# KAISER ALUMINUM CORP (KALU) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from KAISER ALUMINUM CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/811596/000095017024018958/kalu-20231231.htm
Accession: 0000950170-24-018958
Filing date: 2024-02-23
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/KALU/
All MD&A years: /company/KALU/mda/
Previous year: /company/KALU/mda/fy2022/ (FY 2022)
Next year: /company/KALU/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data” of this Form 10-K. For a detailed discussion of items impacting the year ended December 31, 2021, as well as a year‑to‑year comparison of our financial position and results of operations for the years ended December 31, 2022 and December 31, 2021, 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, 2021 and 2022, respectively, filed with the SEC on March 1, 2022 and February 23, 2023, respectively.

Non-GAAP Financial Measures

This information contains certain non-GAAP financial measures. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with US GAAP in the statements of income (loss), 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 a discussion of the reasons we believe that presentation of the non-GAAP financial measures provides useful information to investors, as well as any additional ways in which we use the non-GAAP financial measures. The non-GAAP financial measures used in the following discussions are Conversion Revenue (defined as Net Sales less the Hedged Cost of Alloyed Metal, see below in “Metal Pricing Policies” discussion), Adjusted 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 (loss), see below in “Results of Operations - Selected Operational and Financial Information.” Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP measures are not provided because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted or provided without unreasonable effort.

Metal Pricing Policies

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 certain alloys so that our earnings are predominantly associated with the conversion of aluminum to semi‑fabricated mill products. To allow users of our financial statements to consider the impact of aluminum and alloy cost on our Net sales, we disclose Net sales as well as Conversion Revenue, which is Net sales less the Hedged Cost of Alloyed Metal. As used in this discussion, “Hedged Cost of Alloyed Metal” is the cost of aluminum at the average MWTP 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 MWTP of aluminum reflects the primary aluminum supply/demand dynamics in North America. For a reconciliation of Conversion Revenue to Net sales, see below in “Results of Operations - Selected Operational and Financial Information.”

Molten Metal and Magnesium Supply Chain Issues

In September 2021, Warrick faced specific challenges with the force majeure declaration of its primary magnesium supplier, US Magnesium, LLC (“US Mag”), which resulted in a significant reduction in deliveries while we were also being impacted by the operational challenges Alcoa was experiencing at its adjacent smelter, which supplies molten metal to Warrick. In June 2022, US Mag deliveries unexpectedly stopped while performance of the smelter also rapidly deteriorated, negatively impacting Warrick’s operating efficiency and financial performance. As a result of the abrupt and unexpected decline in magnesium supply, on July 7, 2022, we declared force majeure at Warrick due to the limited availability of magnesium utilized in the production of our beverage and food packaging products, reducing our ability to produce those products at the time. After successfully securing and qualifying magnesium from additional sources, on September 6, 2022, we announced that we had lifted our force majeure declaration. We believe our supply base is now well diversified, as it is not reliant on any one single supplier or geographical region, including with respect to the supply of molten metal to our Warrick operation.

32

Management Review of 2023 and Outlook for the Future

Review

Despite its challenges, 2023 was a foundational year for Kaiser as we laid the groundwork we believe to be necessary to capture the vast growth opportunities ahead. Our focused execution led us to end the year in a solid position with full year Net income of $47.2 million and adjusted EBITDA increasing 48% over 2022 to approximately $210 million. Our marketing organization was successful working with our customers on pricing initiatives in response to higher inflationary costs impacting our performance as we exited 2022 and the first half of 2023. In addition, we led the industry in securing contain metal pass through to address the volatility of alloy costs. Aero/HS Products demand remained strong with Net sales and conversion revenue each setting a new record high. While reduced demand for general engineering plate products persisted, our unique ability to flex our capacity at our Trentwood facility to support strengthening aerospace demand further contributed to our performance. After five consecutive quarters, destocking activity for general engineering long products stabilized during the fourth quarter of 2023. In our Packaging operations, we continue to stabilize operations following the prior years impact of supply chain disruptions and the start of a beverage product destocking cycle that continued through the first half of 2023. While destocking stabilized for beverage products in the second half of 2023, the fourth quarter of 2023 was further impacted by destocking for food related products. Our new roll coat installation, to convert approximately 25% of our existing packaging capacity to higher valued coated products, is progressing well and is on time for completion and customer qualifications by the end of 2024. We believe we have ample financial resources, including $599.1 million in liquidity as of December 31, 2023, and a strong capital expenditures budget, to implement our growth initiatives as we strive to drive sustainable long-term growth.

