UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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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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(State of incorporation) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which registered |
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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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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 July 24, 2023
, there were
TABLE OF CONTENTS
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I – FINANCI AL INFORMATION
Item 1. Financi al Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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As of June 30, 2023 |
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As of December 31, 2022 |
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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 |
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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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(
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(
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Accumulated other comprehensive (loss) income |
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(
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Total stockholders’ equity |
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Total |
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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 CONSOLIDA TED INCOME (LOSS) (UNAUDITED)
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Quarter Ended June 30, |
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Six Months Ended June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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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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$ |
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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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— |
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— |
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Other operating charges, net |
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— |
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— |
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Total costs and expenses |
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Operating income (loss) |
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(
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Other (expense) income: |
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Interest expense |
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(
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(
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(
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Other (expense) income, net – Note 9 |
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(
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(
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(
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Income (loss) before income taxes |
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(
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(
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Income tax (provision) benefit |
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(
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(
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Net income (loss) |
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$ |
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$ |
(
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$ |
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(
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Net income (loss) per common share: |
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Basic |
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$ |
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$ |
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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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$ |
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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 COM PREHENSIVE INCOME (LOSS) (UNAUDITED)
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Quarter Ended June 30, |
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Six Months Ended June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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(In millions of dollars) |
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(In millions of dollars) |
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Net income (loss) |
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$ |
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$ |
(
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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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(
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(
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Cash flow hedges |
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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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Comprehensive income (loss) |
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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.
3
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STO CKHOLDERS ’ EQUITY (UNAUDITED)
Six Months Ended June 30, 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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(
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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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— |
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— |
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(
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Cash dividends declared 2 |
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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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(
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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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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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(
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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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Cancellation of shares to cover tax withholdings
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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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(
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Cash dividends declared 2 |
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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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(
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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, June 30, 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.
4
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS ’ EQUITY CONTINUED (UNAUDITED)
Six Months Ended June 30, 2022
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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, 2021 |
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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 income, 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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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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— |
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— |
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— |
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(
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Cash dividends declared 1 |
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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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(
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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, 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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$ |
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Net loss |
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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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— |
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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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) |
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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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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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— |
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— |
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— |
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— |
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Cash dividends declared 1 |
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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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— |
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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, June 30, 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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) |
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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 CONSOLIDATE D CASH FLOWS (UNAUDITED)
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Six Months Ended June 30, |
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|
|
2023 |
|
|
2022 |
|
||
|
|
|
(In millions of dollars) |
|
|||||
|
Cash flows from operating activities 1 : |
|
|
|
|
|
|
||
|
Net income (loss) |
|
$ |
|
|
|
$ |
(
|
) |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
||
|
Depreciation of property, plant and equipment |
|
|
|
|
|
|
|
|
|
Amortization of definite-lived intangible assets |
|
|
|
|
|
|
|
|
|
Amortization of debt premium and debt issuance costs |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
(
|
) |
|
Non-cash equity compensation |
|
|
|
|
|
|
|
|
|
Non-cash asset impairment charge |
|
|
— |
|
|
|
|
|
|
(Gain) loss on disposition of property, plant and equipment |
|
|
(
|
) |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
|
Trade and other receivables |
|
|
(
|
) |
|
|
(
|
) |
|
Contract assets |
|
|
|
|
|
|
(
|
) |
|
Inventories |
|
|
|
|
|
|
(
|
) |
|
Prepaid expenses and other current assets |
|
|
(
|
) |
|
|
(
|
) |
|
Accounts payable |
|
|
(
|
) |
|
|
|
|
|
Accrued liabilities |
|
|
|
|
|
|
|
|
|
Long-term assets and liabilities, net |
|
|
|
|
|
|
(
|
) |
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities 1 : |
|
|
|
|
|
|
||
|
Capital expenditures |
|
|
(
|
) |
|
|
(
|
) |
|
Purchase of equity securities |
|
|
(
|
) |
|
|
(
|
) |
|
Proceeds from disposition of property, plant and equipment |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(
|
) |
|
|
(
|
) |
|
Cash flows from financing activities 1 : |
|
|
|
|
|
|
||
|
Borrowings under the Revolving Credit Facility |
|
|
|
|
|
|
— |
|
|
Repayment of borrowings under the Revolving Credit Facility |
|
|
(
|
) |
|
|
— |
|
|
Cash paid for debt issuance costs |
|
|
— |
|
|
|
(
|
) |
|
Repayment of finance lease |
|
|
(
|
) |
|
|
(
|
) |
|
Cancellation of shares to cover employees' tax withholdings upon
|
|
|
(
|
) |
|
|
(
|
) |
|
Cash dividends and dividend equivalents paid |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash used in financing activities |
|
|
(
|
) |
|
|
(
|
) |
|
Net decrease in cash, cash equivalents and restricted cash during the period |
|
|
(
|
) |
|
|
(
|
) |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
|
$ |
|
|
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
|
|
8 |
||
|
|
9 |
||
|
|
9 |
||
|
|
11 |
||
|
|
Derivatives, Hedging Programs and Other Financial Instruments |
12 |
|
|
|
15 |
||
|
|
16 |
||
|
|
18 |
||
|
Note 9 |
|
18 |
|
|
|
19 |
||
|
|
19 |
||
|
|
20 |
||
|
|
21 |
||
|
|
21 |
7
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. Basis of Presentation
This Quarterly Report on Form 10-Q (this “Report”) should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Unless the context otherwise requires, references in these notes to interim consolidated financial statements - unaudited to “Kaiser Aluminum Corporation,” “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 United States generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“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 2023 fiscal year. The financial information as of December 31, 2022 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, 2022 .
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.
