy price pass through and firm-price sales agreements create price exposure for us, which we mitigate through hedging and related programs with an objective to remain metal price neutral. Additionally, we have certain contracts that may adjust certain alloy prices for a forward period based on an average prior period cost for such alloys. As a result, until the selling price resets, we can experience an adverse impact when alloy prices increase and a favorable impact when alloy prices decrease.
Our pricing policies and hedging program are intended to significantly reduce or eliminate the impact on our profitability of fluctuations in underlying price of primary, rolling ingot and scrap, or recycled, aluminum, our main raw material, and certain alloys so that our earnings are predominantly associated with the conversion of aluminum to semi‑fabricated mill products. To allow users of our financial statements to consider the impact of aluminum and alloy cost on our Net sales, we disclose Net sales as well as Conversion Revenue, which is Net sales less the Hedged Cost of Alloyed Metal. As used in this discussion, “Hedged Cost of Alloyed Metal” is the cost of aluminum at the average MWTP plus the cost of alloying elements and any realized gains and/or losses on settled hedges related to the metal sold in the referenced period. The average MWTP of aluminum reflects the primary aluminum supply/demand dynamics in North America. For a reconciliation of Conversion Revenue to Net sales, see below in “Results of Operations - Selected Operational and Financial Information.”
Business Overview
We manufacture and sell semi-fabricated specialty aluminum mill products for the following end market applications: (i) Aero/HS Products; (ii) Packaging; (iii) GE Products; (iv) Automotive Extrusions; and (v) Other products. Our fabricated aluminum mill products include flat-rolled (plate, sheet and coil), extruded (rod, bar, hollows and shapes), drawn (rod, bar, pipe, tube and wire) and certain cast aluminum products. The sophistication of our products is due to the metallurgy and physical properties of the metal and the special characteristics that are required for particular end uses. We strategically choose to serve technically challenging applications for which we can deploy our core metallurgical and process technology capabilities to produce highly engineered mill products with differentiated characteristics that present opportunities for us to receive premium pricing and to create long-term profitable growth.
With respect to the global market for flat-rolled aluminum mill products, our focus is on heat treat plate and sheet for applications that require higher strength and other desired product attributes that cannot be achieved by common alloy rolled products. The primary end market applications of flat-rolled heat treat plate and sheet, which are produced at Trentwood, are Aero/HS Products (which we sell globally) and GE Products (which we predominantly sell within North America). The primary end market application of bare and coated aluminum coil, which are produced at Warrick, is Packaging for can stock applications which we sell in North America. Our Packaging products require demanding attributes and can be further processed to include coating and slitting depending on customer specifications.
In the areas of aluminum extrusions, we focus on demanding Aero/HS Products, GE Products, and Automotive Extrusions that require high strength, machinability or other specific properties where we can create and maintain a defensible competitive position because of our technical expertise, strong production capability and high product quality. Our 11 extrusion/drawing facilities, 10 of which are in the United States and one of which is in Canada, serve primarily North American demand for aerospace, general engineering, or automotive applications. Additionally, we have a facility in Columbia, New Jersey, that focuses on multi-material advanced manufacturing methods and techniques, which include multi-axis computer numerical control machining, additive manufacturing (“3D Printing”), welding and fabrication for demanding aerospace and defense, high tech, general industrial, and automotive applications. Our consolidated Net sales for the quarter ended March 31, 2024 totaled $737.5 million on 291.0 million pounds shipped from our facilities. We employed approximately 4,000 people at March 31, 2024.
We have long-standing relationships with our customers, which consist primarily of blue-chip companies including leading aerospace and automotive manufacturers, tier one aerospace and automotive suppliers, food and beverage packaging manufacturers, and metal service centers. Approximately 75% of our shipments is sold direct to manufacturers or tier one suppliers and approximately 25% is sold to metal service centers. In our served markets, we seek to be the supplier of choice by pursuing “Best in Class” customer satisfaction driven by quality, availability, service and delivery performance. We believe we differentiate our product portfolio through our broad product offering and our KaiserSelect® products, which are engineered and manufactured to deliver enhanced product characteristics with improved consistency, so as to result in better performance, lower waste and, in many cases, lower production cost for our customers.