Outlook

We believe Kaiser remains well positioned in the current demand environment as a key supplier in diverse end markets with multi-year contracts with strategic partners and expects demand will continue to improve across key markets throughout 2024. In Aero/HS Products, the strong momentum from 2023 is expected to continue, supported by customer declarations for commercial jets and strong demand for defense, space, and business jets. In Packaging applications, shipments and conversion revenue are expected to improve modestly as destocking ends in coated food products, along with anticipated steady demand improvements for both beverage and food products as the year progresses. GE Products destocking is expected to continue to abate in the first half of 2024 with improving shipments in the second half of the year. Automotive Extrusions demand is expected to continue its modest recovery with steady shipments and conversion revenue.

As a result, conversion revenue for the full year 2024 is expected to improve 2% - 3% with adjusted EBITDA margins to improve 70 - 170 basis points over 2023. The Company believes its adjusted EBITDA and adjusted EBITDA margin will continue to improve as we implement cost reduction measures in our operations, increase manufacturing efficiencies, and pursue our strategic growth initiatives in Aero/HS Products and Packing applications.

Results of Operations

Fiscal 2023 Summary

•
Increasing demand for our Aero/HS Products within commercial aerospace and space applications, while defense and business jet applications demand remained strong;

•
Continued destocking in our Packaging and GE Products end markets;

•
Negotiated more efficient contained metal pass throughs and commodity price adjustments in our customer contracts to help mitigate the impact of higher material and other inflationary costs on our business;

•
Capital investment was $143.2 million for the year, driven by the fourth roll coat line investment at our Warrick facility;

•
As of December 31, 2023, we had $599.1 million of combined cash and cash equivalents and net borrowing availability under our Revolving Credit Facility;

•
We paid a total of approximately $50.4 million, or $3.08 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, 2023.

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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 Form 10-K.

Net Sales. We reported Net sales for 2023 of $3,087.0 million, compared to $3,427.9 million for 2022. The decrease in Net sales reflected a 57.8 million pound (5%) decrease in shipment volume and a $0.15/lb (5%) decrease in average realized sales price per pound. The shipment volume decrease reflected: (i) a 88.3 million pound (29%) decrease in GE Products primarily due to destocking at service centers for our plate and extruded rod and bar products; (ii) a 42.9 million pound (7%) decrease in Packaging reflecting destocking in the beverage and food cans market; and (iii) a 2.4 million pound (20%) decrease in our Other products, partially offset by: (i) a 67.8 million pound (36%) increase in Aero/HS Products reflecting strengthening demand for commercial aerospace applications and (ii) a 8.0 million pound (8%) increase in Automotive Extrusions reflecting increased North American automotive build rates. The decrease in average realized sales price per pound reflected a $0.28/lb (17%) decrease in average Hedged Cost of Alloyed Metal prices per pound offset by a $0.13/lb (12%) increase in Conversion Revenue per pound reflecting higher pricing and surcharges to offset higher inflationary and commodity related costs. See the table in “Selected Operational and Financial Information” below for further details.

COGS. COGS for 2023 totaled $2,754.9 million, or 89% of Net sales, compared to $3,180.2 million, or 93% of Net sales, in 2022. The decrease during 2023 compared to 2022 of $425.3 million reflected: (i) a $424.1 million decrease in Hedged Cost of Alloyed Metal and (ii) a $1.2 million decrease in net manufacturing conversion and other costs. Of the $424.1 million decrease in Hedged Cost of Alloyed Metal, $329.7 million was due to lower hedged metal cost and $94.4 million was due to lower shipment volume, as discussed above in “Net Sales.” The $1.2 million decrease in net manufacturing conversion and other costs was primarily due to: (i) a $19.8 million decrease related to lower shipments; (ii) a $10.9 million decrease in other costs, primarily due to lower freight costs; and (iii) a $3.2 million decrease in environmental costs, partially offset by: (i) a net $25.3 million increase in manufacturing costs primarily due to higher labor and material costs and (ii) a $7.4 million increase in major maintenance. See “Selected Operational and Financial Information” below for a further discussion of the comparative results of operations for 2023 and 2022.