Favorable Commodity Contract Intangible Asset Impairment.
During the quarter ended June 30, 2022, we impaired the remaining book value of our favorable commodity contract intangible asset as the supplier associated with the intangible asset ceased all deliveries of magnesium to us and provided no indication of when or if deliveries would resume over the remaining six months of the contract. The impairment charge of $
8
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
2. Supplemental Balan ce Sheet Information
|
|
|
As of June 30, 2023 |
|
|
As of December 31, 2022 |
|
||
|
|
|
(In millions of dollars) |
|
|||||
|
Trade Receivables, Net |
|
|
|
|
|
|
||
|
Billed trade receivables |
|
$ |
|
|
|
$ |
|
|
|
Allowance for doubtful receivables |
|
|
(
|
) |
|
|
(
|
) |
|
Trade receivables, net |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Inventories 1 |
|
|
|
|
|
|
||
|
Finished products |
|
$ |
|
|
|
$ |
|
|
|
Work-in-process |
|
|
|
|
|
|
|
|
|
Raw materials |
|
|
|
|
|
|
|
|
|
Operating supplies |
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Property, Plant and Equipment, Net |
|
|
|
|
|
|
||
|
Land and improvements |
|
$ |
|
|
|
$ |
|
|
|
Buildings and leasehold improvements |
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
|
|
|
|
|
|
|
|
Construction in progress |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross |
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization |
|
|
(
|
) |
|
|
(
|
) |
|
Assets held for sale |
|
|
— |
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Other Accrued Liabilities |
|
|
|
|
|
|
||
|
Uncleared cash disbursements |
|
$ |
|
|
|
$ |
|
|
|
Accrued income taxes and other taxes payable |
|
|
|
|
|
|
|
|
|
Accrued interest |
|
|
|
|
|
|
|
|
|
Short-term environmental accrual – Note 7 |
|
|
|
|
|
|
|
|
|
Short-term operating lease liabilities |
|
|
|
|
|
|
|
|
|
Short-term 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 |
|
$ |
|
|
|
$ |
|
|
3. Employe e 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 June 30, 2023 and December 31, 2022 was
$
9
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
Short-Term Incentive Plans (“STI Plans”)
As of June 30, 2023, we had a liability of
$
Postretirement Benefit Plans
The following table presents the total expense (benefit) related to all postretirement benefit plans (in millions of dollars):
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Defined contribution plans 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Deferred compensation plan 2 |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
Multiemployer pension plans 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost relating to defined benefit plans 2,3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Warrick Pension Amendment.
During the quarter ended June 30, 2023, we reached a new four-year collective bargaining agreement with the United Steelworkers Local 104. In connection with the agreement, we amended the Kaiser Aluminum Warrick pension plan (“Warrick Pension Plan”) to increase certain pension benefits for covered plan participants, which resulted in an interim remeasurement of the Warrick Pension Plan as of April 30, 2023. The remeasurement increased our projected benefit obligation by $
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 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 relating to the defined benefit plans (in millions of dollars):
|
|
|
Pension Plans |
|
|
OPEB |
|
|
Salaried VEBA |
|
|||||||||||||||
|
|
|
Quarter Ended June 30, |
|
|
Quarter Ended June 30, |
|
|
Quarter Ended June 30, |
|
|||||||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
(
|
) |
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
Amortization of prior service cost 1 |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss (gain) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total net periodic postretirement benefit cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Pension Plans |
|
|
OPEB |
|
|
Salaried VEBA |
|
|||||||||||||||
|
|
|
Six Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|||||||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
(
|
) |
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
Amortization of prior service cost 1 |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss (gain) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total net periodic postretirement benefit cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
4. Restru cturing
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”). As of June 30, 2023, the total amount expected to be incurred in connection with the 2022 Restructuring Plan is approximately
$
The following table summarizes activity relating to restructuring plan liabilities (in millions of dollars):
|
BALANCE, December 31, 2022 |
|
$ |
|
|
|
|
Restructuring costs |
|
|
|
|
|
|
Costs paid or otherwise settled |
|
|
(
|
) |
|
|
BALANCE, March 31, 2023 |
|
|
|
|
|
|
Restructuring costs |
|
|
|
|
|
|
Costs paid or otherwise settled |
|
|
(
|
) |
|
|
BALANCE, June 30, 2023 |
|
$ |
|
|
|
11
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
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 employees selected by the chief executive officer. The Hedging Committee meets regularly to review commodity price exposure, 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
$
Additionally, 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 in addition to zinc and copper (“Alloying Metals”) used in our fabrication operations and 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.
12
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
Alloying Metals Hedges . We are exposed to 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 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 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.
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 (expense) income, net, respectively.