22
Highlights of the quarter ended March 31, 2024 include:
Results of Operations
Consolidated Results of Operations
Net Sales. Net sales totaled $737.5 million and $807.6 million for the quarters ended March 31, 2024 and March 31, 2023, respectively, reflecting an 8.3 million pound decrease in shipment volume and a $0.17/lb (6%) decrease in average realized sales price per pound. The shipment volume decrease reflected: (i) an 11.3 million pound (7%) decrease in Packaging reflecting the impact of destocking primarily of coated food packaging material; (ii) a 1.7 million pound (61%) decrease in Other products; and (iii) a 1.2 million pound (4%) decrease in Automotive Extrusions, partially offset by: (i) a 4.7 million pound (8%) increase in Aero/HS Products reflecting continued strong demand for commercial aerospace applications and (ii) a 1.2 million pound (2%) increase in GE Products. The average realized sales price per pound reflected a $0.20/lb (14%) decrease in the average Hedged Cost of Alloyed Metal price per pound and a $0.03/lb (2%) increase in Conversion Revenue per pound reflecting higher pricing and improved mix. For further details, see the table below in “Selected Operational and Financial Information.”
COGS. COGS for the quarter ended March 31, 2024 totaled $642.9 million, or 87% of Net sales, compared to $731.1 million, or 91% of Net sales, for the quarter ended March 31, 2023. The decrease of $88.2 million reflected a $67.7 million decrease in Hedged Cost of Alloyed Metal and a $20.5 million decrease in net manufacturing conversion and other costs. Of the $67.7 million decrease in Hedged Cost of Alloyed Metal, $55.5 million was due to lower hedged metal prices and $12.2 million was due to lower shipment volume (see above in our “Net Sales” discussion for further details). The $20.5 million decrease in net manufacturing conversion and other costs reflected: (i) an $8.1 million decrease due to lower shipments; (ii) a $7.5 million decrease in major maintenance costs driven by timing of annual planned maintenance programs; and (iii) a $4.9 million decrease in freight and other manufacturing cost. For a further discussion of the comparative results of operations for the quarters ended March 31, 2024 and March 31, 2023, see below in “Selected Operational and Financial Information.”
Selling, General, Administrative, Research and Development (“SG&A and R&D”). SG&A and R&D expense totaled $32.6 million and $29.7 million for the quarters ended March 31, 2024 and March 31, 2023, respectively. The increase during the quarter ended March 31, 2024 was primarily due to a $2.8 million increase in employee related costs.
Restructuring Costs. Restructuring costs of $0.1 million and $1.4 million for the quarters ended March 31, 2024 and March 31, 2023, respectively, related to our restructuring plan initiated in 2022. See Note 4 of Notes to Interim Consolidated Financial Statements included in this Report for further information regarding the restructuring plan.
Other Operating Charges, Net. Other operating charge of $0.4 million for the quarter ended March 31, 2024 represents an impairment charge on land classified as held for sale during the quarter.
Interest Expense. See Note 6 of Notes to Interim Consolidated Financial Statements included in this Report for a discussion of our debt and credit facilities that were in effect during the quarters ended March 31, 2024 and March 31, 2023 and interest expense capitalized as part of construction in progress.
Other Income, Net. See Note 9 of Notes to Interim Consolidated Financial Statements included in this Report for details.
Income Tax Provision. See Note 10 of Notes to Interim Consolidated Financial Statements included in this Report for disclosure regarding our income tax provision.
Selected Operational and Financial Information
The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Part I, Item 1. “Financial Statements” of this Report. Interim results are not necessarily indicative of those for a full year.
