KAISER ALUMINUM CORP (KALU) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K (“Report”). For a detailed discussion of items impacting the year ended December 31, 2019, as well as a year‑to‑year comparison of our financial position and results of operations for the years ended December 31, 2020 and December 31, 2019, refer to Part II, Item 7. “Management’s Discussion and Analysis” of our Annual Report on Form 10-K for the years ended December 31, 2019 and 2020, respectively, and filed with the Securities and Exchange Commission (“SEC”) on February 25, 2020 and February 26, 2021, respectively.
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 generally accepted accounting principles (“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 provide 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 value added revenue (“VAR”), earnings before interest, taxes, depreciation and amortization adjusted for non-run-rate items (“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 (loss) income, see “Results of Operations - Selected Operational and Financial Information” below. 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
Our pricing policies and hedging program are intended to significantly reduce or eliminate the impact on our profitability of fluctuations in the underlying price of primary and scrap, or recycled, aluminum, our main raw material, and 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 VAR, 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 Midwest Transaction Price (“Midwest Price”) 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 Midwest Price of aluminum reflects the primary aluminum supply/demand dynamics in North America. For a reconciliation of VAR to Net sales, see “Results of Operations - Selected Operational and Financial Information” below.
Management Review of 2021 and Outlook for the Future
Review
This past year was transformational for the company, although one with a unique set of operational challenges. As we look ahead, we are confident in the processes and counter measures we have put in place to address the significant challenges experienced in 2021, setting the stage for stronger performance in 2022. We also achieved a number of major milestones that served to strengthen the strategic positioning of our company as we continue to manage our business for long-term growth and profitability, including our strategic acquisition of Alcoa Warrick LLC and certain assets comprising the aluminum casting and rolling mill facility located in Warrick County, Indiana (collectively, “Warrick”), providing non-cyclic end market diversification of our portfolio and re-entry into the resurging North American aluminum packaging market. In addition, we completed multiple multi-year contracts and extensions with key strategic aerospace and packaging partners securing additional long-term growth. With confidence in the continued strength of our markets and the expected long-term growth in our businesses, along with our commitment to continue creating value for our shareholders, in early 2022 we increased our quarterly dividend by 7% to $0.77 per share, an incremental increase from the 7.5% increase in early 2021.
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Demand across our end markets was mixed creating inefficiencies as we adjusted to changing market conditions. While demand for general engineering applications (“GE products”) and beverage and food packaging products (“Packaging”) remained strong, demand for automotive applications (“Automotive Extrusions”) was muted throughout the year due to continued semiconductor chip shortages that significantly limited North American auto production. Recovery in demand for commercial aerospace applications continued to progress as anticipated but remained pressured, while demand for business jet and defense related applications remained strong. Our financial results for the full year 2021 reflected the impact of the demand environment, combined with rapidly rising costs, significant supply chain issues, labor constraints, continued market disruptions related to the Coronavirus Disease 2019 (“COVID‑19”) pandemic, the declaration of force majeure by one of the company’s largest magnesium suppliers and the complex integration of the Warrick acquisition.
Outlook
As we look forward, labor issues that hampered our ability to maximize the market opportunities during the year, have been addressed, as we are nearly fully staffed and expect the decline of COVID-19 pandemic-related staffing challenges and the impact of the Omicron virus continues to subside. Our commercial teams have been very successful passing through price increases and instituting contained metals and commodity surcharges to offset the majority of higher materials costs. Operating efficiencies across all facilities have begun to improve and the supply chain issues experienced during most of the year have either been mitigated, resolved or addressed, with the exception of challenges we continue to work through with our major magnesium supplier and the metal supply to our Warrick facility.
For the full year 2022, we anticipate total VAR will be up 20% to 25% year-over-year with further strengthening in demand for our products across all our major markets and the benefit of a full year of operations at our Warrick facility. Our expectations by end market are outlined below:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Aerospace and high strength (“Aero/HS products”). We anticipate 15% to 20% year-over-year growth, primarily driven by declarations from major original equipment manufacturer (“OEMs”) customers, as well as continued strength in demand for business jet and defense applications. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Packaging. We anticipate 35% to 40% year-over-year growth, primarily driven by continued strength in demand, a full year of shipments and improved pricing and mix. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | GE products. We anticipate 10% to 20% year-over-year growth, primarily driven by strong underlying demand, service center restocking and reshoring. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Automotive Extrusions. We anticipate 10% to 20% year-over-year growth, primarily driven by strong demand for SUV’s, crossovers and light trucks, moderated by continued semiconductor chip shortages. |
Consolidated adjusted EBITDA margin (Adjusted EBITDA as a percentage of VAR) is expected to improve to the 17% to 20% level for the full year 2022; strengthening through the year as operations and efficiencies improve, costs normalize and the Warrick integration process is completed.