Notional Amount of Derivative Contracts
The following table summarizes our derivative positions at June 30, 2023:
|
Aluminum |
|
Maturity Period |
|
Notional Amount of Contracts (mmlbs) |
|
|
|
Fixed price purchase contracts |
|
through |
|
|
|
|
|
Fixed price sale contracts |
|
through |
|
|
|
|
|
Midwest premium purchase contracts 1 |
|
through |
|
|
|
|
|
Midwest premium sale contracts 1 |
|
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 |
|
|
|
|
|
Euro |
|
Maturity Period |
|
Notional Amount of Contracts (EUR) |
|
|
|
Fixed price forward contracts |
|
through |
|
|
|
|
|
British Pounds |
|
Maturity Period |
|
Notional Amount of Contracts (GBP) |
|
|
|
Fixed price forward purchase contract |
|
through |
|
|
|
|
|
Fixed price forward sale contract |
|
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 (Loss) in (in millions of dollars):
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Total of income and expense line items presented in our Statements of Consolidated Income (Loss) in which the effects of hedges are recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flow hedges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Loss (gain) recognized in our Statements of Consolidated Income (Loss) related to cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Aluminum |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
Natural gas |
|
|
|
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Electricity |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Total loss (gain) recognized in our Statements of Consolidated Income (Loss) related to cash flow hedges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Loss (gain) recognized in our Statements of Consolidated Income (Loss) related to non-designated hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Alloying Metals – Realized loss (gain) |
|
$ |
— |
|
|
$ |
(
|
) |
|
$ |
— |
|
|
$ |
(
|
) |
|
Alloying Metals – Unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss recognized in our Statements of Consolidated Income (Loss) related to non-designated hedges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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 June 30, 2023 |
|
|
As of December 31, 2022 |
|
||||||||||||||||||
|
|
|
Assets |
|
|
Liabilities |
|
|
Net Amount |
|
|
Assets |
|
|
Liabilities |
|
|
Net Amount |
|
||||||
|
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Aluminum – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Fixed price purchase contracts |
|
$ |
— |
|
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
(
|
) |
|
Fixed price sale contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Midwest premium purchase contracts |
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
Midwest premium sale contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Natural gas – Fixed price purchase contracts |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Foreign currency – Fixed price forward contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total cash flow hedges |
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Non-Designated Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Alloying Metals – Fixed price purchase contracts |
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total non-designated hedges |
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
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 June 30, 2023 |
|
|
As of December 31, 2022 |
|
||
|
Derivative assets: |
|
|
|
|
|
|
||
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
$ |
|
|
|
$ |
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
||
|
|
|
$ |
(
|
) |
|
$ |
(
|
) |
|
|
|
|
(
|
) |
|
|
— |
|
|
Total 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 Cr edit Facility
Senior Notes
During the years ended December 31, 2021 and December 31, 2019, we issued fixed rate unsecured notes with varying maturity dates (“Senior Notes”). The stated interest rates and aggregate principal amounts of our Senior Notes were: (i)
|
|
|
|
|
|
|
Outstanding (in millions of dollars) |
|
|||||||
|
|
|
Issuance Date |
|
Maturity |
|
Effective Interest Rate |
|
As of June 30, 2023 |
|
|
As of December 31, 2022 |
|
||
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2023 |
|
|
As of December 31, 2022 |
|
||
|
4.50% Senior Notes |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
4.625% Senior Notes |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Revolving Credit Facility
In October 2019, we entered into a revolving credit facility with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto, which was subsequently amended three times in March 2021, December 2021 and April 2022 (as amended, the “Revolving Credit Facility”). The Revolving Credit Facility contains a maximum commitment amount of $
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 June 30, 2023 (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 i
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Senior Notes, including debt issuance cost amortization |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revolving Credit Facility, including commitment fees and finance cost amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense capitalized as construction in progress |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Total interest expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
7. Commitments a nd 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. See below for our discussion of the status of these environmental contingencies. 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 Spokane, Washington (“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 groundwater 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. As the long-term success of the new methodology 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, Ohio (“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 are currently preparing the required feasibility study, which we expect to submit to the OEPA for review during the quarter ending December 31, 2023. The actual and final remediation cost estimates will not be fully determinable until the feasibility study has been accepted by 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 June 30, 2023, 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.
17
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
8. Accumulated Other Comprehensive Loss
The following table presents the changes in the accumulated balances for each component of AOCI (in millions of dollars):
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Defined Benefit Plans: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Beginning balance |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
Actuarial (loss) gain arising during the period |
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
Less: income tax benefit |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Net actuarial (loss) gain arising during the period |
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
Prior service cost arising during the period |
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
Less: income tax benefit |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Net prior service cost arising during the period |
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
Amortization of net actuarial (gain) loss 1 |
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
Amortization of prior service cost 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: income tax expense 2 |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Net amortization reclassified from AOCI to Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (gain) upon settlement of cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
Less: income tax (expense) benefit 2 |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
|
|
|
Net loss (gain) reclassified from AOCI to Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
Other comprehensive loss, net of tax |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Ending balance 3 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total AOCI ending balance |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
9. Oth er (Expense) Income, Net
The following table presents the components of Other (expense) income, net (in millions of dollars):
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Interest income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net periodic postretirement benefit cost |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Unrealized gain (loss) on equity securities |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
(Loss) gain on disposition of property, plant and equipment |
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
All other, net |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Other (expense) income, net |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
18
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
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 quarter and six months ended June 30, 2023, we sold trade accounts receivable totaling
$
10. Income Tax Matters
The following table presents the income tax (provision) benefit by region (in millions of dollars):
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Domestic |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Foreign |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Total |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
The income tax (provision) benefit for the quarters ended June 30, 2023 and June 30, 2022
was $(
There was no material difference between the effective tax rate and the projected blended statutory tax rate for the quarter ended June 30, 2022.
The income tax (provision) benefit for the six months ended June 30, 2023 and June 30, 2022
was $(
The difference between the effective tax rate and the projected blended statutory tax rate for the six months ended June 30, 2022 was primarily due to: (i) a decrease of
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.
Basic net income (loss) per share is computed by dividing distributed and undistributed net income (loss) allocable to common shares by the weighted-average number of common shares outstanding during the applicable period. The basic weighted-average number of common shares outstanding during the period excludes non-vested share-based payment awards. Diluted net income (loss)
19
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
per share was calculated under the treasury stock method for the quarters and six months ended June 30, 2023 and June 30, 2022, which in both periods was more dilutive than the two-class method.
