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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-25 · 137 added, 125 removed, 233 unchanged (53% of the section changed)

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New Accounting Pronouncements.

Our MD&A should be read in conjunction with the consolidated financial statements and related notes included in Item 8.

Our MD&A should be read in conjunction with our consolidated financial statements and related notes included in Item 8.

”Financial Statements and Supplementary Data” of this Report.

For detailed discussion of items impacting the year ended December 31, 2017 , as well as a year-to-year comparison of our financial position and results of operations for the years ended December 31, 2018 and December 31, 2017 , refer to Part II, Item 7.

"Management's Discussion and Analysis" of our Annual Report on Form 10-K for the year ended December 31, 2018 , filed with the SEC on February 22, 2019.

For a detailed discussion of items impacting the year ended December 31, 2018, as well as a year-to-year comparison of our financial position and results of operations for the years ended December 31, 2019 and December 31, 2018, refer to Part II, Item 7.

“Management’s Discussion and Analysis” of our Annual Report on Form 10-K for the years ended December 31, 2018 and 2019, respectively, and filed with the Securities and Exchange Commission (“SEC”) on February 22, 2019 and February 25, 2020, respectively.

This information contains certain non-GAAP financial measures.

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For a reconciliation of Adjusted EBITDA to Net income, see “Results of Operations - Selected Operational and Financial Information ” below.

Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP measures are not provided because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted or provided without unreasonable effort.

Our pricing policies and hedging program are intended to significantly reduce or eliminate the impact on our profitability of fluctuations in underlying metal price so that our earnings are predominantly associated with the conversion of aluminum to semi‑fabricated mill products.

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Management Review of 2020 and Outlook for the Future

For the full year 2019, results were driven by increased aerospace and high strength products ("Aero/HS products") shipments and strong value added pricing, partially offset by lower general engineering ("GE products") and automotive ("Automotive Extrusions") shipments.

Strong aerospace demand was driven by growing military airframe builds and restocking in the commercial aerospace supply chain.

The strong demand provided a favorable environment for non-contract pricing on our Aero/HS products and GE products.

Results were negatively impacted by heat treat plate capacity constraints at our Spokane, Washington ("Trentwood") facility due to planned and unplanned downtime during the first half of 2019.

Lower shipments of our GE products resulted primarily from allocating a portion of our heat treat plate capacity to meet the strong aerospace demand during the year.

In addition, demand for general engineering and industrial applications began to slow in the second half of 2019, and supply chain destocking resulted in additional pressure on demand for our products.

Automotive Extrusions shipments reflected lower build rates, a significant number of automotive model changeovers and new program delays, in addition to the impact of the General Motors strike in the latter part of 2019.

Adjusted EBITDA for the full year 2019 reflected an approximately $15.0 million impact related to the Trentwood downtime, $5.0 million related to the General Motor's strike, and other costs and inefficiencies due to the transition of a number of automotive extrusion programs to new vehicle platforms, as previously noted.

Non-recurring charges of $20.3 million associated with refinancing our $375.0 million, 5.875% senior notes and a non-cash goodwill impairment of $25.2 million related to the 2018 acquisition of Imperial Machine & Tool Co., were reflected in our reported Net income.

The goodwill impairment was driven by a change in valuation of the additive manufacturing business which was determined to have a longer term horizon for development and acceptance than anticipated at the time of acquisition.

We also proactively took several actions to enhance our financial and operational position during the year.

Capitalizing on attractive credit markets, we successfully completed two new debt financings that increased liquidity.

This enhanced financial flexibility will support our strategic investment initiatives, ensuring our continued financial strength throughout the business and economic cycles.

In addition, we recently finalized a new labor agreement for our two largest facilities in Trentwood and Newark, Ohio ("Newark") that extends through 2025.

Our continued confidence in the long-term outlook for our business is reflected in our decision to increase our quarterly dividend by 12% to $0.67 per share, up from the 9% increase in early 2019, marking the ninth consecutive year we have increased the quarterly dividend.

Looking forward, we expect that the impact of the Boeing 737 MAX situation on our Aero/HS products shipments will be offset by higher GE products and Automotive Extrusions shipments than in 2019, resulting in a low-single-digit year-over-year increase in both total shipments and VAR.

With a market environment continuing to support strong value added pricing and with expected efficiency gains in both our automotive operations and at our Trentwood facility, we expect to achieve an EBITDA margin (Adjusted EBITDA as a percentage of VAR) above 26% for the full year.

Our Aero/HS products order book for 2020 is strengthened by increased defense spending and demand for the F35 Joint Strike Fighter, the F/A-18 Super Hornet, and other military applications.

For the full year 2020, we expect a single-digit reduction in Aero/HS products shipments and VAR compared to the full year 2019.

We also anticipate North American

automotive build rates in 2020 to be similar to 2019 and expect double-digit year-over-year growth in our Automotive Extrusions shipments as new programs continue to come on stream.