We are well positioned for continued long-term growth with a diversified portfolio and strong secular growth trends in each of our served end markets. Notwithstanding near-term challenges, the fundamentals of our Aero/HS products, Automotive Extrusions and GE products end markets are solid and we are increasingly optimistic in our ability to deliver significant margin expansion and long-term profitability for our Packaging business where we have a significant market position. We remain confident around the timing of the recovery in commercial aerospace and we are optimistic that as semiconductor chip shortages are alleviated, automotive production will ramp back up and our program launches will resume. We also expect our costs and operating efficiencies will continue to improve as we resolve the metal and magnesium supply chain challenges.
Results of Operations
Fiscal 2021 Summary
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | The global COVID-19 pandemic significantly impacted all of our end market applications during the year ended December 31, 2021, most notably Aero/HS products, which experienced a 7% decline in shipments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | In March 2021, we completed our $670.0 million purchase of the Warrick rolling mill from Alcoa Corporation; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | As of December 31, 2021, we had $670.5 million of combined cash and cash equivalents and net borrowing availability under our revolving credit facility with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto (“Revolving Credit Facility”); |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | In May 2021, we issued $550.0 million aggregate principal amounts of 4.50% unsecured senior notes due June 1, 2031 (“4.50% Senior Notes”) resulting in proceeds of $541.4 million, net of $8.6 million of transaction fees; |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | In May 2021, we redeemed all outstanding 6.50% unsecured senior notes due May 2025 (“6.50% Senior Notes”) using proceeds from our 4.50% Senior Notes offering, resulting in a cash outflow for principal, redemption premium and accrued interest of $382.2 million; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | We paid a total of approximately $46.7 million, or $2.88 per common share, in cash dividends to stockholders, including holders of restricted stock, and dividend equivalents to holders of certain restricted stock units during the year ended December 31, 2021, reflecting a 7.5% increase in the quarterly dividend compared with the prior year ended December 31, 2020. |
Consolidated Selected Operational and Financial Information
The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8. “Financial Statements and Supplementary Data” of this Report.
Net Sales. We reported Net sales for 2021 of $2,622.0 million, compared to $1,172.7 million for 2020. The increase in Net sales during 2021 compared to 2020 reflected a 619.2 million pound (123%) increase in shipment volume and a $0.01/lb increase in average realized sales price per pound. The shipment volume increase reflected: (i) a 541.7 million pound addition in Packaging due to our Warrick acquisition; (ii) a 62.6 million pound (27%) increase in GE products reflecting the reshoring of supply lines in North America and strong demand for our semi-conductor plate; (iii) a 16.7 million pound (178%) increase in our other industrial end market application (“Other products”) reflecting an increase of non-strategic rolled products acquired with the Warrick acquisition; and (iv) a 9.9 million pound (12%) increase in Automotive Extrusions primarily reflecting the recovery from the COVID‑19 pandemic related automotive supply chain shutdowns that occurred during the quarter ended June 30, 2020, partially offset by demand impact due to the ongoing semiconductor chip shortage in the automotive industry, which continues to hamper the return to full production and new program launches. The shipment volume increase was partially offset by an 11.7 million pound (7%) decrease in Aero/HS products reflecting lower demand for our commercial aerospace products as a result of the COVID-19 pandemic. The increase in average realized sales price per pound reflected a $0.41/lb (44%) increase in average Hedged Cost of Alloyed Metal prices per pound, partially offset by a $0.40 (29%) decrease in VAR per pound due primarily to the introduction of lower VAR per pound Packaging products, as well as approximately $14.8 million of additional net sales recognized in 2020 within Aero/HS products related to modifications to the 2020 customer declarations under multi-year contracts. See the table in “Selected Operational and Financial Information” below for further details.
Cost of Products Sold, Excluding Depreciation and Amortization and Other Items. Cost of products sold, excluding depreciation and amortization and other items for 2021 totaled $2,348.1 million, or 90% of Net sales, compared to $941.3 million, or 80% of Net sales, in 2020. The increase during 2021 compared to 2020 of $1,406.8 million was largely attributable to the addition of Packaging and reflected a $1,035.2 million increase in Hedged Cost of Alloyed Metal and a $371.6 million increase in net manufacturing conversion and other costs. Of the $1,035.2 million increase in Hedged Cost of Alloyed Metal, $586.1 million was due to higher shipment volume, as discussed above in “Net Sales,” and $449.1 million was due to higher hedged metal prices. The $371.6 million increase in net manufacturing conversion and other costs was primarily due to the addition of Packaging and additional overhead associated with the related increase in volume, as well as higher labor, energy, freight, benefit and metal cost driven by supply chain inefficiencies, inflation and labor shortages. See “Selected Operational and Financial Information” below for a further discussion of the comparative results of operations for 2021 and 2020.