23
The table below provides selected operational and financial information (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|
|||||
|
|
2024 |
|
|
2023 |
|
|
||
Net income |
|
$ |
24.6 |
|
|
$ |
15.9 |
|
|
Interest expense |
|
|
11.5 |
|
|
|
11.9 |
|
|
Other income, net |
|
|
(10.9 |
) |
|
|
(13.6 |
) |
|
Income tax provision |
|
|
7.5 |
|
|
|
4.9 |
|
|
Depreciation and amortization |
|
|
28.8 |
|
|
|
26.3 |
|
|
Non-run-rate items: |
|
|
|
|
|
|
|
||
Restructuring costs |
|
|
0.1 |
|
|
|
1.4 |
|
|
Mark-to-market gain on derivative instruments1 |
|
|
— |
|
|
|
(0.1 |
) |
|
Non-cash asset impairment charge |
|
|
0.4 |
|
|
|
— |
|
|
Environmental expenses2 |
|
|
0.4 |
|
|
|
— |
|
|
Total non-run-rate items |
|
|
0.9 |
|
|
|
1.3 |
|
|
Adjusted EBITDA |
|
$ |
62.4 |
|
|
$ |
46.7 |
|
|
Adjusted EBITDA for the quarter ended March 31, 2024 was $15.7 million higher than Adjusted EBITDA for the quarter ended March 31, 2023. Adjusted EBITDA for the quarter ended March 31, 2024 was impacted by: (i) improved pricing and mix; (ii) improved operating efficiencies; (iii) lower cost of major maintenance driven by timing of annual planned maintenance programs; and (iv) a decrease in freight costs, partially offset by an increase in employee benefit and incentive costs. See above in “Consolidated Results of Operations” for further details.
24
The following table provides our shipment and Conversion Revenue information (in millions of dollars, except shipments and Conversion Revenue per pound) by end market applications:
|
|
Quarter Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||
Aero/HS Products: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shipments (mmlbs) |
|
62.9 |
|
|
58.2 |
|
||||||||||
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||
Net sales |
|
$ |
220.5 |
|
|
$ |
3.51 |
|
|
$ |
214.0 |
|
|
$ |
3.68 |
|
Less: Hedged Cost of Alloyed Metal |
|
|
(84.0 |
) |
|
|
(1.34 |
) |
|
|
(91.6 |
) |
|
|
(1.58 |
) |
Conversion Revenue |
|
$ |
136.5 |
|
|
$ |
2.17 |
|
|
$ |
122.4 |
|
|
$ |
2.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shipments (mmlbs) |
|
142.4 |
|
|
153.7 |
|
||||||||||
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||
Net sales |
|
$ |
298.1 |
|
|
$ |
2.09 |
|
|
$ |
354.2 |
|
|
$ |
2.30 |
|
Less: Hedged Cost of Alloyed Metal |
|
|
(180.1 |
) |
|
|
(1.26 |
) |
|
|
(221.0 |
) |
|
|
(1.43 |
) |
Conversion Revenue |
|
$ |
118.0 |
|
|
$ |
0.83 |
|
|
$ |
133.2 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
GE Products: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shipments (mmlbs) |
|
58.1 |
|
|
56.9 |
|
||||||||||
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||
Net sales |
|
$ |
153.0 |
|
|
$ |
2.63 |
|
|
$ |
162.1 |
|
|
$ |
2.85 |
|
Less: Hedged Cost of Alloyed Metal |
|
|
(72.8 |
) |
|
|
(1.25 |
) |
|
|
(82.2 |
) |
|
|
(1.45 |
) |
Conversion Revenue |
|
$ |
80.2 |
|
|
$ |
1.38 |
|
|
$ |
79.9 |
|
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Automotive Extrusions: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shipments (mmlbs) |
|
26.5 |
|
|
27.7 |
|
||||||||||
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||
Net sales |
|
$ |
63.5 |
|
|
$ |
2.39 |
|
|
$ |
70.8 |
|
|
$ |
2.56 |
|
Less: Hedged Cost of Alloyed Metal |
|
|
(32.4 |
) |
|
|
(1.22 |
) |
|
|
(39.6 |
) |
|
|
(1.43 |
) |
Conversion Revenue |
|
$ |
31.1 |
|
|
$ |
1.17 |
|
|
$ |
31.2 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Products: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shipments (mmlbs) |
|
1.1 |
|
|
2.8 |
|
||||||||||
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||
Net sales |
|
$ |
2.4 |
|
|
$ |
2.18 |
|
|
$ |
6.5 |
|
|
$ |
2.32 |
|
Less: Hedged Cost of Alloyed Metal |
|
|
(1.3 |
) |
|
|
(1.18 |
) |
|
|
(3.9 |
) |
|
|
(1.39 |
) |
Conversion Revenue |
|
$ |
1.1 |
|
|
$ |
1.00 |
|
|
$ |
2.6 |
|
|
$ |
0.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shipments (mmlbs) |
|
291.0 |
|
|
299.3 |
|
||||||||||
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||
Net sales |
|
$ |
737.5 |
|
|
$ |
2.53 |
