What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-02-26 · 142 added, 151 removed, 219 unchanged (57% of the section changed)

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;

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.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8.

“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K (“Report”).

For a detailed discussion of items impacting the year ended December 31, 2019, as well as a year‑to‑year comparison of our financial position and results of operations for the years ended December 31, 2020 and December 31, 2019, refer to Part II, Item 7.

“Management’s Discussion and Analysis” of our Annual Report on Form 10-K for the years ended December 31, 2019 and 2020, respectively, and filed with the Securities and Exchange Commission (“SEC”) on February 25, 2020 and February 26, 2021, respectively.

Non-GAAP Financial Measures

This information contains certain non-GAAP financial measures.

10 unchanged sentences

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.

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

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

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.

Metal Pricing Policies

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

To allow users of our financial statements to consider the impact of aluminum and alloy cost on our Net sales, we disclose Net sales as well as VAR, which is Net sales less the Hedged Cost of Alloyed Metal.

As used in this discussion, “Hedged Cost of Alloyed Metal” is the cost of aluminum at the average Midwest Transaction Price (“Midwest Price”) plus the cost of alloying elements and any realized gains and/or losses on settled hedges related to the metal sold in the referenced period.

The average Midwest Price of aluminum reflects the primary aluminum supply/demand dynamics in North America.

1 unchanged sentence

Management Review of 2021 and Outlook for the Future

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.

This past year was transformational for the company, although one with a unique set of operational challenges.

As we look ahead, we are confident in the processes and counter measures we have put in place to address the significant challenges experienced in 2021, setting the stage for stronger performance in 2022.

We also achieved a number of major milestones that served to strengthen the strategic positioning of our company as we continue to manage our business for long-term growth and profitability, including our strategic acquisition of Alcoa Warrick LLC and certain assets comprising the aluminum casting and rolling mill facility located in Warrick County, Indiana (collectively, “Warrick”), providing non-cyclic end market diversification of our portfolio and re-entry into the resurging North American aluminum packaging market.

In addition, we completed multiple multi-year contracts and extensions with key strategic aerospace and packaging partners securing additional long-term growth.

With confidence in the continued strength of our markets and the expected long-term growth in our businesses, along with our commitment to continue creating value for our shareholders, in early 2022 we increased our quarterly dividend by 7% to $0.77 per share, an incremental increase from the 7.5% increase in early 2021.

Demand across our end markets was mixed creating inefficiencies as we adjusted to changing market conditions.

While demand for general engineering applications (“GE products”) and b everage and food packaging products (“Packaging”) remained strong, demand for automotive applications (“Automotive Extrusions”) was muted throughout the year due to continued semiconductor chip shortages that significantly limited North American auto production.

Recovery in demand for commercial aerospace applications continued to progress as anticipated but remained pressured, while demand for business jet and defense related applications remained strong.

Our financial results for the full year 2021 reflected the impact of the demand environment, combined with rapidly rising costs, significant supply chain issues, labor constraints, continued market disruptions related to the Coronavirus Disease 2019 (“COVID ‑19”) pandemic, the declaration of force majeure by one of the company’s largest magnesium suppliers and the complex integration of the Warrick acquisition.

As we look forward, labor issues that hampered our ability to maximize the market opportunities during the year, have been addressed, as we are nearly fully staffed and expect the decline of COVID-19 pandemic-related staffing challenges and the impact of the Omicron virus continues to subside.

Our commercial teams have been very successful passing through price increases and instituting contained metals and commodity surcharges to offset the majority of higher materials costs.

Operating efficiencies across all facilities have begun to improve and the supply chain issues experienced during most of the year have either been mitigated, resolved or addressed, with the exception of challenges we continue to work through with our major magnesium supplier and the metal supply to our Warrick facility.

For the full year 2022, we anticipate total VAR will be up 20% to 25% year-over-year with further strengthening in demand for our products across all our major markets and the benefit of a full year of operations at our Warrick facility.

Our expectations by end market are outlined below:

Aerospace and high strength (“Aero/HS products”) .

We anticipate 15% to 20% year-over-year growth, primarily driven by declarations from major original equipment manufacturer (“OEMs”) customers, as well as continued strength in demand for business jet and defense applications.

We anticipate 35% to 40% year-over-year growth, primarily driven by continued strength in demand, a full year of shipments and improved pricing and mix.

GE products .

We anticipate 10% to 20% year-over-year growth, primarily driven by strong underlying demand, service center restocking and reshoring.

Automotive Extrusions .

We anticipate 10% to 20% year-over-year growth, primarily driven by strong demand for SUV’s, crossovers and light trucks, moderated by continued semiconductor chip shortages.