The following table sets forth the computation of basic and diluted net income (loss) per share (in millions of dollars, except share and per share amounts):
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
Denominator – Weighted-average common shares outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: dilutive effect of non-vested common shares, restricted stock units and performance shares 1 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) per common share, Basic: |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
Net income (loss) per common share, Diluted: |
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
12. Supplemental Ca sh Flow Information
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2023 |
|
|
2022 |
|
||
|
|
|
(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 June 30, |
|
|||||
|
|
|
2023 |
|
|
2022 |
|
||
|
|
|
(In millions of dollars) |
|
|||||
|
Components of cash, cash equivalents and restricted cash: |
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Restricted cash included in Other assets 1 |
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash presented on our Statements of Consolidated Cash Flows |
|
$ |
|
|
|
$ |
|
|
20
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
13. Business, Product and Ge ographical Area Information
Our primary line of business is the production of semi-fabricated specialty aluminum mill products, such as bare and coated coils, plate and sheet and extruded and drawn products, for the following end market applications: (i) aerospace and high strength (“Aero/HS products”); (ii) beverage and food packaging products (“Packaging”); (iii) general engineering (“GE products”); (iv) automotive (“Automotive Extrusions”); and (v) other industrial (“Other products”). We operate
The following table presents Net sales by end market applications and by timing of control transfer (in millions of dollars):
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
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 June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Income taxes paid: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Domestic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes paid |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
14. Subsequ ent Events
Dividend Declaration.
On
21
Item 2. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Report”) 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, 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, and other conditions that impact demand drivers in the aerospace/high strength, aluminum beverage and food packaging, general engineering, automotive 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 changing economic conditions, volatile commodity costs and inflation; (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) stakeholder’s, including regulator’s, views regarding our environmental, social and governance 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, 2022, 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, 2022.
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 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 earnings before interest, taxes, depreciation and amortization (“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
22
alloys at prices that fluctuate on a monthly basis, and our pricing policies generally allow us to pass the underlying index cost of 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 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 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) aerospace and high strength (“Aero/HS products”); (ii) aluminum beverage and food packaging (“Packaging”); (iii) general engineering (“GE products”); (iv) automotive (“Automotive Extrusions”); and (v) other industrial (“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 our rolling mill in Spokane, Washington (“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 our rolling mill in Warrick County, Indiana (“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 (“CNC”) 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 six months ended June 30, 2023 totaled $814.1 million on 314.1 million pounds shipped from our facilities. We employed approximately 4,000 people at June 30, 2023.
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
23
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.
Highlights of the quarter ended June 30, 2023 include:
Results of Operations
Consolidated Results of Operations
Net Sales. Net sales totaled $814.1 million and $954.2 million for the quarters ended June 30, 2023 and June 30, 2022, respectively, reflecting a 21.0 million pound decrease in shipment volume and a $0.26/lb (9%) decrease in average realized sales price per pound. The shipment volume decrease reflected: (i) a 23.7 million pound (30%) decrease in GE products primarily due to destocking at service centers for our plate and extruded rod and bar products; (ii) a 16.5 million pound (9%) decrease in Packaging primarily due to destocking in the beverage can markets; and (iii) a 0.2 million pound (7%) decrease in Other products, partially offset by: (i) a 15.6 million pound (32%) increase in Aero/HS products reflecting strengthening demand for commercial aerospace applications and (ii) a 3.8 million pound (16%) increase in Automotive Extrusions. The average realized sales price per pound reflected a $0.42/lb (23%) decrease in the average Hedged Cost of Alloyed Metal price per pound and a $0.16/lb (15%) increase in Conversion Revenue per pound reflecting higher pricing. For further details, see the table below in “Selected Operational and Financial Information.”
Net sales totaled $1,621.7 million and $1,903.0 million for the six months ended June 30, 2023 and June 30, 2022, respectively, reflecting a 57.1 million pound (9%) decrease in shipment volume and a $0.20/lb (7%) decrease in average realized sales price per pound. The shipment volume decrease reflected: (i) a 54.4 million pound (32%) decrease in GE products reflecting destocking at service centers for our plate and extruded rod and bar products; (ii) a 37.5 million pound (11%) decrease in Packaging reflecting destocking in the beverage can markets; and (iii) a 1.7 million pound (23%) decrease in Other products, partially offset by: (i) a 28.3 million pound (30%) increase in Aero/HS products reflecting strengthening demand for commercial aerospace applications and (ii) an 8.2 million pound (17%) increase in Automotive Extrusions reflecting increased North America automotive build rates. The average realized sales price per pound reflected a $0.37/lb (21%) decrease in average Hedged Cost of Alloyed Metal price per pound and a $0.17/lb (16%) increase in Conversion Revenue per pound reflecting higher pricing and surcharges to offset higher inflationary and commodity related costs. For further details, see the table below in “Selected Operational and Financial Information.”
Cost of Products Sold, Excluding Depreciation and Amortization (“Cost of products sold”). Cost of products sold for the quarter ended June 30, 2023 totaled $718.4 million, or 88% of Net sales, compared to $898.4 million, or 94% of Net sales, for the quarter ended June 30, 2022. The decrease of $180.0 million reflected a $167.2 million decrease in Hedged Cost of Alloyed Metal and a $12.8 million decrease in net manufacturing conversion and other costs. Of the $167.2 million decrease in Hedged Cost of Alloyed Metal, $129.5 million was due to lower hedged metal prices and $37.7 million was due to lower shipment volume (see above in our “Net Sales” discussion for further details). The $12.8 million decrease in net manufacturing conversion and other costs reflected: (i) a $9.3 million decrease due to lower shipments; (ii) a $4.0 million decrease in major maintenance costs; (iii) a $2.2 million decrease in energy costs; and (iv) a $1.2 million decrease in other costs, partially offset by a $4.1 million increase in manufacturing costs due to higher labor and material cost. For a further discussion of the comparative results of operations for the quarters ended June 30, 2023 and June 30, 2022, see below in “Selected Operational and Financial Information.”