GE products demand is expected to be driven by strong semi-conductor demand and relief from the supply chain destocking that suppressed demand in the second half of 2019.

Our shipments of non-core applications are expected to decline significantly in 2020 as capacity is allocated to more strategic applications.

Commencing in 2020, we will launch a $375.0 million, multi-year expansion and operational security investment project at our Trentwood facility.

The Trentwood facility has consistently operated at capacity since 2004 and we expect this to continue in 2020.

While the 737 MAX situation has short-term demand implications, we expect that the result will be pent-up long-term demand for commercial aerospace applications in addition to growing long-term demand for our heat treat plate products.

The long-term fundamentals for strong secular growth in aerospace applications remain intact and the strategic investment and expansion project will further position us to capitalize on demand growth throughout the next decade and beyond.

The initial project at our Trentwood facility is a new $145.0 million heavy gauge plate stretcher that will relieve the load on our existing plate stretcher, which has operated at far greater production rates than anticipated when it was installed in 2008.

The new stretcher will provide redundancy, efficiency and operational security for a critical operation in our process flow.

Timing of other investment modules of the $375.0 million project will depend upon market conditions, although we currently expect to complete the full expansion project by 2025.

Expected benefits include an increase in heat treat plate production capacity of approximately 25% in addition to enhanced quality, and cost and inventory efficiency.

During 2020, we demonstrated solid execution under very challenging business conditions, as we navigated the significant decline in commercial aerospace demand during the second half of the year while managing strong demand for our general engineering (“GE products”) and automotive (“Automotive Extrusions”) end market applications and defense related applications.

For the full year 2020 compared to our 2019 results , Net sales of $1,172.7 million decreased approximately 23% and VAR of $697.1 million declined approximately 19% , reflect ing a strong quarter ended March 31, 2020 , foll owed by significant COVID-19 pandemic related disruptions to our operations and end markets during the remainder of the year.

Despite the decline in Net sales and VAR, we reported full year Net income of $28.8 million, Adjusted EBITDA of $153.8 million and an EBITDA margin (Adjusted EBITDA as a percentage of VAR ) at 22% .

Our results reflect ed our ability to quickly flex costs and operating levels in response to rapidly changing business conditions.

Demand for our aerospace and high strength end market applications (“Aero/HS products”) declined sharply from 2019 levels, reflecting the COVID-19 pandemic impact on commercial airline travel, delays in recertification of the Boeing 737 MAX and destocking within the supply chain.

While commercial aerospace demand fell sharply in the second half of 2020, we experienced strong demand throughout the year for our defense related applications, specifically from the F-35 Joint Strike Fighter program and other legacy military aircraft programs.

Automotive Extrusions demand regained strength following significant but temporary COVID-19 pandemic related supply chain shutdowns in the quarter ended June 30, 2020.

Planned program launches for multiple new platforms ramped up during the second half of 2020 and new programs were awarded during the year reflecting the continued trend for aluminum content growth.

Demand for our GE products reflected steady underlying demand driven in part by strength in semi‑conductor and automotive applications, restocking in the supply chain and strong customer preference for KaiserSelect® plate.

For the full year 2021, we anticipate total VAR to be up 5% to 10% year-over-year and an EBITDA margin comparable to 2020 driven by strong growth in Automotive Extrusions, defense applications and GE products.

We anticipate VAR for our Aero/HS products to be down 5% to 8% year-over-year on slightly lower shipments compared to 2020, which reflected strong demand for our commercial aerospace applications during the first half of 2020.

Commercial aerospace demand continues to reflect weak airline travel impacted by the COVID-19 pandemic and destocking in the supply chain.

We continue to anticipate full recovery of commercial aerospace demand in 2023 to 2024.

Lower commercial aerospace demand in 2021 is expected to be mitigated in part by continued strength in demand for defense related applications as build rates for the F-35 Joint Strike Fighter are expected to increase 20% to 30% compared to 2020, while business and regional jet demand continues to improve.

VAR and shipments for our Automotive Extrusions are anticipated to increase 35% to 45% year-over-year as North American build rates are expected to increase more than 25% to approximately 16.0 million units in 2021 from 13.0 million units in 2020, and numerous new product launches in 2020 and 2021 increase our aluminum content on vehicles.

VAR and shipments for our GE products are anticipated to increase 10% to 15% year-over-year, reflecting solid service center and end market demand driven by continued growth in semi-conductor and automotive demand.

In addition, reshoring continues as many North American original equipment manufacturers secure domestic supply for their raw material needs to minimize risk of supply chain disruption.

Our planned acquisition of Alcoa Warrick LLC and certain assets comprising the aluminum casting and rolling mill facility located in Warrick County, Indiana (collectively, the “Warrick Rolling Mill”) provides an opportunity for further value creation with strong secular growth in the non-cyclical packaging business.

The transaction is anticipated to close on March 31, 2021 and is expected to be immediately accretive to earnings and cash flow.