Depreciation and Amortization. Depreciation and amortization for 2023 was $108.6 million compared to $106.9 million for 2022. The increase of $1.7 million was primarily attributable to various construction-in-progress projects being placed in service related to manufacturing cost efficiency initiatives.

Selling, General, Administrative, Research and Development (“SG&A and R&D”). SG&A and R&D expense totaled $122.7 million in 2023 compared to $110.9 million in 2022. The $11.8 million increase in 2023 compared to 2022 was primarily due to: (i) an $11.2 million increase in salaries, benefits, and incentive compensation and (ii) a $2.7 million increase in legal fees, partially offset by a $3.6 million decrease in consulting and outsourced services.

Goodwill Impairment. See Note 4 of Notes to Consolidated Financial Statements included in this Form 10-K for further details.

Restructuring Costs. Restructuring costs reflect the impacts of our restructuring plans initiated in 2022 and 2020. See Note 12 of Notes to Consolidated Financial Statements included in this Form 10-K for further information regarding the restructuring plans.

Other Operating Charges, Net. Other operating charges, net, of $3.2 million for the year ended December 31, 2022 was primarily due to the impairment of our favorable commodity contract intangible asset. See Note 4 of Notes to Consolidated Financial Statements included in this Form 10-K for further details.

Interest Expense. Interest expense represents cash and non-cash interest expense incurred on our Senior Notes and our Revolving Credit Facility, net of capitalized interest. See Note 9 of Notes to Consolidated Financial Statements included in this Form 10-K for further information regarding interest expense, capitalized interest expense and a discussion of our debt and credit facilities that were in effect during each of the years 2023 and 2022.

Other Income (Expense), Net. See Note 13 of Notes to Consolidated Financial Statements included in this Form 10-K for details.

Income Tax (Provision) Benefit. The income tax provision for 2023 was $9.1 million, resulting in an effective tax rate of 16.2%. The difference between the effective tax rate and the projected blended statutory tax rate for 2023 was primarily due to: (i) a decrease of 6% related to a federal Research and Development credit and (ii) a decrease of 3% related to state taxes, partially offset by an increase of 3% related to non-deductible compensation expense.

The income tax benefit for 2022 was $8.3 million, resulting in an effective tax rate of 21.9%. The difference between the effective tax rate and the projected blended statutory tax rate for 2022 was primarily due to: (i) an increase of 3% due to various permanent items not deductible for tax purposes; (ii) an increase of 2% related to non-deductible compensation expense; and (iii) an increase of 1% related to state taxes, partially offset by a decrease of 6% related to a federal Research and Development credit.

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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 Form 10-K.

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022"],["Net income (loss)","","$","47.2","","","$","(29.6",")"],["Interest expense","","","46.9","","","","48.3"],["Other income, net","","","(7.4",")","","","(6.4",")"],["Income tax provision (benefit)","","","9.1","","","","(8.3",")"],["Depreciation and amortization","","","108.6","","","","106.9"],["Non-run-rate items:"],["Restructuring cost","","","5.0","","","","2.2"],["Mark-to-market loss on derivative instruments1","","","\u2014","","","","1.4"],["Goodwill impairment2","","","\u2014","","","","20.5"],["Non-cash asset impairment charge","","","\u2014","","","","3.2"],["Net periodic postretirement service cost relating to Salaried VEBA","","","\u2014","","","","0.1"],["Environmental expenses3","","","0.2","","","","3.2"],["Acquisition costs4","","","\u2014","","","","0.4"],["Total non-run-rate items","","","5.2","","","","31.0"],["Adjusted EBITDA","","$","209.6","","","$","141.9"]]
[[/GREPCENT_TABLE]]

1.
Mark-to-market loss on derivative instruments for 2022 represents loss on non-designated commodity hedges. Adjusted EBITDA reflects the realized loss of such settlements.