Cost of products sold, excluding depreciation and amortization and other items for the six months ended June 30, 2023 totaled $1,449.5 million or 89% of Net sales, compared to $1,764.3 million, or 93% of Net sales, for the six months ended June 30, 2022. The decrease of $314.8 million reflected a $323.8 million decrease in Hedged Cost of Alloyed Metal, partially offset by a $9.1 million increase in net manufacturing conversion and other costs. Of the $323.8 million decrease in Hedged Cost of Alloyed Metal, $221.9 million was due to lower hedged metal prices and $101.9 million was due to lower shipment volume, as discussed above in “Net Sales.” The $9.1 million increase in net manufacturing conversion and other costs reflected: (i) a $26.1 million increase in manufacturing costs due to higher labor and material cost; (ii) a $4.9 million increase in the cost of coatings; (iii) a $3.2 million increase of major maintenance costs; and (iv) a $1.2 million increase in energy costs, partially offset by: (i) a $17.3 million decrease due to lower shipments and (ii) a $9.0 million decrease in other costs primarily due to lower freight costs. For a further discussion of the comparative results of operations for the six months ended June 30, 2023 and June 30, 2022, see below in “Selected Operational and Financial Information.”
24
Selling, General, Administrative, Research and Development ( “ SG&A and R&D ” ). SG&A and R&D expense totaled $32.2 million and $27.5 million for the quarters ended June 30, 2023 and June 30, 2022, respectively, and $61.9 million and $57.7 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The increase during the quarter ended June 30, 2023 was primarily due to a $4.4 million increase in salaries, benefits and incentive compensation and a $1.3 million increase in legal fees, partially offset by a $1.6 million decrease in consulting and outsourced services. The increase for the six months ended June 30, 2023 compared with June 30, 2022 was primarily due to a $3.1 million increase in salaries, benefits and incentive compensation, a $2.4 million increase in legal fees and other miscellaneous expenses, partially offset by a $3.3 million decrease in consulting and outsourced services.
Restructuring Costs. Restructuring costs of $1.2 million and $2.6 million for the quarter and six months ended June 30, 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 charges, net, of $3.2 million for the quarter and six months ended June 30, 2022 was primarily due to the impairment of our favorable commodity contract intangible asset. See Note 1 of Notes to Interim Consolidated Financial Statements included in this Report for further details.
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 and six months ended June 30, 2023 and June 30, 2022 and interest expense capitalized as part of construction in progress.
Other Expense (Income), Net. See Note 9 of Notes to Interim Consolidated Financial Statements included in this Report for details.
Income Tax (Provision) Benefit. 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.
The table below provides selected operational and financial information (in millions of dollars):
|
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Net income (loss) |
|
$ |
18.3 |
|
|
$ |
(13.8 |
) |
|
$ |
34.2 |
|
|
$ |
(5.7 |
) |
|
Interest expense |
|
|
12.1 |
|
|
|
12.2 |
|
|
|
24.0 |
|
|
|
24.4 |
|
|
Other expense (income), net |
|
|
2.5 |
|
|
|
3.7 |
|
|
|
(11.1 |
) |
|
|
5.3 |
|
|
Income tax provision (benefit) |
|
|
3.0 |
|
|
|
(4.1 |
) |
|
|
7.9 |
|
|
|
(0.8 |
) |
|
Depreciation and amortization |
|
|
26.4 |
|
|
|
27.1 |
|
|
|
52.7 |
|
|
|
54.6 |
|
|
Non-run-rate items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Restructuring cost |
|
|
1.2 |
|
|
|
— |
|
|
|
2.6 |
|
|
|
— |
|
|
Mark-to-market loss on derivative instruments 1 |
|
|
0.2 |
|
|
|
2.9 |
|
|
|
0.1 |
|
|
|
1.9 |
|
|
Non-cash asset impairment charge |
|
|
— |
|
|
|
3.2 |
|
|
|
— |
|
|
|
3.2 |
|
|
Environmental expenses 2 |
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.1 |
|
|
Acquisition costs (credits) 3 |
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
0.5 |
|
|
Total non-run-rate items |
|
|
1.4 |
|
|
|
6.1 |
|
|
|
2.7 |
|
|
|
5.7 |
|
|
Adjusted EBITDA |
|
$ |
63.7 |
|
|
$ |
31.2 |
|
|
$ |
110.4 |
|
|
$ |
83.5 |
|
25
Adjusted EBITDA for the quarter ended June 30, 2023 was $32.5 million higher than Adjusted EBITDA for the quarter ended June 30, 2022. Adjusted EBITDA for the quarter ended June 30, 2023 was impacted by: (i) improved pricing and mix, partially offset by higher metal input cost; (ii) a reduction in labor and material cost; (iii) a decrease in freight costs; (iv) a decrease in major maintenance, primarily due to timing; and (v) a decrease in energy costs, partially offset by an increase in overhead, benefit and incentive costs. See above in “Consolidated Results of Operations” for further details.
Adjusted EBITDA for the six months ended June 30, 2023 was $26.9 million higher than Adjusted EBITDA for the six months ended June 30, 2022. Adjusted EBITDA for the six months ended June 30, 2023 was impacted by: (i) improved pricing and mix, partially offset by higher metal input cost and (ii) a decrease in freight costs, partially offset by: (i) an increase in labor and material costs; (ii) an increase in overhead, benefit and incentive costs; (iii) an increase in major maintenance; and (iv) an increase in energy costs. See above in “Consolidated Results of Operations” for further details.