The outlook for the beverage and food packaging markets is strong with favorable demand and industry dynamics driving growth.

North American can demand was up 5% year-over-year in 2020 and is projected to increase an additional 3% to 5% in 2021.

The Warrick Rolling Mill is one of only four dedicated can sheet mills in North America and we expect to become a significant participant in the supply chain solution in meeting the growing North American demand.

Results of Operations

Fiscal 2020 Summary

The global COVID-19 pandemic significantly impacted all of our end market applications during the year ended December 31, 2020, most notably Aero/HS products, which experienced a 37% decline in shipments;

For the year ended December 31, 2020, we reported Operating income of $81.1 million, VAR of $697.1 million and Adjusted EBITDA of $153.8 million;

Our liquidity was approximately $695.9 million as of December 31, 2019 , comprised of our cash balances, short-term investments and net borrowing availability under our revolving credit facility (on which there were no outstanding borrowings).

We invested $60.2 million in capital spending for further capacity expansion, manufacturing cost efficiency, product quality and operational security.

See " Liquidity and Capital Resources - Capital Expenditures and Investments " below.

In December 2019, we completed a new five-year Master Labor Agreement for our Trentwood and Newark facilities with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC ("USW") that commences in October 2020 and expires in September 2025.

In October 2019, we entered into a revolving credit facility ("Revolving Credit Facility"), which replaced the previously existing Revolving Credit Facility that was due to mature in December 2020.

The new Revolving Credit Facility provides us with a $375.0 million funding commitment through October 30, 2024.

In November 2019, we issued $500.0 million principal amount of 4.625% unsecured senior notes due March 2028 (" 4.625% Senior Notes"), resulting in proceeds of $492.5 million , net of $7.5 million of transaction fees.

Using the proceeds received from our 4.625% Senior Notes, in December 2019, we redeemed all of our outstanding 5.875% unsecured senior notes due May 2024 ("5.875% Senior Notes"), resulting in a cash outflow for principal, redemption premium and accrued interest of $393.5 million .

We paid a total of approximately $39.4 million , or $2.40 per common share, in cash dividends to stockholders, including holders of restricted stock, and dividend equivalents to holders of certain restricted stock units.

We repurchased 445,421 shares of common stock in 2019 for an aggregate cost of $42.9 million pursuant to a stock repurchase program authorized by our Board of Directors.

As of December 31, 2020 , we had $1,031.8 million of combined cash and cash equivalents and net borrowing availability under our r evolving c redit f acility with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto (“Revolving Credit Facility”) ;

In April and May 2020, we issued $350.0 million aggregate principal amounts of our 6.50% unsecured senior notes due May 1, 2025 ("6.50% Senior Notes"), resulting in proceeds of $343.8 million, net of $6.2 million of transaction fees, for enhanced flexibility and to further strengthen our liquidity safety net;

Following a deliberate, multi-year planning process, Jack A.

Hockema transitioned from Chief Executive Officer (“CEO”) to Executive Chairman and Keith A.

Harvey, formerly our President and Chief Operating Officer, succeeded Mr.

Hockema as President and CEO and became a member of the board of directors, each effective July 31, 2020;

In November 2020, we entered into a definitive agreement with Alcoa Corporation (“Alcoa”) to purchase the Warrick Rolling Mill for $670.0 million, consisting of approximately $587.0 million of cash and $83.0 million of assumed other post‑employment benefits liabilities.

The transaction is anticipated to close on March 31, 2021 and will provide us entry into the North American beverage and food packaging industry and diversification of our end markets;

We paid a total of approximately $43.4 million, or $2.68 per common share, in cash dividends to stockholders, including holders of restricted stock, and dividend equivalents to holders of certain restricted stock units during the year ended December 31, 2020, reflecting a 12% increase in the quarterly dividend compared with the prior year ended December 31, 2019;

We repurchased 152,763 shares of our common stock for $12.5 million at a weighted average price of $81.94 prior to suspending our share repurchase program as of March 18, 2020 in response to the uncertainty in economic conditions.

Consolidated Selected Operational and Financial Information

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We reported Net sales for 2020 of $1,172.7 million, compared to $1,514.1 million for 2019.

The decrease in Net sales during 2019 compared to 2018 reflected a 27.4 million pound ( 4% ) decrease in shipment volume and an $0.11 /lb ( 9% ) decrease in average Hedged Cost of Alloyed Metal prices per pound, partially offset by a $0.10 ( 8% ) increase in VAR per

pound due primarily to a higher mix of Aero/HS products and higher non-contract pricing on both Aero/HS products and GE products.

The decrease in Net sales during 2020 compared to 2019 reflected a 122.6 million pound (20%) decrease in shipment volume and a $0.09/lb (4%) decrease in average realized sales price per pound.