Consolidated adjusted EBITDA margin (Adjusted EBITDA as a percentage of VAR) is expected to improve to the 17% to 20% level for the full year 2022;

strengthening through the year as operations and efficiencies improve, costs normalize and the Warrick integration process is completed.

We are well positioned for continued long-term growth with a diversified portfolio and strong secular growth trends in each of our served end markets.

Notwithstanding near-term challenges, the fundamentals of our Aero/HS products, Automotive Extrusions and GE products end markets are solid and we are increasingly optimistic in our ability to deliver significant margin expansion and long-term profitability for our Packaging business where we have a significant market position.

We remain confident around the timing of the recovery in commercial aerospace and we are optimistic that as semiconductor chip shortages are alleviated, automotive production will ramp back up and our program launches will resume.

We also expect our costs and operating efficiencies will continue to improve as we resolve the metal and magnesium supply chain challenges.

Results of Operations

1 unchanged sentence

The global COVID-19 pandemic significantly impacted all of our end market applications during the year ended December 31, 2021, most notably Aero/HS products, which experienced a 7% decline in shipments;

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;

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;

In March 2021, we completed our $670.0 million purchase of the Warrick rolling mill from Alcoa Corporation;

As of December 31, 2021, we had $670.5 million of combined cash and cash equivalents and net borrowing availability under our revolving credit facility with Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto (“Revolving Credit Facility”);

In May 2021, we issued $550.0 million aggregate principal amounts of 4.50% unsecured senior notes due June 1, 2031 (“4.50% Senior Notes”) resulting in proceeds of $541.4 million, net of $8.6 million of transaction fees;

In May 202 1 , we redeemed all outstanding 6.50% unsecured senior notes due May 2025 (“6.50% Senior Notes”) using proceeds from our 4.50% Senior Notes offering, resulting in a cash outflow for principal, redemption premium and accrued interest of $382.2 million ;

We paid a total of approximately $46.7 million, or $2.88 per common share, in cash dividends to stockholders, including holders of restricted stock, and dividend equivalents to holders of certain restricted stock units during the year ended December 31, 2021, reflecting a 7.5% increase in the quarterly dividend compared with the prior year ended December 31, 2020.

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

2 unchanged sentences

We reported Net sales for 2021 of $2,622.0 million, compared to $1,172.7 million for 2020.

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.

The increase in Net sales during 2021 compared to 2020 reflected a 619.2 million pound (123%) increase in shipment volume and a $0.01/lb increase in average realized sales price per pound.

The shipment volume increase reflected:

(i) a 541.7 million pound addition in Packaging due to our Warrick acquisition;

(ii) a 62.6 million pound (27%) increase in GE products reflecting the reshoring of supply lines in North America and strong demand for our semi-conductor plate;

(iii) a 16.7 million pound (178%) increase in our other industrial end market application (“Other products”) reflecting an increase of non-strategic rolled products acquired with the Warrick acquisition;

and (iv) a 9.9 million pound (12%) increase in Automotive Extrusions primarily reflecting the recovery from the COVID‑19 pandemic related automotive supply chain shutdowns that occurred during the quarter ended June 30, 2020, partially offset by demand impact due to the ongoing semiconductor chip shortage in the automotive industry, which continues to hamper the return to full production and new program launches.

The shipment volume increase was partially offset by an 11.7 million pound (7%) decrease in Aero/HS products reflecting lower demand for our commercial aerospace products as a result of the COVID-19 pandemic.

The increase in average realized sales price per pound reflected a $0.41/lb (44%) increase in average Hedged Cost of Alloyed Metal prices per pound, partially offset by a $0.40 (29%) decrease in VAR per pound due primarily to the introduction of lower VAR per pound Packaging products, as well as approximately $14.8 million of additional net sales recognized in 2020 within Aero/HS products related to modifications to the 2020 customer declarations under multi-year contracts.

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

1 unchanged sentence

Cost of products sold, excluding depreciation and amortization and other items for 2021 totaled $2,348.1 million, or 90% of Net sales, compared to $941.3 million, or 80% of Net sales, in 2020.

The 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.

The increase during 2021 compared to 2020 of $1,406.8 million was largely attributable to the addition of Packaging and reflected a $1,035.2 million increase in Hedged Cost of Alloyed Metal and a $371.6 million increase in net manufacturing conversion and other costs.

Of the $1,035.2 million increase in Hedged Cost of Alloyed Metal, $586.1 million was due to higher shipment volume, as discussed above in “ Net Sales,” and $449.1 million was due to higher hedged metal prices.