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 June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||||
|
Aero/HS Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Shipments (mmlbs) |
|
63.9 |
|
|
48.3 |
|
|
122.1 |
|
|
93.8 |
|
||||||||||||||||||||
|
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||||||
|
Net sales |
|
$ |
225.1 |
|
|
$ |
3.52 |
|
|
$ |
175.4 |
|
|
$ |
3.63 |
|
|
$ |
439.1 |
|
|
$ |
3.60 |
|
|
$ |
352.0 |
|
|
$ |
3.75 |
|
|
Less: Hedged Cost of Alloyed Metal |
|
|
(94.6 |
) |
|
|
(1.48 |
) |
|
|
(87.4 |
) |
|
|
(1.81 |
) |
|
|
(186.2 |
) |
|
|
(1.53 |
) |
|
|
(176.2 |
) |
|
|
(1.88 |
) |
|
Conversion Revenue |
|
$ |
130.5 |
|
|
$ |
2.04 |
|
|
$ |
88.0 |
|
|
$ |
1.82 |
|
|
$ |
252.9 |
|
|
$ |
2.07 |
|
|
$ |
175.8 |
|
|
$ |
1.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Shipments (mmlbs) |
|
163.3 |
|
|
179.8 |
|
|
317.0 |
|
|
354.5 |
|
||||||||||||||||||||
|
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||||||
|
Net sales |
|
$ |
354.7 |
|
|
$ |
2.17 |
|
|
$ |
450.7 |
|
|
$ |
2.51 |
|
|
$ |
708.9 |
|
|
$ |
2.24 |
|
|
$ |
898.7 |
|
|
$ |
2.54 |
|
|
Less: Hedged Cost of Alloyed Metal |
|
|
(221.0 |
) |
|
|
(1.35 |
) |
|
|
(304.6 |
) |
|
|
(1.70 |
) |
|
|
(442.0 |
) |
|
|
(1.40 |
) |
|
|
(607.6 |
) |
|
|
(1.72 |
) |
|
Conversion Revenue |
|
$ |
133.7 |
|
|
$ |
0.82 |
|
|
$ |
146.1 |
|
|
$ |
0.81 |
|
|
$ |
266.9 |
|
|
$ |
0.84 |
|
|
$ |
291.1 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
GE Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Shipments (mmlbs) |
|
56.3 |
|
|
80.0 |
|
|
113.2 |
|
|
167.6 |
|
||||||||||||||||||||
|
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||||||
|
Net sales |
|
$ |
159.4 |
|
|
$ |
2.83 |
|
|
$ |
247.7 |
|
|
$ |
3.10 |
|
|
$ |
321.5 |
|
|
$ |
2.84 |
|
|
$ |
498.9 |
|
|
$ |
2.98 |
|
|
Less: Hedged Cost of Alloyed Metal |
|
|
(78.2 |
) |
|
|
(1.39 |
) |
|
|
(158.2 |
) |
|
|
(1.98 |
) |
|
|
(160.4 |
) |
|
|
(1.42 |
) |
|
|
(313.0 |
) |
|
|
(1.87 |
) |
|
Conversion Revenue |
|
$ |
81.2 |
|
|
$ |
1.44 |
|
|
$ |
89.5 |
|
|
$ |
1.12 |
|
|
$ |
161.1 |
|
|
$ |
1.42 |
|
|
$ |
185.9 |
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Automotive Extrusions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Shipments (mmlbs) |
|
27.8 |
|
|
24.0 |
|
|
55.5 |
|
|
47.3 |
|
||||||||||||||||||||
|
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||||||
|
Net sales |
|
$ |
68.4 |
|
|
$ |
2.46 |
|
|
$ |
71.6 |
|
|
$ |
2.98 |
|
|
$ |
139.2 |
|
|
$ |
2.51 |
|
|
$ |
135.4 |
|
|
$ |
2.86 |
|
|
Less: Hedged Cost of Alloyed Metal |
|
|
(38.0 |
) |
|
|
(1.37 |
) |
|
|
(47.0 |
) |
|
|
(1.95 |
) |
|
|
(77.6 |
) |
|
|
(1.40 |
) |
|
|
(89.0 |
) |
|
|
(1.88 |
) |
|
Conversion Revenue |
|
$ |
30.4 |
|
|
$ |
1.09 |
|
|
$ |
24.6 |
|
|
$ |
1.03 |
|
|
$ |
61.6 |
|
|
$ |
1.11 |
|
|
$ |
46.4 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Other Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Shipments (mmlbs) |
|
2.8 |
|
|
3.0 |
|
|
5.6 |
|
|
7.3 |
|
||||||||||||||||||||
|
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||||||
|
Net sales |
|
$ |
6.5 |
|
|
$ |
2.32 |
|
|
$ |
8.8 |
|
|
$ |
2.93 |
|
|
$ |
13.0 |
|
|
$ |
2.32 |
|
|
$ |
18.0 |
|
|
$ |
2.47 |
|
|
Less: Hedged Cost of Alloyed Metal |
|
|
(3.8 |
) |
|
|
(1.36 |
) |
|
|
(5.6 |
) |
|
|
(1.86 |
) |
|
|
(7.7 |
) |
|
|
(1.37 |
) |
|
|
(11.9 |
) |
|
|
(1.63 |
) |
|
Conversion Revenue |
|
$ |
2.7 |
|
|
$ |
0.96 |
|
|
$ |
3.2 |
|
|
$ |
1.07 |
|
|
$ |
5.3 |
|
|
$ |
0.95 |
|
|
$ |
6.1 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Shipments (mmlbs) |
|
314.1 |
|
|
335.1 |
|
|
613.4 |
|
|
670.5 |
|
||||||||||||||||||||
|
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
|
$ |
|
|
$ / lb |
|
||||||||
|
Net sales |
|
$ |
814.1 |
|
|
$ |
2.59 |
|
|
$ |
954.2 |
|
|
$ |
2.85 |
|
|
$ |
1,621.7 |
|
|
$ |
2.64 |
|
|
$ |
1,903.0 |
|
|
$ |
2.84 |
|
|
Less: Hedged Cost of Alloyed Metal 1 |
|
|
(435.6 |
) |
|
|
(1.38 |
) |
|
|
(602.8 |
) |
|
|
(1.80 |
) |
|
|
(873.9 |
) |
|
|
(1.42 |
) |
|
|
(1,197.7 |
) |
|
|
(1.79 |
) |
|
Conversion Revenue |
|
$ |
378.5 |
|
|
$ |
1.21 |
|
|
$ |
351.4 |
|
|
$ |
1.05 |
|
|
$ |
747.8 |
|
|
$ |
1.22 |
|
|
$ |
705.3 |
|
|
$ |
1.05 |
|
26
Outlook
We remain well positioned in the current mixed demand environment as a key supplier in diverse end markets with multi-year contracts with strategic partners. We expect demand in commercial aerospace to continue to strengthen and approach pre-pandemic levels by the end of 2023, with business jet, defense and space all remaining strong. In Packaging, we expect continued destocking, albeit at a lesser rate due to contractual minimums in place with our customers. GE products demand is expected to decline due to destocking and the anticipated seasonal decline typical of the third quarter. In automotive, we expect the market to continue to recover into 2024.