The shipment volume decrease reflected:

(i) a 30.6 million pound ( 11% ) decrease in GE products that resulted primarily from allocating a portion of our heat treat plate capacity to meet the strong demand for Aero/HS products during the year;

(ii) an 11.5 million pound ( 36% ) decrease in Other products as we continue to redirect our resources and production capacity to focus on our primary end market applications;

(iii) a 10.1 million pound ( 10% ) decrease in Automotive Extrusions reflecting lower build rates, model changeovers, program delays and the General Motors strike in the second half of 2019;

and (iv) heat treat plate capacity constraints related to the planned and unplanned downtime at our Trentwood facility during the quarters ended June 30, 2019 and March 31, 2019, respectively, partially offset by a 24.8 million pound ( 10% ) increase in Aero/HS products due restocking in the commercial aerospace supply chain and growing military airframe builds.

(i) a 100.3 million pound (37%) decrease in Aero/HS products reflecting the impact of the pandemic on demand for our aerospace applications;

(ii) an 11.4 million pound (55%) decrease in our other industrial end market application (“Other products”) reflecting our planned exit from non‑strategic applications;

(iii) a 10.2 million pound (11%) decrease in Automotive Extrusions reflecting the impact of the temporary shutdown of the North American automotive supply chain during the quarter ended June 30, 2020 due to the pandemic;

and (iv) a 0.7 million pound (0.3%) decrease in GE products.

The decrease in average realized sales price per pound reflected an $0.11/lb (10%) decrease in average Hedged Cost of Alloyed Metal prices per pound, partially offset by a $0.02 (1%) increase in VAR per pound due primarily to approximately $14.8 million of additional net sales associated with provisions under multi-year contracts with our customers.

See the table in “ Selected Operational and Financial Information ” below for further details.

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Cost of products sold, excluding depreciation and amortization and other items for 2020 totaled $941.3 million, or 80% of Net sales, compared to $1,215.2 million, or 80% of Net sales, in 2019.

The decrease during 2019 compared to 2018 of $85.5 million reflected a $99.4 million decrease in Hedged Cost of Alloyed Metal, partially offset by a $13.9 million increase in net manufacturing conversion and other costs.

Of the $99.4 million decrease in Hedged Cost of Alloyed Metal, $67.5 million was due to lower hedged metal prices and $31.9 million was due to lower shipment volume, as discussed above in " Net Sales ." The $13.9 million increase in net manufacturing conversion and other costs reflected $23.6 million of higher costs associated with:

(i) planned and unplanned downtime at our Trentwood facility and (ii) cost inefficiencies related to lower Automotive Extrusions shipments, partially offset by a decrease of $9.7 million related to lower shipment volume.

The decrease during 2020 compared to 2019 of $273.9 million reflected a $183.0 million decrease in Hedged Cost of Alloyed Metal and a $90.9 million decrease in net manufacturing conversion and other costs.

Of the $183.0 million decrease in Hedged Cost of Alloyed Metal, $129.1 million was due to lower shipment volume, as discussed above in “ Net Sales,” and $53.9 million was due to lower hedged metal prices.

The $90.9 million decrease in net manufacturing conversion and other costs reflected:

(i) a $90.7 million decrease related to lower sales volume;

(ii) $17.4 million of lower benefits and overhead costs;

and (iii) a $7.6 million reduction in major maintenance, partially offset by:

(i) an increase of $23.0 million in manufacturing costs due to manufacturing inefficiencies and (ii) an increase of $2.3 million in environmental costs associated with on-going historical environmental cleanup.

See “ Selected Operational and Financial Information ” below for a further discussion of the comparative results of operations for 2020 and 2019.

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Depreciation and amortization for 2020 was $52.2 million compared to $49.1 million for 2019.

The increase in Depreciation and amortization of $5.2 million in 2019 compared to 2018 was due to various construction-in-progress projects being placed in service related primarily to the Trentwood modernization initiative and other manufacturing cost efficiency and product quality initiatives, as well as our acquisition of Imperial Machine & Tool Co.

("IMT") in September 2018.

The increase of $3.1 million was due to various construction-in-progress projects being placed in service during 2020 related primarily to critical sustaining and enhancement projects, as well as for upgrades to equipment supporting Automotive Extrusions.

Selling, General, Administrative, Research and Development ( “ SG&A and R&D ” ).

SG&A and R&D expense totaled $91.2 million in 2020 compared to $98.0 million in 2019 .

The increase during 2019 was due primarily to:

(i) a $2.9 million increase in salaries and benefits, including consulting costs;

(ii) a $1.3 million increase in miscellaneous selling and marketing costs;

and (iii) a $0.8 million increase in miscellaneous corporate costs, partially offset by:

(i) a $3.3 million decrease in incentive compensation expense based on performance factors and modifiers.

The decrease during 2020 was due primarily to:

(i) a $ 3.9 million reduction in salaries and benefits ;

(ii) a $3.2 million reduction in travel costs;

(i i i) a $3.