2.
See Note 4 of Notes to Consolidated Financial Statements included in this Form 10-K for additional information relating to the impairment of goodwill in 2022.

3.
Non-run-rate environmental expenses are related to legacy contingencies from activities at operating facilities prior to July 6, 2006. See Note 10 of Notes to Consolidated Financial Statements included in this Form 10-K for additional information relating to environmental expenses.

4.
Acquisition costs are non-run-rate acquisition-related transaction costs, which include professional fees, as well as non‑cash hedging charges recorded in connection with our Warrick acquisition.

Adjusted EBITDA for 2023 was $67.7 million higher than Adjusted EBITDA for 2022. Adjusted EBITDA for the year ended December 31, 2023 was impacted by: (i) improved pricing and surcharges to offset higher inflationary and commodity related costs; (ii) a decrease in freight costs due to lower shipment volumes; and (iii) lower energy costs, partially offset by: (i) an increase in material and overhead costs; (ii) higher personnel costs; and (ii) an increase in major maintenance. See above in “Consolidated Results of Operations” for further details.

35

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022"],["Aero/HS Products:"],["Shipments (mmlbs)","","254.3","","","186.5"],["","","$","","","$ / lb","","","$","","","$ / lb"],["Net sales","","$","899.3","","","$","3.54","","","$","676.1","","","$","3.63"],["Less: Hedged Cost of Alloyed Metal","","","(366.4",")","","","(1.44",")","","","(319.8",")","","","(1.72",")"],["Conversion Revenue","","$","532.9","","","$","2.10","","","$","356.3","","","$","1.91"],["Packaging:"],["Shipments (mmlbs)","","612.4","","","655.3"],["","","$","","","$ / lb","","","$","","","$ / lb"],["Net sales","","$","1,315.2","","","$","2.15","","","$","1,585.3","","","$","2.42"],["Less: Hedged Cost of Alloyed Metal","","","(812.0",")","","","(1.33",")","","","(1,030.6",")","","","(1.57",")"],["Conversion Revenue","","$","503.2","","","$","0.82","","","$","554.7","","","$","0.85"],["GE Products:"],["Shipments (mmlbs)","","215.6","","","303.9"],["","","$","","","$ / lb","","","$","","","$ / lb"],["Net sales","","$","596.5","","","$","2.77","","","$","883.8","","","$","2.91"],["Less: Hedged Cost of Alloyed Metal","","","(291.4",")","","","(1.35",")","","","(517.2",")","","","(1.70",")"],["Conversion Revenue","","$","305.1","","","$","1.42","","","$","366.6","","","$","1.21"],["Automotive Extrusions:"],["Shipments (mmlbs)","","104.5","","","96.5"],["","","$","","","$ / lb","","","$","","","$ / lb"],["Net sales","","$","254.9","","","$","2.44","","","$","254.8","","","$","2.64"],["Less: Hedged Cost of Alloyed Metal","","","(138.7",")","","","(1.33",")","","","(159.0",")","","","(1.65",")"],["Conversion Revenue","","$","116.2","","","$","1.11","","","$","95.8","","","$","0.99"],["Other Products:"],["Shipments (mmlbs)","","9.6","","","12.0"],["","","$","","","$ / lb","","","$","","","$ / lb"],["Net sales","","$","21.1","","","$","2.20","","","$","27.9","","","$","2.33"],["Less: Hedged Cost of Alloyed Metal","","","(12.6",")","","","(1.31",")","","","(18.6",")","","","(1.55",")"],["Conversion Revenue","","$","8.5","","","$","0.89","","","$","9.3","","","$","0.78"],["Total:"],["Shipments (mmlbs)","","1,196.4","","","1,254.2"],["","","$","","","$ / lb","","","$","","","$ / lb"],["Net sales","","$","3,087.0","","","$","2.58","","","$","3,427.9","","","$","2.73"],["Less: Hedged Cost of Alloyed Metal1","","","(1,621.1",")","","","(1.35",")","","","(2,045.2",")","","","(1.63",")"],["Conversion Revenue","","$","1,465.9","","","$","1.23","","","$","1,382.7","","","$","1.10"]]
[[/GREPCENT_TABLE]]