Depreciation and Amortization. Depreciation and amortization for 2021 was $91.5 million compared to $52.2 million for 2020. The increase of $39.3 million was primarily attributable to the addition of Packaging.
Selling, General, Administrative, Research and Development (“SG&A and R&D”). SG&A and R&D expense totaled $118.8 million in 2021 compared to $91.2 million in 2020. The increase in 2021 compared with 2020 was due primarily to: (i) an $11.4 million increase in costs related to the addition of Warrick operations and related transition service agreements with Alcoa Corporation to facilitate the integration; (ii) an $11.2 million increase in acquisition related costs, which were primarily comprised of professional fees; and (iii) a $5.3 million increase in salaries and benefits.
Goodwill Impairment. See Note 4 of Notes to Consolidated Financial Statements included in this Report for further details.
Restructuring Costs. See Note 12 of Notes to Consolidated Financial Statements included in this Report for further information regarding the restructuring plan.
Other Operating Charges (Income), Net. There were no Other operating charges (income), net, for the year ended December 31, 2021. Other operating charges (income), net, was $0.6 million of income for the year ended December 31, 2020. During the year ended December 31, 2020, we recognized $1.3 million of payroll subsidies received by our subsidiary Kaiser Aluminum Canada Limited under the Canada Emergency Wage Subsidy (“CEWS”) Program, which was partially offset by $0.5 million of
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impairment charges related to property, plant and equipment (see Note 1 of Notes to Consolidated Financial Statements included in this Report for details of government grants received).
Interest Expense. Interest expense represents cash and non-cash interest expense incurred on our unsecured senior notes and our Revolving Credit Facility, net of capitalized interest. Interest expense was $49.5 million and $40.9 million for 2021 and 2020, respectively. See Note 9 of Notes to Consolidated Financial Statements included in this Report for a discussion of our debt and credit facilities that were in effect during each of the years 2021 and 2020 and Note 1 of Notes to Consolidated Financial Statements included in this Report for a discussion of our interest expense capitalized as part of construction in progress.
Other Expense, Net. Other expense, net for the year ended December 31, 2021 included a $35.9 million loss on extinguishment of debt related to the redemption of our 6.50% Senior Notes. See Note 9 and Note 13 of Notes to Consolidated Financial Statements included in this Report for details.
Income Tax Benefit (Provision). The income tax benefit for 2021 was $5.5 million, resulting in an effective tax rate of 22.9%. There was no material difference between the effective tax rate and the projected blended statutory tax rate for 2021.
The income tax provision for 2020 was $10.0 million, resulting in an effective tax rate of 25.9%. There was no material difference between the effective tax rate and the projected blended statutory tax rate for 2020.
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 II, Item 8. “Financial Statements and Supplementary Data” of this Report.
The following table provides selected operational and financial information (in millions of dollars):
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Net (loss) income | $ | (18.5 | ) | $ | 28.8 | |||
| Interest expense | 49.5 | 40.9 | ||||||
| Other expense, net | 38.9 | 1.4 | ||||||
| Income tax (benefit) provision | (5.5 | ) | 10.0 | |||||
| Depreciation and amortization | 91.5 | 52.2 | ||||||
| Non-run-rate items: | ||||||||
| Restructuring (benefit) costs | (0.8 | ) | 7.5 | |||||
| Adjustments to plant-level LIFO1 | 7.8 | 2.4 | ||||||
| Mark-to-market loss (gain) on derivative instruments2 | 1.4 | (2.6 | ) | |||||
| Workers' compensation cost due to discounting | — | 1.8 | ||||||
| Non-cash asset impairment charges | — | 0.5 | ||||||
| Net periodic post retirement service cost relating to Salaried VEBA | 0.1 | 0.1 | ||||||
| Environmental expenses3 | 0.2 | 5.3 | ||||||
| Acquisition costs4 | 28.0 | 5.5 | ||||||
| Total non-run-rate items | 36.7 | 20.5 | ||||||
| Adjusted EBITDA | $ | 192.6 | $ | 153.8 |
| Column 1 | Column 2 |
|---|---|
| 1. | We manage our business on a monthly last-in, first-out (“LIFO”) basis at each plant, but report inventory externally on an annual LIFO basis in accordance with GAAP on a consolidated basis. This line item represents the conversion from GAAP LIFO applied on a consolidated basis to monthly LIFO applied on a plant-by-plant basis. For the year ended December 31, 2021, this line item reflects a $5.2 million non-run-rate LIFO benefit that resulted from a purchase accounting adjustment to step-up Warrick’s inventory to fair value. |