0 million reduction in employee incentive programs ;

and (i v ) a $1.2 million reduction in miscellaneous expenses, partially offset by a $5.5 million increase in legal fees and consulting charges, primarily related to the pending Warrick Rolling Mill acquisition.

Goodwill Impairment.

See Note 4 of Notes to Consolidated Financial Statements included in this Report for further details.

Restructuring Costs.

See Note 12 of Notes to Consolidated Financial Statements included in this Report for further information regarding the restructuring plan.

Other Operating (Income) Charges, Net .

Other operating (income) charges, net, was $0.6 million of income and $0.9 million of charges for the years ended December 31, 2020 and December 31, 2019, respectively.

During the year ended December 31, 2020, we recognized $1.3 million of payroll subsidies received by our subsidiary Kaiser Aluminum Canada Limited under the Canada Emergency Wage Subsidy (“CEWS”) Program, which was partially offset by $0.5 million of impairment charges related to property, plant and equipment.

The 2019 amount reflected an impairment charge related to property, plant and equipment.

Interest Expense.

Interest expense represents cash and non-cash interest expense incurred on our Revolving Credit Facility, our 4.625% Senior Notes and our 5.875% Senior Notes, net of capitalized interest.

The 5.875% Senior Notes were redeemed on December 18, 2019 (see Note 9 of Notes to Consolidated Financial Statements included in this Report).

Interest expense was $24.6 million and $22.7 million for 2019 and 2018 , respectively, net of $1.6 million and $1.7 million of interest expense capitalized as part of construction-in-progress, respectively, for both periods.

Interest expense represents cash and non-cash interest expense incurred on our 6.50% Senior Notes, 4.625% unsecured senior notes due March 1, 2028 (“4.625% Senior Notes”) and our Revolving Credit Facility, net of capitalized interest.

Interest expense was $40.9 million and $24.6 million for 2020 and 2019, respectively.

See Note 9 of Notes to Consolidated Financial Statements included in this Report for a discussion of our debt and credit facilities that were in effect during each of the years 2020 and 2019 and Note 1 of Notes to Consolidated Financial Statements included in this Report for a discussion of our interest expense capitalized as part of construction in progress.

Other Expense, Net.

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The income tax provision for 2020 was $10.0 million, resulting in an effective tax rate of 25.9%.

The difference between the effective tax rate and the projected blended statutory tax rate for 2019 was primarily due to a decrease of $7.7 million (10% of taxable income) for cumulative R&D credits recognized for the tax years 2010 through 2019, partially offset by:

There was no material difference between the effective tax rate and the projected blended statutory tax rate for 2020.

The income tax provision for 2019 was $18.4 million, resulting in an effective tax rate of 22.9%.

The difference between the effective tax rate and the projected blended statutory tax rate for 2019 was primarily due to a decrease of $7.7 million (10% of taxable income) for cumulative research and development credits recognized for the tax years 2010 through 2019, partially offset by:

(i) an increase in unrecognized tax benefits, including interest and penalties, of $2.7 million (3% of taxable income);

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and (iii) an increase of $1.5 million (2% of taxable income) in the valuation allowance for federal and certain state net operating losses.

There was no material difference between the effective tax rate and the projected blended statutory tax rate for 2018.

Selected Operational and Financial Information

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“Financial Statements and Supplementary Data” of this Report.

The table below provides selected operational and financial information for each period presented (in millions of dollars):

The following table provides selected operational and financial information (in millions of dollars):

Year Ended December 31,

Interest expense

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Non-run-rate items:

Restructuring charges

Adjustments to plant-level LIFO 1

Mark-to-market loss on derivative instruments 2

Workers' compensation cost (benefit) due to discounting

Mark-to-market (gain) loss on derivative instruments 2

Workers' compensation cost due to discounting

Goodwill impairment 3

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Environmental expenses 4

Acquisition costs 5

Total non-run-rate items

Adjusted EBITDA

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We manage our business on a monthly last-in, first-out (“LIFO”) basis at each plant, but report inventory externally on an annual LIFO basis in accordance with GAAP on a consolidated basis.

This amount represents the conversion from GAAP LIFO applied on a consolidated basis to monthly LIFO applied on a plant-by-plant basis.

Mark-to-market loss (gain) on derivative instruments for 2019 and 2018 represents the reversal of mark-to-market loss (gain) on hedges entered into prior to the adoption of Accounting Standards Update ("ASU") No.

Mark-to-market (gain) loss on derivative instruments for 2020 and 2019 represents:

(i) the reversal of mark-to-market (gain) loss on hedges entered into prior to the adoption of Accounting Standards Update No.

2017-12, Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") (see Note 1 of Notes to Consolidated Financial Statements included in this Report) and settled in 2019 and 2018.

Adjusted EBITDA reflects the realized loss (gain) of such settlements.

Targeted Improvements to Accounting for Hedging Activities and settled in the periods presented above;

(ii) (gain) loss on non-designated commodity hedges;

and (iii) reclassifications out of Accumulated other comprehensive loss due to forecasted transactions no longer probable of occurring.