|
|
$ |
807.6 |
|
|
$ |
2.70 |
|
Less: Hedged Cost of Alloyed Metal1 |
|
|
(370.6 |
) |
|
|
(1.27 |
) |
|
|
(438.3 |
) |
|
|
(1.47 |
) |
Conversion Revenue |
|
$ |
366.9 |
|
|
$ |
1.26 |
|
|
$ |
369.3 |
|
|
$ |
1.23 |
|
Outlook
We remain well positioned in the current demand environment as a key supplier in diverse end markets with multi-year contracts with strategic partners. We expect demand will improve across the majority of our end markets throughout 2024. In Aero/HS Products, a more cautious outlook is warranted on expected build rates for domestic large commercial jet production in the near-term resulting in anticipated flat conversion revenue in 2024 following a strong 2023. The long-term demand outlook for these platforms remains
25
unchanged. We believe demand for other Aero/HS Products applications remains strong. Now that destocking is complete, we expect the rest of our end markets to perform consistent with the prior outlook.
As a result, we continue to expect conversion revenue for the full year 2024 to improve 2% - 3% and Adjusted EBITDA margin to improve 70 - 170 basis points over 2023 as we implement cost reduction measures in operations, increase manufacturing efficiencies, and pursue our strategic growth initiatives.
Liquidity and Capital Resources
Summary
The following table summarizes our liquidity (in millions of dollars):
|
|
As of March 31, 2024 |
|
|
As of December 31, 2023 |
|
||
Available cash and cash equivalents |
|
$ |
101.6 |
|
|
$ |
82.4 |
|
Borrowing availability under Revolving Credit Facility, net of letters of credit1 |
|
|
517.4 |
|
|
|
516.7 |
|
Total liquidity |
|
$ |
619.0 |
|
|
$ |
599.1 |
|
We place our cash in bank deposits with high credit quality financial institutions. See Note 12 of Notes to Interim Consolidated Financial Statements included in this Report for information regarding restricted cash at March 31, 2024.
We had no outstanding borrowings as of March 31, 2024 and December 31, 2023 under our Revolving Credit Facility. See below in “Sources of Liquidity” for a further discussion of subsequent borrowing activity. See Note 6 of Notes to Interim Consolidated Financial Statements included in this Report.
Cash Flows
The following table summarizes our cash flows from operating, investing, and financing activities (in millions of dollars):
|
|
Quarter Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Total cash provided by (used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
63.3 |
|
|
$ |
(20.3 |
) |
Investing activities |
|
$ |
(29.9 |
) |
|
$ |
(25.9 |
) |
Financing activities |
|
$ |
(14.2 |
) |
|
$ |
25.0 |
|
Cash provided by operating activities for the quarter ended March 31, 2024 reflected results of business activity described above in our “Consolidated Results of Operations” discussion, as well as the following working capital changes: (i) an increase in accounts payable of $18.6 million primarily due to the timing of payments and higher metal cost; (ii) an increase in trade and other receivables of $15.1 million and contract assets of $4.5 million primarily due to timing of customer shipments; (iii) a decrease in inventory of $4.4 million due to continued focus on inventory management; and (iv) a decrease in accrued liabilities of $5.2 million.
Cash used in operating activities for the quarter ended March 31, 2023 reflected results of business activity described above in our “Consolidated Results of Operations” discussion, as well as the following working capital changes: (i) an increase in trade and other receivables of $36.9 million, primarily due to higher pricing and an increase in metal price; (ii) a decrease in accounts payable of $22.6 million primarily due to the timing of payments; and (iii) an increase in inventory of $12.3 million due primarily to a higher per pound inventory cost.
See Statements of Consolidated Cash Flows included in this Report for further details on our cash flows from operating, investing, and financing activities for the quarters ended March 31, 2024 and March 31, 2023.