1.
Hedged Cost of Alloyed Metal for 2023 and 2022 was comprised of $1,599.7 million and $2,028.2 million, respectively, reflecting the cost of aluminum at the average MWTP and the cost of certain alloys used in the production process, as well as metal price exposure on shipments that we hedged with realized losses upon settlement of $21.4 million and $17.0 million in 2023 and 2022, respectively, all of which were included within both Net sales and COGS in our Statements of Consolidated Income (Loss). See Note 8 of Notes to Consolidated Financial Statements included in this Form 10-K for the total realized loss (gain) on aluminum hedges for which we hedged the metal price exposure externally.

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Liquidity and Capital Resources

Summary

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

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","","2022"],["Available cash and cash equivalents","","$","82.4","","","$","57.4"],["Borrowing availability under Revolving Credit Facility, net of letters of credit1","","","516.7","","","","557.8"],["Total liquidity","","$","599.1","","","$","615.2"]]
[[/GREPCENT_TABLE]]

1.
In April 2022, we executed Amendment No. 3 to our Revolving Credit Facility to, among other things: (i) increase the commitment to $575.0 million; (ii) extend the maturity date; (iii) update our borrowing base; and (iv) update relevant benchmark provisions from LIBOR to Term SOFR. See Note 9 of Notes to Consolidated Financial Statements included in this Form 10-K for further details. Borrowing availability under the Revolving Credit Facility was determined by a borrowing base calculated as of December 31, 2023 and December 31, 2022.

We place our cash in bank deposits and money market funds with high credit quality financial institutions. Cash equivalents primarily consist of money market funds, which are highly liquid. As of December 31, 2023, we had no cash in money market funds. As of December 31, 2022, we had $10.3 million in money market funds.

See Note 16 of Notes to Consolidated Financial Statements included in this Form 10-K for information regarding restricted cash at December 31, 2023.

We had no outstanding borrowings as of December 31, 2023 under our Revolving Credit Facility, after repaying borrowings of $215.1 million incurred during the year ended December 31, 2023. We had no borrowings under our Revolving Credit Facility during the year ended December 31, 2022. See “Sources of Liquidity” below for a further discussion of subsequent borrowing activity.

Cash Flows

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022"],["Total cash provided by (used in):"],["Operating activities","","$","211.9","","","$","(63.1",")"],["Investing activities","","$","(128.2",")","","$","(125.8",")"],["Financing activities","","$","(54.3",")","","$","(56.8",")"]]
[[/GREPCENT_TABLE]]

Cash provided by operating activities for the year ended December 31, 2023 reflected results of business activity described within “Consolidated Selected Operational and Financial Information” above, as well as the following working capital changes: (i) a decrease in inventory of $48.2 million, primarily driven by improved inventory management and lower metal costs; (ii) a decrease in trade and other receivables of $33.1 million, primarily due to a decrease in metal costs in addition to the timing of collections; and (iii) a decrease in accounts payable of $43.0 million due to the timing of payments, in addition to a decrease in metal prices.

Cash used in operating activities for the year ended December 31, 2022 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 inventory of $120.8 million, primarily driven by higher inventory pounds built at our Warrick facility to mitigate the impact of supply chain disruptions related to magnesium and hot metal supply and at our Trentwood facility to prepare for the planned outages associated with our large stretcher refurbishment, as well as higher per pound inventory cost due to higher metal prices in ending inventory; (ii) a decrease in accounts payable of $61.2 million, primarily due to timing of purchases and a decrease in period ending metal prices; and (iii) a decrease in accounts receivable of $15.0 million due to the timing and mix of sales, as well as a decrease in period ending metal prices.

See Statements of Consolidated Cash Flows included in this Form 10-K for further details on our cash flows from operating, investing, and financing activities for the years ended December 31, 2023 and December 31, 2022.