Adjusted EBITDA reflects the realized (gain) loss of such settlements.

See Note 4 of Notes to Consolidated Financial Statements included in this Report for additional information relating to the impairment of goodwill in 2019.

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See Note 10 of Notes to Consolidated Financial Statements included in this Report for additional information relating to the environmental expenses.

Adjusted EBITDA for 2019 was $7.9 million higher than Adjusted EBITDA for 2018 due to strong aerospace demand for our products and higher pricing on our non-contract business, as discussed in "Net Sales" above, partially offset by the negative impact associated with:

(i) both planned and unplanned downtime at our Trentwood facility during the quarters ended June 30, 2019 and March 31, 2019, respectively;

(ii) the General Motors strike in the second half of 2019;

and (iii) costs and related inefficiencies associated with transitioning our Automotive Extrusions from end-of-life to new program launches, as discussed in "Management Review of 2019 and Outlook for the Future" above.

The table below provides our shipment and VAR information (in millions of dollars, except shipments and VAR per pound) by end market applications for each period presented:

Non-run-rate acquisition costs are acquisition-related transaction costs primarily comprised of professional fees.

Adjusted EBITDA for 2020 was $153.8 million as compared to $212.7 million for 2019.

The decline primarily reflected:

(i) a $74.2 million sales impact and (ii) $14.2 million in manufacturing inefficiencies, partially offset by:

(i) a $17.1 million reduction in plant and corporate overhead;

(ii) a $7.6 million reduction in major maintenance;

and (iii) a $4.7 million reduction in incentive compensation expense.

The following table provides our shipment and VAR information (in millions of dollars, except shipments and VAR per pound) by end market applications:

Year Ended December 31,

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Liquidity and Capital Resources

The following table summarizes our liquidity as of the periods presented (in millions of dollars):

December 31, 2019

December 31, 2018

The following table summarizes our liquidity (in millions of dollars):

As of December 31,

Available cash and cash equivalents

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Total liquidity

Borrowing availability under the Revolving Credit Facility as determined by a borrowing base calculated as of December 31, 2020 and December 31, 2019.

We place our cash in bank deposits and money market funds with high credit quality financial institutions.

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Short-term investments represent holdings in investment-grade commercial paper with a maturity at the time of purchase of greater than 90 days.

In addition to our unrestricted cash and cash equivalents described above, we had restricted cash of $14.3 million at December 31, 2019 that was pledged or held as collateral in connection with workers' compensation requirements and certain other agreements.

From time to time, such restricted funds could be returned to us or we could be required to pledge additional cash (see Note 15 of Notes to Consolidated Financial Statements included in this Report).

See Note 16 of Notes to Consolidated Financial Statements included in this Report for information regarding restricted cash at December 31, 2020.

We and certain of our subsidiaries have a Revolving Credit Facility with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto (see Note 9 of Notes to Consolidated Financial Statements included in this Report).

There were no borrowings under our Revolving Credit Facility as of December 31, 2019 or December 31, 2018 .

The following table summarizes our cash flows from operating, investing and financing activities for each period presented (in millions of dollars):

There were no borrowings under our Revolving Credit Facility during the years ending or as of December 31, 2020 or December 31, 2019, respectively.

The following table summarizes our cash flows from operating, investing and financing activities (in millions of dollars):

Year Ended December 31,

Total cash provided by (used in):

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Cash provided by operating activities for the year ended December 31, 2020 included:

(i) a decrease in inventory of $37.5 million to better align with operations;

(ii) a decrease in trade and other receivables of $20.2 million driven primarily by improved collection efforts and a lower metal price;

and (iii) a decrease in accounts payable of $24.5 million driven by reductions in the quantity and price of metal purchases.

(i) a decrease in Trade and other receivables of $60.8 million driven primarily by lower Net sales;

(ii) a decrease in Inventories of $25.6 million to better align with operations;

and (iii) a reduction in Contract assets of $18.5 million driven primarily by timing and volume of shipments related to revenue on products recognized over-time.

Cash provided by operating activities for the year ended December 31, 2019 included:

(i) an increase in accounts payable of $29.2 million driven predominantly by the timing of metal purchases and increase in metal price;

(ii) a $21.9 million change in other non-cash changes in assets and liabilities due primarily to a $17.7 million unfavorable impact which reflected our adoption of ASU 2017-12 (see Note 1 of Notes to Consolidated Financial Statements included in this Report) as unrealized gain or loss on derivative instruments beginning January 1, 2018 was recognized within Other comprehensive income (loss), net of tax;

(iii) an increase in trade and other receivables of $22.3 million driven primarily by timing and mix of sales with extended terms and an increase in metal price;

and (iv) an increase in inventory of $45.0 million due primarily to higher inventory pounds to satisfy increased demand.