| Column 1 | Column 2 |
|---|---|
| 2. | Mark-to-market loss (gain) on derivative instruments for 2021 and 2020 represents: (i) the reversal of mark-to-market loss (gain) on hedges entered into prior to the adoption of Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities and settled in the periods presented above; (ii) loss (gain) on non-designated commodity hedges; and (iii) reclassifications out of Accumulated other comprehensive loss due to forecasted transactions no longer probable of occurring. Adjusted EBITDA reflects the realized loss (gain) of such settlements. |
| Column 1 | Column 2 |
|---|---|
| 3. | Non-run-rate environmental expenses are related to legacy activities at operating facilities prior to July 6, 2006. See Note 10 of Notes to Consolidated Financial Statements included in this Report for additional information relating to the environmental expenses. |
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| Column 1 | Column 2 |
|---|---|
| 4. | Acquisition costs are non-run-rate acquisition-related transaction costs, which include professional fees, as well as non‑cash hedging charges recorded in connection with our Warrick acquisition. The results for the year ended December 31, 2020 were adjusted to reflect $5.5 million now classified as Warrick acquisition-related costs. |
Adjusted EBITDA for 2021 was $38.8 million higher than Adjusted EBITDA for 2020, which had the benefit of the additional $14.8 million of revenue as discussed in “Net sales” above. Adjusted EBITDA for 2021 reflected the benefit of Packaging and improvement in our Automotive Extrusions and GE products, partially offset by higher costs as discussed in “Consolidated Selected Operational and Financial Information” above.
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The following table provides our shipment and VAR information (in millions of dollars, except shipments and VAR per pound) by end market applications:
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||||||||
| Aero/HS Products: | ||||||||||||||||
| Shipments (mmlbs) | 161.6 | 173.3 | ||||||||||||||
| $ | $ / lb | $ | $ / lb | |||||||||||||
| Net sales | $ | 533.7 | $ | 3.30 | $ | 537.9 | $ | 3.10 | ||||||||
| Less: Hedged Cost of Alloyed Metal | (219.0 | ) | (1.35 | ) | (168.6 | ) | (0.97 | ) | ||||||||
| VAR | $ | 314.7 | $ | 1.95 | $ | 369.3 | $ | 2.13 | ||||||||
| Packaging: | ||||||||||||||||
| Shipments (mmlbs) | 541.7 | — | ||||||||||||||
| $ | $ / lb | $ | $ / lb | |||||||||||||
| Net sales | $ | 1,119.3 | $ | 2.07 | $ | — | $ | — | ||||||||
| Less: Hedged Cost of Alloyed Metal | (730.0 | ) | (1.35 | ) | — | — | ||||||||||
| VAR | $ | 389.3 | $ | 0.72 | $ | — | $ | — | ||||||||
| Automotive Extrusions: | ||||||||||||||||
| Shipments (mmlbs) | 94.0 | 84.1 | ||||||||||||||
| $ | $ / lb | $ | $ / lb | |||||||||||||
| Net sales | $ | 225.0 | $ | 2.39 | $ | 161.4 | $ | 1.92 | ||||||||
| Less: Hedged Cost of Alloyed Metal | (128.4 | ) | (1.36 | ) | (78.4 | ) | (0.93 | ) | ||||||||
| VAR | $ | 96.6 | $ | 1.03 | $ | 83.0 | $ | 0.99 | ||||||||
| GE Products: | ||||||||||||||||
| Shipments (mmlbs) | 298.2 | 235.6 | ||||||||||||||
| $ | $ / lb | $ | $ / lb | |||||||||||||
| Net sales | $ | 706.1 | $ | 2.37 | $ | 458.8 | $ | 1.95 | ||||||||
| Less: Hedged Cost of Alloyed Metal | (409.0 | ) | (1.37 | ) | (220.2 | ) | (0.94 | ) | ||||||||
| VAR | $ | 297.1 | $ | 1.00 | $ | 238.6 | $ | 1.01 | ||||||||
| Other Products: | ||||||||||||||||
| Shipments (mmlbs) | 26.1 | 9.4 | ||||||||||||||
| $ | $ / lb | $ | $ / lb | |||||||||||||
| Net sales | $ | 37.9 | $ | 1.45 | $ | 14.6 | $ | 1.55 | ||||||||
| Less: Hedged Cost of Alloyed Metal | (24.4 | ) | (0.93 | ) | (8.4 | ) | (0.89 | ) | ||||||||
| VAR | $ | 13.5 | $ | 0.52 | $ | 6.2 | $ | 0.66 | ||||||||
| Total: | ||||||||||||||||
| Shipments (mmlbs) | 1,121.6 | 502.4 | ||||||||||||||
| $ | $ / lb | $ | $ / lb | |||||||||||||
| Net sales | $ | 2,622.0 | $ | 2.34 | $ | 1,172.7 | $ | 2.33 | ||||||||
| Less: Hedged Cost of Alloyed Metal | (1,510.8 | ) | (1.35 | ) | (475.6 | ) | (0.94 | ) | ||||||||
| VAR | $ | 1,111.2 | $ | 0.99 | $ | 697.1 | $ | 1.39 |
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Liquidity and Capital Resources
Summary
The following table summarizes our liquidity (in millions of dollars):
| As of December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Available cash and cash equivalents | $ | 303.2 | $ | 780.3 | |||
| Borrowing availability under Revolving Credit Facility, net of letters of credit1 | 367.3 | 251.5 | |||||
| Total liquidity | $ | 670.5 | $ | 1,031.8 |
| Column 1 | Column 2 |
|---|---|
| 1. | Borrowing availability under the Revolving Credit Facility as determined by a borrowing base calculated as of December 31, 2021 and December 31, 2020. |