37

Sources of Liquidity

Our most significant sources of liquidity include available cash and cash equivalents, available credit under the Revolving Credit Facility, and funds generated from operations. We believe we have sufficient liquidity to fund our operations and meet our short-term and long-term obligations.

Our Revolving Credit Facility and Senior Notes have covenants that, we believe, allow us to operate our business with limited restrictions and significant flexibility for the foreseeable future. We do not believe that covenants contained in the Revolving Credit Facility are reasonably likely to limit our ability to raise additional debt or equity should we choose to do so during the next 12 months, nor do we believe it is likely that during the next 12 months, we will trigger the availability threshold that would require measuring and maintaining a fixed charge coverage ratio.

At February 19, 2024, we had no outstanding borrowings under the Revolving Credit Facility. See Note 9 of Notes to Consolidated Financial Statements included in this Form 10-K for a description of our Revolving Credit Facility.

We engage in certain customer-based supply chain financing programs to accelerate the receipt of payment for outstanding accounts receivable from certain customers. The costs of these programs are typically reimbursed to us by the customer. Receivables transferred under these customer-based supply chain financing programs generally meet the requirements to be accounted for as sales resulting in the derecognition of such receivables from our consolidated balance sheets. Receivables involved with these customer‑based supply chain finance programs for the year ended December 31, 2023 constituted approximately 41% of our Net sales. See Note 1 and Note 13 of Notes to Consolidated Financial Statements included in this Form 10-K for further details with respect to these supply chain financing programs.

Material Cash Requirements

The discussion below summarizes our material cash requirements from significant contractual obligations, commercial commitments and off-balance sheet arrangements as of December 31, 2023.

Debt. As of December 31, 2023, we have outstanding fixed-rate notes with varying maturities for an aggregate principal amount of $1.05 billion. See Note 9 of Notes to Consolidated Financial Statements included in this Form 10-K for further details with respect to the 4.50% Senior Notes maturing in 2031 (“4.50% Senior Notes”) and 4.625% Senior Notes maturing in 2028 (“4.625% Senior Notes”). At December 31, 2023, future interest payments associated with our outstanding notes total $289.7 million, with $47.9 million payable within 12 months. 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.

Purchase Obligations. Cash outlays for purchase obligations consist primarily of commitments to purchase primary aluminum, recycled scrap aluminum, other alloys, energy, and equipment. We have various contracts with suppliers of metals that require us to purchase minimum quantities of these metals in future years based primarily at the associated metal price at the time of payment. However, we believe the minimum required purchase quantities are lower than our current requirements for these metals. Physical delivery commitments with energy companies are in place to cover our exposure to fluctuations in electricity and natural gas prices and are based on fixed contractual rates and quantities. Equipment purchase obligations are based on scheduled payments to equipment manufacturers.

Leases. We have operating and finance leases for certain manufacturing facilities, warehouses, office space, equipment, and non-cancelable capital commitments. See Note 3 of Notes to Consolidated Financial Statements included in this Form 10-K for the maturity of our lease liabilities.

Deferred Compensation Plan Liability. As of December 31, 2023, 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 Form 10-K for further information, including the total expense related to all benefit plans.

Revolving Credit Facility. We are required to pay a monthly commitment fee equal to 0.25% per annum of the unused commitments under the Revolving Credit Facility. No borrowings were outstanding under our Revolving Credit Facility as of December 31, 2023. Additionally, under our Revolving Credit Facility, we issue standby letters of credit to provide financial assurance of our payment of obligations, primarily related to workers’ compensation claims. 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 April 2027. See Note 9 of Notes to Consolidated Financial Statements included in this Form 10-K for additional information.

Uncertain Tax Liabilities. At December 31, 2023, we had uncertain tax positions which ultimately could result in tax payments. See Note 14 of Notes to Consolidated Financial Statements included in this Form 10-K for further information.

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Pension, OPEB, and Salaried VEBA. See Note 5 of Notes to Consolidated Financial Statements included in this Form 10-K for additional information regarding the future net benefits we expect to pay with respect to our pension plans, OPEB, and our variable cash contributions to the Salaried VEBA. Additionally, we are required to pay $0.3 million in annual administrative fees related to the hourly VEBA that provides benefits for eligible retirees represented by certain unions and their surviving spouses and eligible dependents through September 2025.

While we believe our available cash on hand, anticipated available borrowing capacity under the Revolving Credit Facility, and funds generated from operations will be sufficient to finance our working capital requirements, planned capital expenditures, investments, debt service obligations and other cash requirements for at least the next 12 months, and while we also believe that alternative sources of liquidity will remain available in the event we seek to add liquidity for opportunistic or other reasons in the future, our ability to fund such cash requirements will depend upon our future operating performance (which will be affected by prevailing economic conditions) and financial, business and other factors, some of which are beyond our control.

Capital Expenditures and Investments

We strive to strengthen our competitive position across our end markets through strategic capital investment. Significant investments over the past decade have positioned us well with increased capacity and expanded manufacturing capabilities while more recent capital projects have focused on further enhancing manufacturing cost efficiency, improving product quality and promoting operational security, which we believe are critical to maintaining and strengthening our position in an increasingly competitive market environment. A significant portion of our capital spending over the past several years related to the modernization project at our Trentwood rolling mill, which focused on equipment upgrades throughout the process flow to reduce conversion costs, increase efficiency and further improve our competitive cost position on all products produced at our Trentwood facility. In addition, a significant portion of the investment also focused on modernizing legacy equipment and the process flow for thin gauge plate to achieve KaiserSelect® quality enhancements for these Aero/HS Products and GE Products. These improvements have allowed us to gain incremental manufacturing capacity to enable future sales growth. In 2023, we continued spending on our previously announced capital project to add a fourth roll coat line at our Warrick facility to increase our capacity for higher margin coated packaging products. Total capital expenditures were $143.2 million in 2023, of which $66.0 million related to the new roll coat line and $77.2 million primarily related to critical sustaining capital projects, and $142.5 million in 2022, of which $74.7 million related to the new roll coat line and $67.8 million primarily related to critical sustaining capital projects. During 2023, we reassessed the remaining capital requirements for the fourth roll coat line, resulting in an increase to the total cost of the project from its original estimate of $150 million to approximately $250 million. The increase was primarily driven by higher labor and material costs, in addition to certain scope changes.

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 2024 of $170.0 million to $190.0 million, of which approximately 65% will be focused on growth initiatives, primarily reflecting continued investment in the new roll coat line at Warrick, which we anticipate will be approximately $100 million. In addition, approximately $10 million is attributable to our Phase VII growth project at our Trentwood facility. We expect to continue to deploy capital thoughtfully so that investment decisions align with demand expectations in order to maximize the earnings potential of the business and maintain financial strength and flexibility.

Capital investments will be funded using cash generated from operations, available cash and cash equivalents, borrowings under the Revolving Credit Facility, and/or other third-party financing arrangements. The level of anticipated capital expenditures may be adjusted from time to time depending on our business plans, our price outlook for fabricated aluminum products, our ability to maintain adequate liquidity and other factors. No assurance can be provided as to the timing of any such expenditures or the operational benefits expected therefrom.

Dividends

We have consistently paid a quarterly cash dividend since the second quarter of 2007 to holders of our common stock, including holders of restricted stock. Nevertheless, as in the past, the future declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on a number of factors, including our financial, including the availability of surplus and/or net profits, and operating results, financial position and anticipated cash requirements and contractual restrictions under our Revolving Credit Facility, the indentures for our 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.

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See our Statements of Consolidated Stockholders’ Equity and Note 18 of Notes to Consolidated Financial Statements included in this Form 10-K for information regarding dividends declared during 2023 and 2022 and subsequent to December 31, 2023.

Repurchases of Common Stock

We are not obligated to repurchase any specific number of shares under our stock repurchase program. We suspended share repurchases as of March 2020. We will continue to assess share repurchases as a part of our capital allocation priorities and strategic investment opportunities identified to support further growth in our business. At December 31, 2023, $93.1 million remained authorized and available for future repurchases of common stock under our stock repurchase program. See our Statements of Consolidated Stockholders’ Equity included in this Form 10-K for information regarding minimum statutory tax withholding obligations arising during 2023 and 2022 in connection with the vesting of non-vested shares, restricted stock units, and performance shares.