(i) a decrease in Inventories of $37.5 million to better align with operations;

(ii) a decrease in Accounts payable of $24.5 million driven by reductions in the quantity and price of metal purchases;

and (iii) a decrease in Trade and other receivables of $20.2 million driven primarily by improved collection efforts and a lower 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 years ended December 31, 2020 and December 31, 2019.

Sources of Liquidity

We believe our available cash and cash equivalents, short-term investments, borrowing availability under the Revolving Credit Facility and funds generated from operations are our most significant sources of liquidity.

While we believe these sources will be sufficient to finance our working capital requirements, planned capital expenditures, investments, debt service obligations and other cash requirements for at least the next twelve months, 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.

The table below summarizes recent availability and usage of our Revolving Credit Facility (in millions of dollars except for borrowing rate):

February 14, 2020

December 31, 2019

Revolving Credit Facility borrowing commitment

Borrowing base availability

Outstanding borrowings under Revolving Credit Facility

Outstanding letters of credit under Revolving Credit Facility

Remaining borrowing availability

Borrowing rate (if applicable) 1

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Such borrowing rate, if applicable, represents the interest rate for any overnight borrowings under the Revolving Credit Facility.

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 (including the pending Warrick Rolling Mill acquisition and acquisition-related costs) for at least the next twelve months, and while we also believe that alternative sources of liquidity will remain available in the event we seek to add liquidity for opportunistic or other reasons in the future, our ability to fund such cash requirements will depend upon our future operating performance (which will be affected by prevailing economic conditions) and financial, business and other factors, some of which are beyond our control.

We do not believe that covenants contained in the Revolving Credit Facility are reasonably likely to limit our ability to raise additional debt or equity should we choose to do so during the next 12 months, nor do we believe it is likely that during the next 12 months we will trigger the availability threshold that would require measuring and maintaining a fixed charge coverage ratio.

See Note 9 of Notes to Consolidated Financial Statements included in this Report for a description of our Revolving Credit Facility.

See "Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements - Contractual Obligations and Commercial Commitments " below for mandatory principal and cash interest payments on the outstanding borrowings under the 4.625% Senior Notes.

See Note 9 of Notes to Consolidated Financial Statements included in this Report for further details with respect to the 4.625% Senior Notes and the redemption of our 5.875% Senior Notes.

We do not believe that covenants in the indenture governing the 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.

See “Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements - Contractual Obligations and Commercial Commitments ” below for mandatory principal and cash interest payments on the outstanding borrowings under the 4.625% Senior Notes and 6.50% Senior Notes.

See Note 9 of Notes to Consolidated Financial Statements included in this Report for further details with respect to the 4.625% Senior Notes, 6.50% Senior Notes and the redemption of our 5.875% Senior Notes due 2024 (“5.875% Senior Notes”).

We do not believe that covenants in the indenture governing the 4.625% Senior Notes and 6.50% 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

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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.

See Note 4 of Notes to Consolidated Financial Statements included in this Report for a discussion of our acquisition of IMT on September 19, 2018 for $43.2 million, net of cash received.

A significant portion of our capital spending over the past several years related to the modernization project at our Spokane, Washington (“Trentwood”) facility, 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 and GE products.

These improvements have allowed us to gain incremental manufacturing capacity to enable future sales growth.

Total capital expenditures were $51.9 million and $60.2 million for 2020 and 2019, respectively.

A significant portion of our capital spending over the past several years related to the Trentwood modernization project, which has 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 has also focused on modernizing legacy equipment and the process flow for thin gauge plate to achieve KaiserSelect® quality enhancements for these Aero/HS and GE products.

As a byproduct of the efficiency improvements completed during 2017, we gained incremental manufacturing capacity to enable sales growth in 2018 and beyond.

The remainder of our capital spending for both years was allocated among our manufacturing locations on projects expected to reduce operating costs, improve product quality, expand capacity or enhance operational security.

We anticipate our capital spending in 2020 will be approximately $100.0 million to $125.0 million, primarily related to investment in a new heavy gauge plate stretcher at our Trentwood facility in addition to ongoing sustaining capital spending.

On November 30, 2020, we entered into a Purchase Agreement with Alcoa to purchase the Warrick Rolling Mill for a purchase price of approximately $670.0 million, consisting of approximately $587.0 million in cash and approximately $83.0 million of assumed other post-employment benefits liabilities.

The transaction is anticipated to close on or about March 31, 2021.

The Warrick Rolling Mill acquisition is subject to a number of closing conditions and there can be no assurance that such conditions will be satisfied or that we will be able to complete the Warrick Rolling Mill acquisition within the planned timeframe or at all.

See Note 4 of Notes to Consolidated Financial Statements included in this Report for additional information.

As a response to the COVID-19 pandemic and in order to preserve liquidity, in April 2020 we adjusted our capital spending plans to focus on critical sustaining projects and modest investment opportunities to further support our automotive growth and enhance efficiencies throughout our operations.