Sources of Liquidity
Our most significant sources of liquidity include available cash and cash equivalents, borrowing availability under the Revolving Credit Facility, and funds generated from operations. We believe we have sufficient liquidity to fund our operations and meet our short-term and long-term obligations.
26
Our Revolving Credit Facility and Senior Notes have covenants that, we believe, allow us to operate our business with limited restrictions and significant flexibility for the foreseeable future. We do not believe that covenants contained in the Revolving Credit Facility are reasonably likely to limit our ability to raise additional debt or equity should we choose to do so during the next 12 months, nor do we believe it is likely that during the next 12 months we will trigger the availability threshold that would require measuring and maintaining a fixed charge coverage ratio.
At April 22, 2024, we had no outstanding borrowings under the Revolving Credit Facility. See Note 9 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for a description of our Revolving Credit Facility.
We engage in certain customer-based supply chain financing programs to accelerate the receipt of payment for outstanding accounts receivable from certain customers. Costs of these programs are typically reimbursed to us by the customer. Receivables transferred under these customer-based supply chain financing programs generally meet the requirements to be accounted for as sales resulting in the derecognition of such receivables from our consolidated balance sheets. Receivables involved with these customer‑based supply chain finance programs for the quarter ended March 31, 2024 constituted approximately 37% of our Net sales. See Note 9 of Notes to Interim Consolidated Financial Statements included in this Report for further details with respect to these supply chain financing programs.
Material Cash Requirements
See Note 9 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the year ended December 31, 2023 for mandatory principal and cash interest payments on the outstanding borrowings.
We do not believe that covenants in the indentures governing the Senior Notes are reasonably likely to limit our ability to obtain additional debt or equity financing should we choose to do so during the next 12 months.
Except as otherwise disclosed in this Report, there has been no material change in our material cash requirements from significant contractual obligations, commercial commitments, or off-balance sheet arrangements other than in the ordinary course of business since December 31, 2023.
Capital Expenditures and Investments
We strive to strengthen our competitive position across our end markets through strategic capital investment. Significant investments over the past decade have positioned us well with increased capacity and expanded manufacturing capabilities while more recent capital projects have focused on further enhancing manufacturing cost efficiency, improving product quality and promoting operational security, which we believe are critical to maintaining and strengthening our position in an increasingly competitive market environment. A significant portion of our capital spending over the past several years related to the modernization project at our Trentwood rolling mill, which focused on equipment upgrades throughout the process flow to reduce conversion costs, increase efficiency, and further improve our competitive cost position on all products produced at our Trentwood facility. In addition, a significant portion of the investment also focused on modernizing legacy equipment and the process flow for thin gauge plate to achieve KaiserSelect® quality enhancements for these Aero/HS Products and GE Products. These improvements have allowed us to gain incremental manufacturing capacity to enable future sales growth. We continue spending on our previously announced capital project to add a fourth roll coat line at our Warrick facility to increase our capacity for higher margin coated packaging product.
Our capital investment plans remain focused on supporting demand growth through capacity expansion, sustaining our operations, enhancing product quality and increasing operating efficiencies. We anticipate total capital spending in 2024 of approximately $170.0 million to $190.0 million, the majority of which will be focused on growth initiatives, primarily reflecting investment in the new roll coat line at the Warrick facility, which we anticipate will be $100 million. In addition, approximately $10 million is attributable to our Phase VII growth project at out Trentwood facility. We expect to continue to deploy capital thoughtfully so that investment decisions align with demand expectations in order to maximize the earnings potential of the business and maintain financial strength and flexibility.
Capital investments will be funded using cash generated from operations, available cash and cash equivalents, borrowings under the Revolving Credit Facility and/or other third-party financing arrangements. The level of anticipated capital expenditures may be adjusted from time to time depending on our business plans, our price outlook for fabricated aluminum products, our ability to maintain adequate liquidity, and other factors. No assurance can be provided as to the timing of any such expenditures or the operational benefits expected therefrom.
27
Dividends
We have consistently paid a quarterly cash dividend since the second quarter of 2007 to holders of our common stock, including holders of restricted stock. Nevertheless, as in the past, the future declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on a number of factors, including our financial and operating results, including the availability of surplus and/or net profits, liquidity position, anticipated cash requirements and contractual restrictions under our Revolving Credit Facility, the indentures for our Senior Notes or other indebtedness we may incur in the future. We can give no assurance that dividends will be declared and paid in the future.