As a result, we expect our consolidated Adjusted EBITDA and Adjusted EBITDA margin in the third quarter 2023 to be more in line with our adjusted first quarter 2023 results. We continue to believe our full year 2022 Adjusted EBITDA represented the trough and remain cautiously optimistic our full year 2023 consolidated Adjusted EBITDA and Adjusted EBITDA margin will improve as we pursue cost reductions in our operations, improve manufacturing efficiencies and continue commercial actions to improve pricing.
Liquidity and Capital Resources
Summary
The following table summarizes our liquidity (in millions of dollars):
|
|
|
As of June 30, 2023 |
|
|
As of December 31, 2022 |
|
||
|
Available cash and cash equivalents |
|
$ |
19.8 |
|
|
$ |
57.4 |
|
|
Borrowing availability under Revolving Credit Facility, net of letters of credit 1 |
|
|
537.7 |
|
|
|
557.8 |
|
|
Total liquidity |
|
$ |
557.5 |
|
|
$ |
615.2 |
|
We place our cash in bank deposits with stable, high credit quality financial institutions and, from time to time, highly liquid money market funds. For cash and cash equivalents, we are exposed to credit risk in the event of default by these financial institutions to the extent our deposit amounts exceed federally insured limits; however, we believe this risk to be remote.
See Note 12 of Notes to Interim Consolidated Financial Statements included in this Report for information regarding restricted cash at June 30, 2023.
We had $15.0 million in outstanding borrowings as of June 30, 2023 under our revolving credit facility with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto (“Revolving Credit Facility”), after repaying $195.0 million on total borrowings of $210.0 million incurred during the six months ended June 30, 2023 and no borrowings for the year ended December 31, 2022. 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.
27
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities (in millions of dollars):
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2023 |
|
|
2022 |
|
||
|
Total cash provided by (used in): |
|
|
|
|
|
|
||
|
Operating activities |
|
$ |
47.8 |
|
|
$ |
7.0 |
|
|
Investing activities |
|
$ |
(67.7 |
) |
|
$ |
(44.8 |
) |
|
Financing activities |
|
$ |
(13.0 |
) |
|
$ |
(29.8 |
) |
Cash provided by operating activities for the six months ended June 30, 2023 reflected results of business activity described above in our “Consolidated Results of Operations” discussion, as well as the following working capital changes: (i) a decrease in accounts payable of $56.0 million primarily due to a decrease in metal purchases and timing of payments; (ii) a decrease in inventory of $27.5 million due to improved inventory management; and (iii) an increase in trade and other receivables of $17.8 million primarily due to increased pricing and an increase in metal costs.
Cash provided by operating activities for the six months ended June 30, 2022 reflected results of business activity described above within “Consolidated Results of Operations,” as well as the following working capital changes: (i) an increase in inventory of $64.0 million due primarily to higher inventory pounds to satisfy increased demand, longer lead times, the planned multi-week outage at our Trentwood facility to refurbish our heavy gauge stretcher, as well as a higher per pound inventory cost; (ii) an increase in accounts payable of $61.8 million, the majority of which was driven by an increase in inventory as noted above; and (iii) an increase in contract assets of $30.7 million due primarily to the timing and mix of sales and an increase in metal price.
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 six months ended June 30, 2023 and June 30, 2022.
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 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 12 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.
At July 24, 2023, we had no outstanding borrowings under the Revolving Credit Facility.
28
See Note 9 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 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 June 30, 2023 constituted approximately 41% 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.
Debt
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, 2022 for mandatory principal and cash interest payments on the outstanding borrowings.
We do not believe that covenants in the indentures governing the 4.50% Senior Notes due 2031 (“4.50% Senior Notes”) and 4.625% Senior Notes due 2028 (“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 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 2023 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. 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, 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. 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 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.
29
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 June 30, 2023 and June 30, 2022, and declared subsequent to June 30, 2023.
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 June 30, 2023, $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: (i) repurchases of common stock during the quarters ended June 30, 2023 and June 30, 2022 and (ii) minimum statutory tax withholding obligations arising during the quarters ended June 30, 2023 and June 30, 2022 in connection with the vesting of non‑vested shares, restricted stock units and performance shares.