As such, our $375.0 million multi-year expansion and operational security investment project at our Trentwood facility has been deferred pending changes in market conditions and demand for our Aero/HS products.

We anticipate that total capital spending in 2021 will be approximately $50.0 million to $60.0 million primarily focused on sustaining capital investment, with some growth projects expected to be implemented as our key markets improve.

We will reassess our capital expenditure requirements for organic growth opportunities in our served markets for capacity, quality and efficiency after we have completed the acquisition of the Warrick Rolling Mill.

Capital investments will be funded using cash generated from operations, available cash and cash equivalents, short-term investments, borrowings under the Revolving Credit Facility and/or other third-party financing arrangements.

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We have consistently paid a quarterly cash dividend since the second quarter of 2007 to holders of our common stock, including holders of restricted stock, and have increased the dividend in each year since 2011.

Nevertheless, as in the past, the future declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on a number of factors, including our financial and operating results, financial position and anticipated cash requirements and contractual restrictions under our Revolving Credit Facility, the indenture for our 4.625% Senior Notes or other indebtedness we may incur in the future.

Nevertheless, as in the past, the future declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on a number of factors, including our financial and operating results, financial position and anticipated cash requirements and contractual restrictions under our Revolving Credit Facility, the indentures for our 4.625% Senior Notes and 6.50% Senior Notes or other indebtedness we may incur in the future.

We can give no assurance that dividends will be declared and paid in the future.

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Repurchases of Common Stock

See our Statements of Consolidated Stockholders' Equity included in this Report for information regarding repurchases of common stock in 2019 and 2018 and the amounts authorized and available for future repurchases of common stock under our stock repurchase program.

See our Statements of Consolidated Stockholders' Equity included in this Report for information regarding minimum statutory tax withholding obligations arising during 2019 and 2018 in connection with the vesting of non-vested shares, restricted stock units and performance shares.

In response to prevailing economic conditions, we suspended repurchases of common stock as of March 18, 2020.

See our Statements of Consolidated Stockholders’ Equity included in this Report for information regarding:

(i) repurchases of common stock in 2020 and 2019;

(ii) the amounts authorized and available for future repurchases of common stock under our stock repurchase program;

and (iii) minimum statutory tax withholding obligations arising during 2020 and 2019 in connection with the vesting of non-vested shares, restricted stock units and performance shares.

Environmental Commitments and Contingencies

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Contractual Obligations and Commercial Commitments

The following table and discussion provide a summary of our significant contractual obligations and commercial commitments at December 31, 2019 (in millions of dollars):

The following table and discussion summarizes our significant contractual obligations and commercial commitments as of December 31, 2020 (in millions of dollars):

Payments Due by Period

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Principal and interest on 4.625% Senior Notes

Principal and interest on 6.50% Senior Notes

Standby letters of credit

Employer payroll tax deferrals

Uncertain tax liabilities

Deferred compensation plan liability

Operating leases

Finance leases

Operating lease liabilities

Finance lease liabilities

Salaried VEBA variable contributions

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Total contractual obligations

Principal and Interest on 4.625% Senior Notes.

Cash outlays related to our 4.625% Senior Notes consist of our principal obligations and interest obligations based on scheduled interest payments.

Principal and Interest on 4.625% Senior Notes and 6.50% Senior Notes.

Cash outlays related to our 4.625% Senior Notes and 6.50% Senior Notes consist of our principal obligations and interest obligations based on scheduled interest payments.

Standby Letters of Credit .

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The letters of credit generally automatically renew every 12 months and terminate when the underlying obligations no longer require assurance or upon the maturity of our Revolving Credit Facility in October 2024.

Employer Payroll Tax Deferrals .

As of December 31, 2020, we recognized $7.0 million in employer payroll tax deferrals under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), of which, 50% will be paid in 2021 and 50% will be paid in 2022.

Uncertain Tax Liabilities .

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Operating Leases .

Operating leases represent multi-year obligations for certain manufacturing facilities, warehouses, office space and equipment.

Operating lease liabilities represent multi-year obligations for certain manufacturing facilities, warehouses, office space and equipment.

Finance Leases.

Finance lease spending represents non-cancelable capital commitments as of December 31, 2019 .

We expect finance leases to be funded through available cash generated from our operations, cash and cash equivalents, short-term investments, borrowings under our Revolving Credit Facility and/or other third-party financing arrangements.

Finance lease liabilities represent non-cancelable capital commitments as of December 31, 2020.

We expect finance leases to be funded through available cash generated from our operations, cash and cash equivalents, borrowings under our Revolving Credit Facility and/or other third-party financing arrangements.

Salaried VEBA Variable Contributions .

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The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can significantly impact our results of operations.

Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, projected cash flows and the rate used in discounting those cash flows.

Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, long‑term forecasts of the business, projected cash flows and the rate used in discounting those cash flows.

As the determination of an asset’s fair value and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, these estimates are considered to be critical accounting estimates.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis