KAISER ALUMINUM CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections: • Management Review of 2020 and Outlook for the Future; • Results of Operations; • Liquidity and Capital Resources; • Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements; • Critical Accounting Estimates and Policies; and • New Accounting Pronouncements. 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 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. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles (“GAAP”) in the statements of income, balance sheets or statements of cash flows of the company. We have provided a reconciliation of non-GAAP financial measures to the most directly comparable financial measure in the accompanying tables. We have also provided discussion of the reasons we believe that presentation of the non-GAAP financial measures provide useful information to investors, as well as any additional ways in which we use the non-GAAP financial measures. The non-GAAP financial measures used in the following discussions are value added revenue (“VAR”), earnings before interest, taxes, depreciation and amortization adjusted for non-run-rate items (“Adjusted EBITDA”) and ratios related thereto. These measures are presented because management uses this information to monitor and evaluate financial results and trends and believes this information to also be useful for investors. In the discussion of operating results below, we refer to certain items as “non-run-rate items.” For purposes of such discussion, non-run-rate items are items that, while they may recur from period-to-period: (i) are particularly material to results; (ii) affect costs primarily as a result of external market factors; and (iii) may not recur in future periods if the same level of underlying performance were to occur. Non-run-rate items are part of our business and operating environment but are worthy of being highlighted for the benefit of readers of our financial statements. Our intent is to allow users of the financial statements to consider our results both in light of and separately from such items. For a reconciliation of Adjusted EBITDA to Net 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. To allow users of our financial statements to consider the impact of metal cost on our Net sales, we disclose Net sales as well as VAR, which is Net sales less the Hedged Cost of Alloyed Metal. As used in this discussion, “Hedged Cost of Alloyed Metal” is the cost of our metal inputs at the average Midwest Transaction Price (“Midwest Price”) of aluminum plus the cost of alloying elements and any realized gains and/or losses on settled hedges related to the metal sold in the referenced period. The average Midwest Price of aluminum reflects the primary aluminum supply/demand dynamics in North America. For a reconciliation of VAR to Net sales, see “Results of Operations - Selected Operational and Financial Information ” below. Management Review of 2020 and Outlook for the Future Review 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. 25 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. Outlook 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; 26 • 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; and • 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 The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8. “Financial Statements and Supplementary Data” of this Report. Net Sales. We reported Net sales for 2020 of $1,172.7 million, compared to $1,514.1 million for 2019. 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 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. Cost of Products Sold, Excluding Depreciation and Amortization and Other Items. 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 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. Depreciation and Amortization. Depreciation and amortization for 2020 was $52.2 million compared to $49.1 million for 2019. 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. 27 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 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 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. See Note 13 of Notes to Consolidated Financial Statements included in this Report for details. Income Tax Provision. The income tax provision for 2020 was $10.0 million, resulting in an effective tax rate of 25.9%. There was no material difference between the effective tax rate and the projected blended statutory tax rate for 2020. 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); (ii) an increase of $1.7 million (2% of taxable income) for certain executive compensation; and (iii) an increase of $1.5 million (2% of taxable income) in the valuation allowance for federal and certain state net operating losses. 28 Selected Operational and Financial Information The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Report. The following table provides selected operational and financial information (in millions of dollars): Year Ended December 31, 2020 2019 Net income $ 28.8 $ 62.0 Interest expense 40.9 24.6 Other expense, net 1.4 20.7 Income tax provision 10.0 18.4 Depreciation and amortization 52.2 49.1 Non-run-rate items: Restructuring charges 7.5 — Adjustments to plant-level LIFO 1 2.4 3.4 Mark-to-market (gain) loss on derivative instruments 2 (2.6 ) 5.8 Workers' compensation cost due to discounting 1.8 0.8 Goodwill impairment 3 — 25.2 Non-cash asset impairment charges 0.5 0.9 Net periodic post retirement service cost relating to Salaried VEBA 0.1 0.1 Environmental expenses 4 5.3 1.7 Acquisition costs 5 5.5 — Total non-run-rate items 20.5 37.9 Adjusted EBITDA $ 153.8 $ 212.7 1. We manage our business on a monthly last-in, first-out (“LIFO”) basis at each plant, but report inventory externally on an annual LIFO basis in accordance with GAAP on a consolidated basis. This amount represents the conversion from GAAP LIFO applied on a consolidated basis to monthly LIFO applied on a plant-by-plant basis. 2. 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 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. 3. See Note 4 of Notes to Consolidated Financial Statements included in this Report for additional information relating to the impairment of goodwill in 2019. 4. Non-run-rate environmental expenses are related to legacy activities at operating facilities prior to July 6, 2006. See Note 10 of Notes to Consolidated Financial Statements included in this Report for additional information relating to the environmental expenses. 5. 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. 29 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, 2020 2019 Aero/HS Products: Shipments (mmlbs) 173.3 273.6 $ $ / lb $ $ / lb Net sales $ 537.9 $ 3.10 $ 803.2 $ 2.94 Less: Hedged Cost of Alloyed Metal (168.6 ) (0.97 ) (292.0 ) (1.07 ) VAR $ 369.3 $ 2.13 $ 511.2 $ 1.87 Automotive Extrusions: Shipments (mmlbs) 84.1 94.3 $ $ / lb $ $ / lb Net sales $ 161.4 $ 1.92 $ 190.5 $ 2.02 Less: Hedged Cost of Alloyed Metal (78.4 ) (0.93 ) (97.2 ) (1.03 ) VAR $ 83.0 $ 0.99 $ 93.3 $ 0.99 GE Products: Shipments (mmlbs) 235.6 236.3 $ $ / lb $ $ / lb Net sales $ 458.8 $ 1.95 $ 480.1 $ 2.03 Less: Hedged Cost of Alloyed Metal (220.2 ) (0.94 ) (248.1 ) (1.05 ) VAR $ 238.6 $ 1.01 $ 232.0 $ 0.98 Other Products: Shipments (mmlbs) 9.4 20.8 $ $ / lb $ $ / lb Net sales $ 14.6 $ 1.55 $ 40.3 $ 1.94 Less: Hedged Cost of Alloyed Metal (8.4 ) (0.89 ) (21.3 ) (1.03 ) VAR $ 6.2 $ 0.66 $ 19.0 $ 0.91 Total: Shipments (mmlbs) 502.4 625.0 $ $ / lb $ $ / lb Net sales $ 1,172.7 $ 2.33 $ 1,514.1 $ 2.42 Less: Hedged Cost of Alloyed Metal (475.6 ) (0.94 ) (658.6 ) (1.05 ) VAR $ 697.1 $ 1.39 $ 855.5 $ 1.37 Liquidity and Capital Resources Summary The following table summarizes our liquidity (in millions of dollars): As of December 31, 2020 2019 Available cash and cash equivalents $ 780.3 $ 264.3 Short-term investments — 78.7 Borrowing availability under Revolving Credit Facility, net of letters of credit 1 251.5 323.1 Total liquidity $ 1,031.8 $ 666.1 1. Borrowing availability under the Revolving Credit Facility as determined by a borrowing base calculated as of December 31, 2020 and December 31, 2019. 30 We place our cash in bank deposits and money market funds with high credit quality financial institutions. Cash equivalents consist primarily of investment-grade commercial paper, money market accounts and investments which, when purchased, have a maturity of 90 days or less. Short-term investments represent holdings in investment-grade commercial paper with a maturity at the time of purchase of greater than 90 days. See Note 16 of Notes to Consolidated Financial Statements included in this Report for information regarding restricted cash at December 31, 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 during the years ending or as of December 31, 2020 or December 31, 2019, respectively. Cash Flows The following table summarizes our cash flows from operating, investing and financing activities (in millions of dollars): Year Ended December 31, 2020 2019 Total cash provided by (used in): Operating activities $ 206.9 $ 232.3 Investing activities $ 26.9 $ (101.8 ) Financing activities $ 281.9 $ 8.5 Cash provided by operating activities for the year ended December 31, 2020 included: (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) 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, 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. 31 Debt 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 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 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. 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. The level of anticipated capital expenditures may be adjusted from time to time depending on our business plans, our price outlook for fabricated aluminum products, our ability to maintain adequate liquidity and other factors. No assurance can be provided as to the timing of any such expenditures or the operational benefits expected therefrom. Dividends We have consistently paid a quarterly cash dividend since the second quarter of 2007 to holders of our common stock, including holders of restricted stock, and have increased the dividend in each year since 2011. Nevertheless, as in the past, the future declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on a number of factors, including our financial and operating results, financial position and anticipated cash requirements and contractual restrictions under our Revolving Credit Facility, the indentures for our 4.625% 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. We also pay quarterly dividend equivalents to the holders of certain restricted stock units. Holders of performance shares are not paid a quarterly dividend equivalent, but instead are entitled to receive, in connection with the issuance of underlying shares of common stock for performance shares that ultimately vest, a one-time payment equal to the dividends such holder would have received if the number of such shares of common stock so issued had been held of record by such holder from the date of grant of such performance shares through the date of such issuance. 32 See our Statements of Consolidated Stockholders ’ Equity and Note 18 of Notes to Consolidated Financial Statements included in this Report for information regarding dividends declared during 2020 and 2019 and subsequent to December 31, 2020 . Repurchases of Common Stock 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 See Note 10 of Notes to Consolidated Financial Statements included in this Report for information regarding our environmental commitments and contingencies. Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements Contractual Obligations and Commercial Commitments 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 Total Less than 1 year 1-3 years 3-5 years More than 5 years On-Balance Sheet: Principal and interest on 4.625% Senior Notes $ 673.4 $ 23.1 $ 46.3 $ 46.3 $ 557.7 Principal and interest on 6.50% Senior Notes 452.4 22.8 45.5 384.1 — Standby letters of credit 7.8 6.7 1.1 — — Employer payroll tax deferrals 7.0 3.5 3.5 — — Uncertain tax liabilities 1.8 — — — — Deferred compensation plan liability 9.6 — — — — Operating lease liabilities 38.9 5.9 9.6 6.5 16.9 Finance lease liabilities 8.9 2.2 3.7 2.2 0.8 Salaried VEBA variable contributions 1.7 1.7 — — — Off-Balance Sheet: VEBA administrative fees 1.5 0.3 0.6 0.6 — Purchase obligations 261.3 240.2 13.5 7.6 — Commitment fees on Revolving Credit Facility 3.6 0.9 1.9 0.8 — Total contractual obligations $ 1,467.9 $ 307.3 $ 125.7 $ 448.1 $ 575.4 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 . The $7.8 million represents letters of credit issued under our Revolving Credit Facility. The letters of credit provide financial assurance of our payment of obligations, primarily related to workers’ compensation. The specific timing of payments with respect to such matters is uncertain. The letters of credit generally automatically renew every 12 months and terminate when the underlying obligations no longer require assurance or upon the maturity of our Revolving Credit Facility in October 2024. 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 . At December 31, 2020, we had uncertain tax positions which ultimately could result in tax payments. As the amount of ultimate tax payments beyond 2020 is contingent on the tax authorities’ assessment, it is not practical to present annual payment information. 33 Deferred Compensation Plan Liability . The deferred compensation liability amount relates to our deferred compensation plan for certain key employees. As the distribution amount is contingent upon investment performance, vesting and other eligibility requirements, including retirement dates, it is not practical to present annual payment information unless timing of disbursement is known. Operating Leases . Operating lease liabilities represent multi-year obligations for certain manufacturing facilities, warehouses, office space and equipment. Finance Leases. 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 . See Note 5 of Notes to Consolidated Financial Statements included in this Report for additional information regarding our variable cash contributions to the voluntary employees’ beneficiary association (“VEBA”) that provides benefits for certain eligible retirees and their surviving spouses and eligible dependents (“Salaried VEBA”). VEBA administrative fees . We are required to pay $0.3 million in annual administrative fees related to the VEBA that provides benefits for eligible retirees represented by certain unions and their surviving spouses and eligible dependents through September 2025. Purchase Obligations. Cash outlays for purchase obligations consist primarily of commitments to purchase primary aluminum, recycled scrap aluminum, other metals, energy and equipment. We have various contracts with suppliers of metals that require us to purchase minimum quantities of these metals in future years at a price to be determined at the time of purchase based primarily on the underlying metal price at that time. Amounts included in the table are based on minimum required purchase quantities at the metal price at December 31, 2020. We believe the minimum required purchase quantities are lower than our current requirements for these metals. Actual quantities and actual metal prices at the time of purchase could be different. Physical delivery commitments with energy companies are in place to cover our exposure to fluctuations in electricity and natural gas prices and are based on fixed contractual rates and quantities. Equipment purchase obligations are based on scheduled payments to equipment manufacturers. Commitment Fees on Revolving Credit Facility . Future commitment fees on our Revolving Credit Facility are estimated based on the amount of unused credit under the facility at December 31, 2020 and assuming no extension of terms beyond the current maturity date of our Revolving Credit Facility, which is in October 2024. No borrowings were outstanding under our Revolving Credit Facility either throughout the year or as of December 31, 2020. Other Off-Balance Sheet Arrangements In addition to our off-balance sheet items discussed in the “ Contractual Obligations and Commercial Commitments ” section above: • See Note 6 of Notes to Consolidated Financial Statements included in this Report for information regarding our participation in multi-employer pension plans. • See Note 7 of Notes to Consolidated Financial Statements included in this Report for information regarding our long-term employee incentive plans. Additional equity awards are expected to be made to employees and non-employee directors in 2021 and future years. Critical Accounting Estimates and Policies Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates and such differences could be material. In addition to the accounting estimates we discuss in Note 1 of Notes to Consolidated Financial Statements included in this Report, management believes that the following accounting estimates are critical to aid in fully understanding and evaluating our reported financial results and require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effects of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. 34 Description Judgments and Uncertainties Potential Effect If Actual Results Differ From Assumptions Revenue Recognition. We decide at the outset of entering into contracts with customers whether our performance obligations as specified in these contracts are satisfied over time or at a point in time. To recognize revenue over time means that we will need to synchronize revenue recognition with progress toward completion of the performance obligation. If we have determined that revenue will be recognized over time for a specific customer order, the earliest point in our production process that we will recognize revenue will be the point that the product cannot be directed to another customer. In most cases, this happens at the time we begin to mold the ingot or billet, either by flat rolling the ingot or by extruding the billet through a die. For custom alloys, we would begin recognizing revenue over time at the point the custom alloy billet is cast. Approximately 59% of our business is recognized at a point in time with the remaining 41% recognized over time. We follow the input method of recognizing revenue over time. Under this approach, revenue is recognized on products in production based on the cost incurred to date plus a reasonable margin. Cost incurred to date is based on resources consumed, labor hours expended and other costs incurred relative to the total inputs expected in order to satisfy a performance obligation. Reasonable margins are estimated using an average margin of the respective production facility producing the product. For purposes of recognizing revenue over time on products that are in work‑in-process (“WIP”) as of the period end, we make the assumption that the average margins at the respective production facilities are reasonably close to the individual product margins that are in WIP. Although we believe that the judgments and estimates around recognizing revenue over time discussed herein are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. A change in our estimated average margins by 5% would have had an impact of approximately $0.1 million to Net income for the year ended December 31, 2020. 35 Description Judgments and Uncertainties Potential Effect If Actual Results Differ From Assumptions Income Tax. We have tax attributes available to offset the impact of future income taxes. We have a process for determining the need for a valuation allowance with respect to these attributes. The process includes an extensive review of both positive and negative evidence including our earnings history, future earnings, adverse recent occurrences, carryforward periods, an assessment of the industry and the impact of the timing differences. We expect to record a full statutory tax provision in future periods and, therefore, the benefit of any tax attributes realized will only affect future balance sheets and statements of cash flows. Financial statements for interim periods include an income tax provision based on the effective tax rate expected to be incurred in the current year. Inherent within the completion of our assessment of the need for a valuation allowance, we make significant judgments and estimates with respect to future operating results, timing of the reversal of deferred tax assets and current market and industry factors. In order to determine the effective tax rate to apply to interim periods, estimates and judgments are made (by taxable jurisdiction) as to the amount of taxable income that may be generated, the availability of deductions and credits expected and the availability of net operating loss carryforwards or other tax attributes to offset taxable income. Making such estimates and judgments is subject to inherent uncertainties given the difficulty of predicting future tax rates, market conditions, customer requirements, the cost for key inputs such as energy and primary aluminum, overall operating efficiency and other factors. However, if, among other things: (i) actual results vary from our forecasts due to one or more of the factors cited above or elsewhere in this Report; (ii) income is distributed differently than expected among tax jurisdictions; (iii) one or more material events or transactions occur which were not contemplated; or (iv) certain expected deductions, credits or carryforwards are not available, it is possible that the effective tax rate for a year could vary materially from the assessments used to prepare the interim consolidated financial statements. See Note 14 of Notes to Consolidated Financial Statements included in this Report for additional discussion of these matters. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. A change in our effective tax rate by 1% would have had an impact of approximately $0.4 million to Net income for the year ended December 31, 2020. 36 Description Judgments and Uncertainties Potential Effect If Actual Results Differ From Assumptions Acquisitions, Goodwill and Intangible Assets. We account for acquisitions using the acquisition method of accounting, which requires the assets acquired and liabilities assumed to be recorded at the date of acquisition at their respective estimated fair values. We recognize goodwill as of the acquisition date as the excess over the fair values of the identifiable net assets acquired. Goodwill is tested for impairment on an annual basis as well as on an interim basis as events and changes in circumstances occur. Definite-lived intangible assets acquired are amortized over the estimated useful lives of the respective assets, to reflect the pattern in which the economic benefits of the intangible assets are consumed. In the event the pattern cannot be reliably determined, we use a straight-line amortization method. Whenever events or changes in circumstances indicate that the carrying amount of the intangible assets may not be recoverable, the intangible assets will be reviewed for impairment. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can significantly impact our results of operations. Fair values and useful lives 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. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to estimate the fair value of goodwill and intangible assets. Additionally, as of December 31, 2020, we do not believe any of our reporting units are at risk of failing the goodwill impairment test. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and fair values assigned to each class of assets acquired and liabilities assumed, we may be exposed to losses from impairment charges that could be material. For further details on goodwill and intangible assets, see Note 4 of Notes to Consolidated Financial Statements included in this Report. New Accounting Pronouncements For a discussion of all recently adopted and recently issued but not yet adopted accounting pronouncements, see Note 1 of Notes to Consolidated Financial Statements included in this Report.