Environmental Commitments and Contingencies
See Note 7 of Notes to Interim Consolidated Financial Statements included in this Report for information regarding our environmental commitments and contingencies.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements
During the six months ended June 30, 2023, we granted additional stock-based awards to executive officers and certain key employees under our equity incentive plan. Additional awards are expected to be made in future years.
Except as otherwise disclosed in this Report, there has been no material change in our contractual obligations, commercial commitments or off-balance sheet arrangements other than in the ordinary course of business since December 31, 2022.
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, 2022. 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, 2022.
There have been no material changes in our critical accounting estimates and policies since December 31, 2022.
New Accounting Pronouncements
There have been no new accounting pronouncements identified during the quarter ended June 30, 2023.
30
Available Information
Our website is located at www.kaiseraluminum.com . The website includes a section for investor relations under which we provide notifications of news or announcements regarding our financial performance, including Securities and Exchange Commission (“SEC”) filings, investor events and press and earnings releases. In addition, all Kaiser Aluminum Corporation filings submitted to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements for our annual meeting of stockholders, as well as other Kaiser Aluminum Corporation reports and statements, are available on the SEC’s web site at www.sec.gov . Such filings are also available for download free of charge on our website. In addition, we provide and archive on our website webcasts of our quarterly earnings calls and certain events in which management participates or hosts with members of the investment community and related investor presentations. The contents of the website are not intended to be incorporated by reference into this Report or any other report or document filed by us, and any reference to the websites are intended to be inactive textual references only.
Item 3. Quantitative and Qualitat ive 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 six months ended June 30, 2023 and June 30, 2022, settlements of derivative contracts were for 106.7 million pounds and 137.0 million pounds, respectively, of hedged shipments sold on pricing terms that created aluminum price risk for us. At June 30, 2023, we had derivative contracts with respect to approximately 53.8 million pounds and 16.5 million pounds to hedge sales to be made in the remainder of 2023 and 2024, 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 London Metal Exchange market price of aluminum as of June 30, 2023 and December 31, 2022, with all other variables held constant, would have resulted in an unrealized mark-to-market loss of $7.0 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 June 30, 2023 and December 31, 2022, with all other variables held constant, would have resulted in an unrealized mark-to-market loss of $2.0 million and $3.2 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 June 30, 2023, we had forward swap contracts with settlement dates designed to align with the timing of scheduled purchases of zinc and copper (“Alloying Metals”) by our manufacturing facilities. We estimate that a $0.10/lb decrease in the market price of Alloying Metals as of June 30, 2023 and December 31, 2022, with all other variables held constant, would have resulted in an unrealized mark‑to‑market loss of $0.2 million and $0.1 million, respectively, with corresponding changes to the net fair value of our Alloying Metals 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 physical delivery commitments with firm prices with third parties to mitigate our risk from fluctuations in natural gas and electricity prices. We estimate that a $1.00/mmbtu decrease in natural gas prices would have resulted in an unrealized mark-to-market loss of $3.4 million and $3.5 million as of June 30, 2023 and December 31, 2022, respectively, with corresponding changes to the net fair value of our natural gas derivative positions. We had no outstanding electricity derivative positions as of June 30, 2023 and December 31, 2022.
31
Foreign Currency
As of June 30, 2023, we hedged certain lease transactions and equipment purchases denominated in euros and British pounds using forward swap contracts with settlement dates through June 2024. 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 $0.6 million and $0.1 million as of June 30, 2023 and December 31, 2022, respectively, 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 June 30, 2023 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 six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTH ER 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, 2022 for information concerning material legal proceedings with respect to the Company. There have been no material developments since December 31, 2022.
Item 1A. Ri sk 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, 2022 for information concerning risk factors. There have been no material changes in risk factors since December 31, 2022.
Item 2. Unregistered Sales of Equi ty Securities and Use of Proceeds
The following table provides information regarding our repurchases of our common shares during the quarter ended June 30, 2023:
|
|
|
Equity Incentive Plan |
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|
Stock Repurchase Plan |
|
||||||||||||||
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Total
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|
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Average
|
|
|
Total
|
|
|
Average
|
|
|
Maximum
|
|
|||||
|
April 1, 2023 - April 30, 2023 |
|
|
1,446 |
|
|
$ |
74.63 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
93.1 |
|
|
May 1, 2023 - May 31, 2023 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
93.1 |
|
|
June 1, 2023 - June 30, 2023 |
|
|
4,590 |
|
|
|
65.33 |
|
|
|
— |
|
|
|
— |
|
|
|
93.1 |
|
|
Total |
|
|
6,036 |
|
|
$ |
67.56 |
|
|
|
— |
|
|
$ |
— |
|
|
n/a |
|
|
Item 3. Defaults Upo n Senior Securities
None.
Item 4. Mine Saf ety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
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Exhibit |
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Provided |
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Incorporated by Reference |
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No. |
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Exhibit Description |
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Herewith |
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Form |
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File Number |
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Exhibit |
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Filing Date |
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31.1 |
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Certification of Keith A. Harvey pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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X |
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31.2 |
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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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101.CAL |
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Inline XBRL Taxonomy Extension Calculation |
|
X |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition |
|
X |
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101.LAB |
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Inline XBRL Taxonomy Extension Label |
|
X |
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|
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101.PRE |
|
Inline XBRL Taxonomy Extension Presentation |
|
X |
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104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
X |
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34
SIGNA TURES
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 |
|
|
Vijai Narayan |
|
|
Vice President and Chief Accounting Officer (Principal Accounting Officer) |
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Date: July 27, 2023
35