We place our cash in bank deposits and money market funds with high credit quality financial institutions. Cash equivalents consist primarily of investment-grade commercial paper, money market accounts and investments which, when purchased, have a maturity of 90 days or less. Short-term investments represent holdings in investment-grade commercial paper with a maturity at the time of purchase of greater than 90 days.
See Note 16 of Notes to Consolidated Financial Statements included in this Report for information regarding restricted cash at December 31, 2021.
We and certain of our subsidiaries have a Revolving Credit Facility with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto (see Note 9 of Notes to Consolidated Financial Statements included in this Report). There were no borrowings under our Revolving Credit Facility during the years ending or as of December 31, 2021 or December 31, 2020, respectively.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in millions of dollars):
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Total cash provided by (used in): | |||||||
| Operating activities | $ | 79.4 | $ | 206.9 | |||
| Investing activities | $ | (665.8 | ) | $ | 26.9 | ||
| Financing activities | $ | 109.1 | $ | 281.9 |
Cash provided by operating activities for the year ended December 31, 2021 reflected results of business activity described within “Consolidated Selected Operational and Financial Information” above, as well as the following working capital changes: (i) an increase in accounts payable of $112.5 million, primarily driven by Warrick payables added during the year ended December 31, 2021 and higher metal cost; (ii) an increase in trade and other receivables of $90.3 million, primarily driven by Warrick receivables added during the year ended December 31, 2021 and the remainder due to the timing and mix of sales and an increase in metal prices; and (iii) an increase in inventory of $43.5 million due primarily to higher inventory pounds to satisfy increased demand, as well as a higher per pound inventory cost.
Cash provided by operating activities for the year ended December 31, 2020 reflected results of business activity for the year ended December 31, 2020, as well as the following working capital changes: (i) a decrease in Trade and other receivables of $60.8 million driven primarily by lower Net sales; (ii) a decrease in Inventories of $25.6 million to better align with operations; and (iii) a reduction in Contract assets of $18.5 million driven primarily by timing and volume of shipments related to revenue on products recognized over-time.
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 years ended December 31, 2021 and December 31, 2020.
Sources of Liquidity
We believe our available cash and cash equivalents, borrowing availability under the Revolving Credit Facility and funds generated from operations are our most significant sources of liquidity, and that our Revolving Credit Facility and unsecured notes
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have covenants that allow us to operate our business with limited restrictions and significant flexibility for the foreseeable future. While we believe these sources will be sufficient to finance our working capital requirements, planned capital expenditures, investments, debt service obligations and other cash requirements for at least the next twelve months, and while we also believe that alternative sources of liquidity will remain available in the event we seek to add liquidity for opportunistic or other reasons in the future, our ability to fund such cash requirements will depend upon our future operating performance (which will be affected by prevailing economic conditions) and financial, business and other factors, some of which are beyond our control.
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.
See Note 9 of Notes to Consolidated Financial Statements included in this Report for a description of our Revolving Credit Facility.
Debt
See Note 9 of Notes to Consolidated Financial Statements included in this Report for further details with respect to the 4.50% Senior Notes and 4.625% Senior Notes due 2028 (“4.625% Senior Notes”) and the redemption of our 6.50% Senior Notes.
We do not believe that covenants in the indenture governing the 4.50% Senior Notes and 4.625% 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.
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 rolling mill in Spokane, Washington (“Trentwood”), 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. Total capital expenditures were $58.0 million and $51.9 million for 2021 and 2020, respectively, and primarily related to critical sustaining capital projects.
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 2022 of approximately $180.0 million to $200.0 million, of which approximately 60% of total spending will be focused on growth initiatives, primarily reflecting investment in the new roll coat line at Warrick and modest spending related to the Trentwood facility expansion project. In addition, we have prepared for a multiple week outage early in third quarter 2022 to refurbish the large plate stretcher at our Trentwood facility. The investment of approximately $30.0 million is a highly efficient use of capital that will allow us to temporarily defer the $145.0 million purchase for a new stretcher planned prior to the COVID-19 pandemic. We will continue to deploy capital thoughtfully to ensure 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, short‑term investments, 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.
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, and have increased the dividend in each year since 2011. 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, financial position and anticipated cash requirements and contractual restrictions under our Revolving Credit Facility, the indentures for our 4.50% Senior Notes and 4.625% 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.
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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 holder would have received if the number of such shares of common stock so issued had been held of record by such holder from the date of grant of such performance shares through the date of such issuance.
See our Statements of Consolidated Stockholders’ Equity and Note 18 of Notes to Consolidated Financial Statements included in this Report for information regarding dividends declared during 2021 and 2020 and subsequent to December 31, 2021.
Repurchases of Common Stock
We suspended share repurchases as of March 18, 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. See our Statements of Consolidated Stockholders’ Equity included in this Report for information regarding: (i) repurchases of common stock in 2021 and 2020; (ii) the amounts authorized and available for future repurchases of common stock under our stock repurchase program; and (iii) minimum statutory tax withholding obligations arising during 2021 and 2020 in connection with the vesting of non-vested shares, restricted stock units and performance shares.
Environmental Commitments and Contingencies
See Note 10 of Notes to Consolidated Financial Statements included in this Report for information regarding our environmental commitments and contingencies.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements
The discussion below summarizes our significant contractual obligations, commercial commitments and off-balance sheet arrangements as of December 31, 2021.
Principal and Interest on 4.50% Senior Notes and 4.625% Senior Notes. See Note 9 of Notes to Consolidated Financial Statements included in this Report for information, including the timing of principal and interest payments, associated with our debt.
Standby Letters of Credit. Standby Letters of Credit represents letters of credit issued under our Revolving Credit Facility. The letters of credit provide financial assurance of our payment of obligations, primarily related to workers’ compensation. The specific timing of payments with respect to such matters is uncertain. The letters of credit generally automatically renew every 12 months and terminate when the underlying obligations no longer require assurance or upon the maturity of our Revolving Credit Facility in October 2024. See Note 9 of Notes to Consolidated Financial Statements included in this Report for further information.
Employer Payroll Tax Deferrals. As of December 31, 2021, we had a remaining $3.8 million in employer payroll tax deferrals to be paid in 2022 under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).
Uncertain Tax Liabilities. At December 31, 2021, we had uncertain tax positions which ultimately could result in tax payments. See Note 14 of Notes to Consolidated Financial Statements included in this Report for information regarding further information.
Deferred Compensation Plan Liability. As of December 31, 2021, we had deferred compensation plan liabilities for certain key employees, which were contingent upon investment performance, vesting and other eligibility requirements, including retirement dates. See Note 5 of Notes to Consolidated Financial Statements included in this Report for further information, including the total expense related to all benefit plans.
Operating Leases. Operating lease liabilities represent multi-year obligations for certain manufacturing facilities, warehouses, office space and equipment. See Note 3 of Notes to Consolidated Financial Statements included in this Report for the maturity of our lease liabilities associated with our operating lease portfolio.
Finance Leases. Finance lease liabilities represent non-cancelable capital commitments as of December 31, 2021. We expect finance leases to be funded through available cash generated from our operations, cash and cash equivalents, borrowings under our Revolving Credit Facility and/or other third-party financing arrangements. See Note 3 of Notes to Consolidated Financial Statements included in this Report for the maturity of our lease liabilities associated with our finance lease portfolio.
Pension and OPEB. See Note 5 of Notes to Consolidated Financial Statements included in this Report for additional information regarding the future net benefits we expect to pay with respect to our pension plans and our healthcare and life insurance postretirement benefit plan (“OPEB”).
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Salaried VEBA Variable Contributions. See Note 5 of Notes to Consolidated Financial Statements included in this Report for additional information regarding our variable cash contributions to the voluntary employees’ beneficiary association (“VEBA”) that provides benefits for certain eligible retirees and their surviving spouses and eligible dependents (“Salaried VEBA”).
VEBA administrative fees. We are required to pay $0.3 million in annual administrative fees related to the VEBA that provides benefits for eligible retirees represented by certain unions and their surviving spouses and eligible dependents through September 2025. See Note 5 of Notes to Consolidated Financial Statements included in this Report for additional information.