We also pay quarterly dividend equivalents to the holders of certain restricted stock units. Holders of performance shares are not paid a quarterly dividend equivalent, but instead are entitled to receive, in connection with the issuance of underlying shares of common stock for performance shares that ultimately vest, a one-time payment equal to the dividends such holders would have received if the number of such shares of common stock so issued had been held of record by such holders from the date of grant of such performance shares through the date of such issuance.
See our Statements of Consolidated Stockholders’ Equity and Note 14 of Notes to Interim Consolidated Financial Statements included in this Report for information regarding dividends paid during the quarters ended March 31, 2024 and March 31, 2023, and declared subsequent to March 31, 2024.
Repurchases of Common Stock
We suspended share repurchases as of March 2020. We will continue to assess share repurchases as a part of our capital allocation priorities and strategic investment opportunities identified to support further growth in our business. At March 31, 2024, $93.1 million remained authorized and available for future repurchases of common stock under our stock repurchase program.
See our Statements of Consolidated Stockholders’ Equity included in this Report for information regarding minimum statutory tax withholding obligations arising during the quarters ended March 31, 2024 and March 31, 2023 in connection with the vesting of non‑vested shares, restricted stock units, and performance shares.
Critical Accounting Estimates and Policies
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates and such differences could be material.
Our significant accounting policies are discussed in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. We discuss our critical accounting estimates in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10‑K for the year ended December 31, 2023. There have been no material changes in our critical accounting estimates and policies since December 31, 2023.
New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 1 of our Consolidated Financial Statements in this Form 10-Q.
28
Availability of Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, any amendments to those reports and statements and other information with the SEC. You may obtain the documents that we file electronically from the SEC’s website at http://www.sec.gov. Our filings with the SEC are made available free of charge on our website at http://www.kaiseraluminum.com as soon as reasonably practicable after we file or furnish the materials with the SEC. News releases, announcements of upcoming earnings calls and events in which our management participates or hosts with members of the investment community and an archive of webcasts of such earnings calls and investor events and related investor presentations, are also available on our website. Information on our website is not incorporated into this Form 10-Q unless expressly noted.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following quantitative and qualitative disclosures about market risk should be read in conjunction with Note 5 and Note 8 of Notes to Interim Consolidated Financial Statements included in this Report. Our operating results are sensitive to changes in the prices of primary aluminum, certain alloying metals, natural gas, electricity and foreign currency, and also depend to a significant degree upon the volume and mix of products sold to customers. We have historically utilized hedging transactions to lock in a specified price or range of prices for certain products which we sell or consume in our production process, and to mitigate our exposure to changes in energy prices.
Aluminum
During the quarters ended March 31, 2024 and March 31, 2023, settlements of derivative contracts were for 39.9 million pounds and 49.7 million pounds, respectively, of hedged shipments sold on pricing terms that created aluminum price risk for us. At March 31, 2024, we had derivative contracts with respect to approximately 55.3 million pounds and 12.4 million pounds to hedge sales to be made in the remainder of 2024 and 2025, respectively, on pricing terms that create aluminum price risk for us.
Based on the aluminum derivative positions held by us to hedge firm-price customer sales agreements, we estimate that a $0.10/lb decrease in the LME market price of aluminum as of March 31, 2024 and December 31, 2023, with all other variables held constant, would have resulted in an unrealized mark-to-market loss of $6.8 million and $6.3 million, respectively, with corresponding changes to the net fair value of our aluminum derivative positions. Additionally, we estimate that a $0.05/lb decrease in the Midwest premium for aluminum as of March 31, 2024 and December 31, 2023, with all other variables held constant, would have resulted in an unrealized mark-to-market loss of $1.7 million and $1.4 million, respectively, with corresponding changes to the net fair value of our aluminum derivative positions.