The $371.6 million increase in net manufacturing conversion and other costs was primarily due to the addition of Packaging and additional overhead associated with the related increase in volume, as well as higher labor, energy, freight, benefit and metal cost driven by supply chain inefficiencies, inflation and labor shortages.

See “ Selected Operational and Financial Information ” below for a further discussion of the comparative results of operations for 2021 and 2020.

1 unchanged sentence

Depreciation and amortization for 2021 was $91.5 million compared to $52.2 million for 2020.

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.

The increase of $39.3 million was primarily attributable to the addition of Packaging.

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

SG&A and R&D expense totaled $118.8 million in 2021 compared to $91.2 million in 2020.

The 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.

The increase in 2021 compared with 2020 was due primarily to:

(i) an $11.4 million increase in costs related to the addition of Warrick operations and related transition service agreements with Alcoa Corporation to facilitate the integration;

(ii) an $11.2 million increase in acquisition related costs, which were primarily comprised of professional fees;

and (iii) a $5.3 million increase in salaries and benefits.

Goodwill Impairment.

2 unchanged sentences

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.

Other Operating Charges (Income), Net .

There were no Other operating charges (income), net, for the year ended December 31, 2021.

Other operating charges (income), net, was $0.6 million of income for the year ended December 31, 2020.

impairment charges related t o property, plant and equipment (see Note 1 of Notes to Consolidated Financial Statements included in this Report for details of government grants received).

Interest Expense.

Interest expense represents cash and non-cash interest expense incurred on our 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 represents cash and non-cash interest expense incurred on our unsecured senior notes and our Revolving Credit Facility, net of capitalized interest.

Interest expense was $49.5 million and $40.9 million for 2021 and 2020, respectively.

1 unchanged sentence

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%.

Other expense, net for the year ended December 31, 2021 included a $35.9 million loss on extinguishment of debt related to the redemption of our 6.50% Senior Notes.

See Note 9 and Note 13 of Notes to Consolidated Financial Statements included in this Report for details.

Income Tax Benefit (Provision).

The income tax benefit for 2021 was $5.5 million, resulting in an effective tax rate of 22.9%.

There was no material difference between the effective tax rate and the projected blended statutory tax rate for 2021.

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

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.

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

Selected Operational and Financial Information

3 unchanged sentences

Year Ended December 31,

Net (loss) income

Interest expense

Other expense, net

Income tax provision

Income tax (benefit) provision

Depreciation and amortization

Non-run-rate items:

Restructuring charges

Restructuring (benefit) costs

Adjustments to plant-level LIFO 1

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

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

Workers' compensation cost due to discounting

Goodwill impairment 3

Non-cash asset impairment charges

5 unchanged sentences

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 (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.

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

For the year ended December 31, 2021, this line item reflects a $5.2 million non-run-rate LIFO benefit that resulted from a purchase accounting adjustment to step-up Warrick’s inventory to fair value.

Mark-to-market loss (gain) on derivative instruments for 2021 and 2020 represents:

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

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

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

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

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

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

Adjusted EBITDA reflects the realized (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.

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

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.

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.

Acquisition costs are non-run-rate acquisition-related transaction costs, which include professional fees, as well as non‑cash hedging charges recorded in connection with our Warrick acquisition.

The results for the year ended December 3 1, 202 0 were adjusted to reflect $ 5.5 million now classified as Warrick acquisition-related costs.

Adjusted EBITDA for 2021 was $38.8 million higher than Adjusted EBITDA for 2020, which had the benefit of the additional $14.8 million of revenue as discussed in “Net sales” above.

Adjusted EBITDA for 2021 reflected the benefit of Packaging and improvement in our Automotive Extrusions and GE products, partially offset by higher costs as discussed in “Consolidated Selected Operational and Financial Information” above.

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

3 unchanged sentences

Hedged Cost of Alloyed Metal

Shipments (mmlbs)

Hedged Cost of Alloyed Metal

Automotive Extrusions:

12 unchanged sentences

Available cash and cash equivalents

Short-term investments

Borrowing availability under Revolving Credit Facility, net of letters of credit 1

13 unchanged sentences

Financing activities

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

Cash provided by operating activities for the year ended December 31, 2021 reflected results of business activity described within “Consolidated Selected Operational and Financial Information” above, as well as the following working capital changes:

(i) an increase in accounts payable of $112.5 million, primarily driven by Warrick payables added during the year ended December 31, 2021 and higher metal cost;

(ii) an increase in trade and other receivables of $90.3 million, primarily driven by Warrick receivables added during the year ended December 31, 2021 and the remainder due to the timing and mix of sales and an increase in metal prices;

and (iii) an increase in inventory of $43.5 million due primarily to higher inventory pounds to satisfy increased demand, as well as a higher per pound inventory cost.