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 Form 10-K, 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.

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 78% of our business is recognized at a point in time with the remaining 22% recognized over time.

We follow the input method of recognizing revenue over time. Under this approach, revenue is recognized for products in production based on the cost incurred to date plus a reasonable margin. Cost incurred to date is based on resources consumed, labor hours expended, and other costs incurred relative to the total inputs expected in order to satisfy a performance obligation. Reasonable margins are estimated using an average margin of the respective production facility producing the product. For purposes of recognizing revenue over time on products that are in work‑in-process (“WIP”) as of the period end, we make the assumption that the average margins at the respective production facilities are reasonably close to the individual product margins that are in WIP.

Although we believe that the judgments and estimates around recognizing revenue over time discussed herein are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. A change in our estimated average margins by 5% would have had an impact of approximately $0.2 million to Net income for the year ended December 31, 2023.

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.

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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 Form 10-K; (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 Form 10-K 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 $0.6 million to Net income for the year ended December 31, 2023.

Goodwill and Intangible Assets

We account for acquisitions using the acquisition method of accounting, which requires the assets acquired and liabilities assumed to be recorded at the date of acquisition at their respective estimated fair values. We recognize goodwill as of the acquisition date as the excess over the fair values of the identifiable net assets acquired. Goodwill is tested for impairment on an annual basis as well as on an interim basis as events and changes in circumstances occur.

Definite-lived intangible assets acquired are amortized over the estimated useful lives of the respective assets, to reflect the pattern in which the economic benefits of the intangible assets are consumed. In the event the pattern cannot be reliably determined, we use a straight-line amortization method. Whenever events or changes in circumstances indicate that the carrying amount of the intangible assets may not be recoverable, the intangible assets will be reviewed for impairment.

The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can significantly impact our results of operations. Fair values and useful lives of intangible assets are determined using the income approach valuation methodology, which is based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, long‑term forecasts of the business, projected cash flows and the rate used in discounting those cash flows. As the determination of an asset’s fair value and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, these estimates are considered to be critical accounting estimates.

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to estimate the fair value of goodwill and intangible assets. Additionally, as of December 31, 2023, 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 Form 10-K.

Environmental Commitments and Contingencies

We are subject to a number of environmental laws and regulations, to potential fines or penalties assessed for alleged breaches of such laws and regulations and to potential claims and litigation based upon such laws and regulations. Based on our evaluation of environmental matters, we have established environmental accruals, primarily related to solid waste disposal and soil and groundwater remediation matters. These environmental accruals represent our estimate of costs reasonably expected to be incurred in the ordinary course of business based on presently enacted laws and regulations, currently available facts, existing technology and our assessment of the likely remediation action to be taken.

Making estimates of possible incremental environmental remediation costs is subject to inherent uncertainties. In estimating the amount of any loss, in many instances a single estimation of the loss may not be possible. Rather, we may only be able to estimate a range for possible losses. In such an event, ASC 450, Contingencies ("ASC 450"), requires that a liability be established for at least the minimum end of the range assuming that there is no other amount which is more likely to occur. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals.

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 materially different than those reflected in our accruals. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of our accruals, our future results from operations could

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be materially affected. We believe at this time that it is reasonably possible that undiscounted costs associated with these environmental matters may exceed current accruals by amounts that could be, in the aggregate, up to an estimated $11.6 million over the remediation period. See Note 10 of Notes to Consolidated Financial Statements included in this Form 10-K for additional discussion of these matters.

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 Salaried VEBA 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 in future years. 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 in future years. 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 0.25% would be approximately $3.5 million as of December 31, 2023, and would impact pretax earnings in 2024 by approximately $0.3 million. A change in the assumption for the weighted average expected long-term rate of return on plan assets of 0.25% would impact pretax earnings by approximately $0.2 million for 2024.

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 Form 10-K.