Purchase Obligations. Cash outlays for purchase obligations consist primarily of commitments to purchase primary aluminum, recycled scrap aluminum, other alloys, energy and equipment. We have various contracts with suppliers of metals that require us to purchase minimum quantities of these metals in future years based primarily at the associated metal price at the time of payment. We believe the minimum required purchase quantities are lower than our current requirements for these metals. Physical delivery commitments with energy companies are in place to cover our exposure to fluctuations in electricity and natural gas prices and are based on fixed contractual rates and quantities. Equipment purchase obligations are based on scheduled payments to equipment manufacturers.
Commitment Fees on Revolving Credit Facility. Future commitment fees on our Revolving Credit Facility are estimated based on the amount of unused credit under the facility at December 31, 2021 and assuming no extension of terms beyond the current maturity date of our Revolving Credit Facility, which is in October 2024. No borrowings were outstanding under our Revolving Credit Facility either throughout the year or as of December 31, 2021. See Note 9 of Notes to Consolidated Financial Statements included in this Report for additional information.
In addition to our off-balance sheet items discussed above:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | See Note 6 of Notes to Consolidated Financial Statements included in this Report for information regarding our participation in multi-employer pension plans. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | See Note 7 of Notes to Consolidated Financial Statements included in this Report for information regarding our long-term employee incentive plans. Additional equity awards are expected to be made to employees and non-employee directors in 2022 and future years. |
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.
In addition to the accounting estimates we discuss in Note 1 of Notes to Consolidated Financial Statements included in this Report, management believes that the following accounting estimates are critical to aid in fully understanding and evaluating our reported financial results and require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effects of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
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| Description | Judgments and Uncertainties | Potential Effect If Actual Results Differ From Assumptions | ||
|---|---|---|---|---|
| Revenue Recognition. | ||||
| We decide at the outset of entering into contracts with customers whether our performance obligations as specified in these contracts are satisfied over time or at a point in time. To recognize revenue over time means that we will need to synchronize revenue recognition with progress toward completion of the performance obligation. If we have determined that revenue will be recognized over time for a specific customer order, the earliest point in our production process that we will recognize revenue will be the point that the product cannot be directed to another customer. In most cases, this happens at the time we begin to mold the ingot or billet, either by flat rolling the ingot or by extruding the billet through a die. For custom alloys, we would begin recognizing revenue over time at the point the custom alloy billet is cast. Approximately 79% of our business is recognized at a point in time with the remaining 21% recognized over time. | We follow the input method of recognizing revenue over time. Under this approach, revenue is recognized on products in production based on the cost incurred to date plus a reasonable margin. Cost incurred to date is based on resources consumed, labor hours expended and other costs incurred relative to the total inputs expected in order to satisfy a performance obligation. Reasonable margins are estimated using an average margin of the respective production facility producing the product. For purposes of recognizing revenue over time on products that are in work‑in-process (“WIP”) as of the period end, we make the assumption that the average margins at the respective production facilities are reasonably close to the individual product margins that are in WIP. | Although we believe that the judgments and estimates around recognizing revenue over time discussed herein are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. A change in our estimated average margins by 5% would have had an impact of approximately $0.2 million to Net (loss) income for the year ended December 31, 2021. |
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| Description | Judgments and Uncertainties | Potential Effect If Actual Results Differ From Assumptions | ||
|---|---|---|---|---|
| Income Tax. | ||||
| We have tax attributes available to offset the impact of future income taxes. We have a process for determining the need for a valuation allowance with respect to these attributes. The process includes an extensive review of both positive and negative evidence including our earnings history, future earnings, adverse recent occurrences, carryforward periods, an assessment of the industry and the impact of the timing differences. We expect to record a full statutory tax provision in future periods and, therefore, the benefit of any tax attributes realized will only affect future balance sheets and statements of cash flows. Financial statements for interim periods include an income tax provision based on the effective tax rate expected to be incurred in the current year. | Inherent within the completion of our assessment of the need for a valuation allowance, we make significant judgments and estimates with respect to future operating results, timing of the reversal of deferred tax assets and current market and industry factors. In order to determine the effective tax rate to apply to interim periods, estimates and judgments are made (by taxable jurisdiction) as to the amount of taxable income that may be generated, the availability of deductions and credits expected and the availability of net operating loss carryforwards or other tax attributes to offset taxable income. Making such estimates and judgments is subject to inherent uncertainties given the difficulty of predicting future tax rates, market conditions, customer requirements, the cost for key inputs such as energy and primary aluminum, overall operating efficiency and other factors. However, if, among other things: (i) actual results vary from our forecasts due to one or more of the factors cited above or elsewhere in this Report; (ii) income is distributed differently than expected among tax jurisdictions; (iii) one or more material events or transactions occur which were not contemplated; or (iv) certain expected deductions, credits or carryforwards are not available, it is possible that the effective tax rate for a year could vary materially from the assessments used to prepare the interim consolidated financial statements. See Note 14 of Notes to Consolidated Financial Statements included in this Report for additional discussion of these matters. | Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. A change in our effective tax rate by 1% would have had an impact of approximately $0.2 million to Net (loss) income for the year ended December 31, 2021. |