Cash provided by operating activities for the year ended December 31, 2020 reflected results of business activity for the year ended December 31, 2020, as well as the following working capital changes:

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

1 unchanged sentence

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, 2021 and December 31, 2020.

Sources of Liquidity

We believe our available cash and cash equivalents, borrowing availability under the Revolving Credit Facility and funds generated from operations are our most significant sources of liquidity, and that our Revolving Credit Facility and unsecured notes 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.

have covenants that allow us to operate our business with limited restrictions and significant flexibility for the foreseeable future.

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

See Note 9 of Notes to Consolidated Financial Statements included in this Report for further details with respect to the 4.50% Senior Notes and 4.625% Senior Notes due 2028 (“4.625% Senior Notes”) and the redemption of our 6.50% Senior Notes.

We do not believe that covenants in the indenture governing the 4.50% Senior Notes and 4.625% Senior Notes are reasonably likely to limit our ability to obtain additional debt or equity financing should we choose to do so during the next 12 months.

2 unchanged sentences

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.

A significant portion of our capital spending over the past several years related to the modernization project at our rolling mill in Spokane, Washington (“Trentwood”), which focused on equipment upgrades throughout the process flow to reduce conversion costs, increase efficiency and further improve our competitive cost position on all products produced at our Trentwood facility.

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.

Total capital expenditures were $58.0 million and $51.9 million for 2021 and 2020, respectively, and primarily related to critical sustaining capital projects.

Our capital investment plans remain focused on supporting demand growth through capacity expansion, sustaining our operations, enhancing product quality and increasing operating efficiencies.

We anticipate total capital spending in 2022 of approximately $180.0 million to $200.0 million, of which approximately 60% of total spending will be focused on growth initiatives, primarily reflecting investment in the new roll coat line at Warrick and modest spending related to the Trentwood facility expansion project.

In addition, we have prepared for a multiple week outage early in third quarter 2022 to refurbish the large plate stretcher at our Trentwood facility.

The investment of approximately $30.0 million is a highly efficient use of capital that will allow us to temporarily defer the $145.0 million purchase for a new stretcher planned prior to the COVID-19 pandemic.

We will continue to deploy capital thoughtfully to ensure that investment decisions align with demand expectations in order to maximize the earnings potential of the business and maintain financial strength and flexibility.

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

8 unchanged sentences

Repurchases of Common Stock

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

We suspended share repurchases as of March 18, 2020.

We will continue to assess share repurchases as a part of our capital allocation priorities and strategic investment opportunities identified to support further growth in our business.

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

5 unchanged sentences

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

On-Balance Sheet:

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 lease liabilities

Finance lease liabilities

Salaried VEBA variable contributions

Off-Balance Sheet:

VEBA administrative fees

Purchase obligations

Commitment fees on Revolving Credit Facility

Total contractual obligations

The discussion below summarizes our significant contractual obligations, commercial commitments and off-balance sheet arrangements as of December 31, 2021.

Principal and Interest on 4.50% Senior Notes and 4.625% Senior Notes.

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.

See Note 9 of Notes to Consolidated Financial Statements included in this Report for information, including the timing of principal and interest payments, associated with our debt.

Standby Letters of Credit .

The $7.8 million represents letters of credit issued under our Revolving Credit Facility.

Standby Letters of Credit represents letters of credit issued under our Revolving Credit Facility.

The letters of credit provide financial assurance of our payment of obligations, primarily related to workers’ compensation.

1 unchanged sentence

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

See Note 9 of Notes to Consolidated Financial Statements included in this Report for further information.

Employer Payroll Tax Deferrals .

As of December 31, 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.

As of December 31, 2021, we had a remaining $3.8 million in employer payroll tax deferrals to be paid in 2022 under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).

Uncertain Tax Liabilities .

At December 31, 2021, we had uncertain tax positions which ultimately could result in tax payments.

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.

See Note 14 of Notes to Consolidated Financial Statements included in this Report for information regarding further information.

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.

As of December 31, 2021, we had deferred compensation plan liabilities for certain key employees, which were contingent upon investment performance, vesting and other eligibility requirements, including retirement dates.

See Note 5 of Notes to Consolidated Financial Statements included in this Report for further information, including the total expense related to all benefit plans.

Operating Leases .