Alloying Metals
We are exposed to the risk of fluctuating prices of certain alloying metals, especially copper, zinc, and magnesium, to the extent that changes in their prices do not highly correlate with price changes for aluminum. Copper, zinc, magnesium, and certain other metals are used in our remelt operations to cast rolling ingot and extrusion billet with the proper chemistry for our products. From time to time, we enter into forward contract swaps and/or physical delivery commitments with third parties to mitigate our risk from fluctuations in the prices of these alloys. As of March 31, 2024, we had forward swap contracts with settlement dates designed to align with the timing of scheduled purchases of zinc and copper by our manufacturing facilities. We estimate that a $0.10/lb decrease in the market price of zinc and copper as of March 31, 2024 and December 31, 2023, with all other variables held constant, would have resulted in an unrealized mark‑to‑market loss of $1.0 million and $0.8 million, respectively, with corresponding changes to the net fair value of our zinc and copper derivative positions.
Energy
We are exposed to the risk of fluctuating prices for natural gas and electricity. We, from time to time, in the ordinary course of business, enter into hedging transactions and/or firm price physical delivery commitments with third parties to mitigate our risk from fluctuations in natural gas and electricity prices. We estimate that a $1.00 per mmbtu decrease in natural gas prices would have resulted in an unrealized mark-to-market loss of $3.9 million and $3.4 million as of March 31, 2024 and December 31, 2023, respectively, with corresponding changes to the net fair value of our natural gas derivative positions. We estimate that a $5.00 per Mwh decrease in electricity prices would have resulted in an unrealized mark-to-market loss of $0.2 million, and $0.3 million as of March 31, 2024 and December 31, 2023, respectively, with corresponding changes to the net fair value of our electricity derivative positions.
29
Foreign Currency
As of March 31, 2024, we hedged certain lease transactions and equipment purchases denominated in Euros and British Pounds using forward swap contracts with settlement dates through January 2026. We estimate that a 10% decrease in the exchange rate of our hedged foreign currencies to U.S. dollars would have resulted in an unrealized mark-to-market loss of $1.9 million for both periods as of March 31, 2024 and December 31, 2023, with corresponding changes to the net fair value of our foreign currency derivative positions.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed as of the end of the period covered by this Report under the supervision of and with the participation of our management, including the principal executive officer and principal financial officer. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2024 at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting. We had no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part I, Item 3. “Legal Proceedings” included in our Annual Report on Form 10-K for the year ended December 31, 2023 for information concerning material legal proceedings with respect to the Company. There have been no material developments since December 31, 2023.
Item 1A. Risk Factors
Reference is made to Part I, Item 1A. “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2023 for information concerning risk factors. There have been no material changes in risk factors since December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding our repurchases of our common shares during the quarter ended March 31, 2024:
|
|
Equity Incentive Plan |
|
|
Stock Repurchase Plan |
|
||||||||||||||
|
|
Total |
|
|
Average |
|
|
Total |
|
|
Average |
|
|
Maximum |
|
|||||
January 1, 2024 - January 31, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
93.1 |
|
February 1, 2024 - February 29, 2024 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
93.1 |
|
March 1, 2024 - March 31, 2024 |
|
|
16,175 |
|
|
|
72.39 |
|
|
|
— |
|
|
|
— |
|
|
|
93.1 |
|
Total |
|
|
16,175 |
|
|
$ |
72.39 |
|
|
|
— |
|
|
$ |
— |
|
|
n/a |
|
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Arrangements. During the quarter ended March 31, 2024, no director or officer of the Company
31
*Item 6. Exhibits
Exhibit |
|
|
|
Provided |
|
Incorporated by Reference |
||||||
No. |
|
Exhibit Description |
|
Herewith |
|
Form |
|
File Number |
|
Exhibit |
|
Filing Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1 |
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2 |
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3 |
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
Certification of Keith A. Harvey pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
Certification of Neal E. West pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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X |
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32.1 |
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Certification of Keith A. Harvey pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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X |
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32.2 |
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Certification of Neal E. West pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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X |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema |
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X |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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X |
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32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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KAISER ALUMINUM CORPORATION
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/s/ Neal E. West |
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Neal E. West |
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Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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/s/ Vijai Narayan |
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Vijai Narayan |
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Vice President and Chief Accounting Officer (Principal Accounting Officer) |
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Date: April 25, 2024
33