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| Description | Judgments and Uncertainties | Potential Effect If Actual Results Differ From Assumptions | ||
|---|---|---|---|---|
| Acquisitions, Goodwill and Intangible Assets. | ||||
| We account for acquisitions using the acquisition method of accounting, which requires the assets acquired and liabilities assumed to be recorded at the date of acquisition at their respective estimated fair values. We recognize goodwill as of the acquisition date as the excess over the fair values of the identifiable net assets acquired. Goodwill is tested for impairment on an annual basis as well as on an interim basis as events and changes in circumstances occur. Definite-lived intangible assets acquired are amortized over the estimated useful lives of the respective assets, to reflect the pattern in which the economic benefits of the intangible assets are consumed. In the event the pattern cannot be reliably determined, we use a straight-line amortization method. Whenever events or changes in circumstances indicate that the carrying amount of the intangible assets may not be recoverable, the intangible assets will be reviewed for impairment. | The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can significantly impact our results of operations. Fair values and useful lives of intangible assets are determined using the income approach valuation methodology, which is based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, long‑term forecasts of the business, projected cash flows and the rate used in discounting those cash flows. As the determination of an asset’s fair value and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, these estimates are considered to be critical accounting estimates. | We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to estimate the fair value of goodwill and intangible assets. Additionally, as of December 31, 2021, we do not believe any of our reporting units are at risk of failing the goodwill impairment test. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and fair values assigned to each class of assets acquired and liabilities assumed, we may be exposed to losses from impairment charges that could be material. For further details on goodwill and intangible assets, see Note 4 of Notes to Consolidated Financial Statements included in this Report. |
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| Description | Judgments and Uncertainties | Potential Effect If Actual Results Differ From Assumptions | ||
|---|---|---|---|---|
| Pension and Other Postretirement Benefits. | ||||
| Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return (“LTRR”) on plan assets and several assumptions relating to the employee workforce (salary increases, health care cost trend rates, retirement age and mortality). The most significant assumptions used in determining the estimated year-end obligations include the assumed discount rate and the LTRR. In addition to the above assumptions used in the actuarial valuations, changes in plan provisions could also have a material impact on the net funded status of our pensions and other postretirement benefits. Additionally, our obligation to the Salaried VEBA is to pay an annual variable contribution amount based on the level of our cash flow. The funding status of the Salaried VEBA has no impact on our annual variable contribution amount. We have no control over any aspect of the plan. We rely on information provided to us by the Salaried VEBA administrator with respect to specific plan provisions such as annual benefits expected to be paid. See Note 5 of Notes to Consolidated Financial Statements included in this Report for additional information on our benefit plans. | Since the recorded obligation represents the present value of expected postretirement benefit payments over the life of the plans, decreases in the discount rate (used to compute the present value of the payments) would cause the estimated obligation to increase. Conversely, an increase in the discount rate would cause the estimated present value of the obligation to decline. The LTRR on plan assets reflects an assumption regarding what the amount of earnings would be on existing plan assets (before considering any future contributions to the plan). Increases in the assumed LTRR would cause the projected value of plan assets available to satisfy postretirement obligations to increase, yielding a reduced net expense of these obligations. A reduction in the LTRR would reduce the amount of projected net assets available to satisfy postretirement obligations and, thus, cause the net expense of these obligations to increase. A change in plan provisions could cause the estimated obligations to change. An increase in annual benefits expected to be paid would increase the estimated present value of the obligations and conversely, a decrease in annual benefits expected to be paid would decrease the estimated present value of the obligations. | The impact on the combined pension and other postretirement liabilities of a change in the weighted average discount rate of ¼ of 1% would be approximately $5.1 million as of December 31, 2021 and either a charge or credit of approximately $0.5 million to pretax earnings in 2022. A change in the assumption for the weighted average expected long-term rate of return on plan assets of ¼ of 1% would impact pretax earnings by approximately $0.4 million for 2022. |
New Accounting Pronouncements
For a discussion of all recently adopted and recently issued but not yet adopted accounting pronouncements, see Note 1 of Notes to Consolidated Financial Statements included in this Report.