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

See Note 3 of Notes to Consolidated Financial Statements included in this Report for the maturity of our lease liabilities associated with our operating lease portfolio.

Finance Leases.

1 unchanged sentence

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

See Note 3 of Notes to Consolidated Financial Statements included in this Report for the maturity of our lease liabilities associated with our finance lease portfolio.

Pension and OPEB .

See Note 5 of Notes to Consolidated Financial Statements included in this Report for additional information regarding the future net benefits we expect to pay with respect to our pension plans and our healthcare and life insurance postretirement benefit plan (“OPEB”).

Salaried VEBA Variable Contributions .

2 unchanged sentences

We are required to pay $0.3 million in annual administrative fees related to the VEBA that provides benefits for eligible retirees represented by certain unions and their surviving spouses and eligible dependents through September 2025.

See Note 5 of Notes to Consolidated Financial Statements included in this Report for additional information.

Purchase Obligations.

Cash outlays for purchase obligations consist primarily of commitments to purchase primary aluminum, recycled scrap aluminum, other 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.

Cash outlays for purchase obligations consist primarily of commitments to purchase primary aluminum, recycled scrap aluminum, other alloys, energy and equipment.

We have various contracts with suppliers of metals that require us to purchase minimum quantities of these metals in future years based primarily at the associated metal price at the time of payment.

We believe the minimum required purchase quantities are lower than our current requirements for these metals.

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.

3 unchanged sentences

No borrowings were outstanding under our Revolving Credit Facility either throughout the year or as of December 31, 2021.

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 9 of Notes to Consolidated Financial Statements included in this Report for additional information.

In addition to our off-balance sheet items discussed above:

See Note 6 of Notes to Consolidated Financial Statements included in this Report for information regarding our participation in multi-employer pension plans.

25 unchanged sentences

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.

A change in our estimated average margins by 5% would have had an impact of approximately $0.2 million to Net (loss) income for the year ended December 31, 2021.

Judgments and Uncertainties

16 unchanged sentences

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.

A change in our effective tax rate by 1% would have had an impact of approximately $0.2 million to Net (loss) income for the year ended December 31, 2021.

Judgments and Uncertainties

9 unchanged sentences

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.

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

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

3 unchanged sentences

For further details on goodwill and intangible assets, see Note 4 of Notes to Consolidated Financial Statements included in this Report.

Judgments and Uncertainties

Potential Effect If Actual Results

Differ From Assumptions

Pension and Other Postretirement Benefits.

Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return (“LTRR”) on plan assets and several assumptions relating to the employee workforce (salary increases, health care cost trend rates, retirement age and mortality).

The most significant assumptions used in determining the estimated year-end obligations include the assumed discount rate and the LTRR.

In addition to the above assumptions used in the actuarial valuations, changes in plan provisions could also have a material impact on the net funded status of our pensions and other postretirement benefits.

Additionally, our obligation to the Salaried VEBA is to pay an annual variable contribution amount based on the level of our cash flow.

The funding status of the Salaried VEBA has no impact on our annual variable contribution amount.

We have no control over any aspect of the plan.

We rely on information provided to us by the Salaried VEBA administrator with respect to specific plan provisions such as annual benefits expected to be paid.

See Note 5 of Notes to Consolidated Financial Statements included in this Report for additional information on our benefit plans.

Since the recorded obligation represents the present value of expected postretirement benefit payments over the life of the plans, decreases in the discount rate (used to compute the present value of the payments) would cause the estimated obligation to increase.

Conversely, an increase in the discount rate would cause the estimated present value of the obligation to decline.

The LTRR on plan assets reflects an assumption regarding what the amount of earnings would be on existing plan assets (before considering any future contributions to the plan).

Increases in the assumed LTRR would cause the projected value of plan assets available to satisfy postretirement obligations to increase, yielding a reduced net expense of these obligations.

A reduction in the LTRR would reduce the amount of projected net assets available to satisfy postretirement obligations and, thus, cause the net expense of these obligations to increase.

A change in plan provisions could cause the estimated obligations to change.

An increase in annual benefits expected to be paid would increase the estimated present value of the obligations and conversely, a decrease in annual benefits expected to be paid would decrease the estimated present value of the obligations.

The impact on the combined pension and other postretirement liabilities of a change in the weighted average discount rate of ¼ of 1% would be approximately $5.1 million as of December 31, 2021 and either a charge or credit of approximately $0.5 million to pretax earnings in 2022.

A change in the assumption for the weighted average expected long-term rate of return on plan assets of ¼ of 1% would impact pretax earnings by approximately $0.4 million for 2022.

New Accounting Pronouncements

1 unchanged sentence

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