Business context and reporting period
Century Aluminum Company’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013. The company produces primary aluminum and operates smelters in the United States and Iceland. Results include the Sebree smelter from its June 1, 2013 acquisition; comparisons with 2012 are therefore not fully like-for-like.
Financial performance and position
Amounts below are in millions of dollars unless otherwise stated.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $399.9 | $304.6 | $1,053.1 | $954.4 |
| Gross profit | $12.4 | $3.3 | $24.2 | $29.8 |
| Gross margin | 3.1% | 1.1% | 2.3% | 3.1% |
| Operating loss | $(4.2) | $(13.3) | $(27.9) | $(9.9) |
| Net loss | $(9.5) | $(12.0) | $(30.6) | $(28.7) |
| Loss per diluted share | $(0.11) | $(0.14) | $(0.35) | $(0.32) |
- Revenue rose 31% in Q3 and 10% for the nine-month period. Higher shipments drove the increase, chiefly because of Sebree; lower LME aluminum prices reduced sales realizations.
- Q3 gross profit improved year over year, while nine-month gross profit declined. The nine-month comparison was significantly affected by a $10.3 million inventory valuation charge in 2013 versus a $19.8 million reserve release in 2012. Q3 also benefited from $11.7 million of amortization credit on Sebree’s acquired power-contract liability.
- Nine-month operating cash flow was $42.5 million, compared with $21.1 million. Investing cash outflow was $93.9 million, including $48.1 million paid for Sebree; financing provided $8.3 million. Cash fell to $140.8 million from $184.0 million at year-end 2012.
- At September 30, cash was $140.8 million and total debt was $273.6 million, for approximately $132.8 million of net debt. Working capital was approximately $234.1 million. The revolving facility had $16.7 million drawn and $44.3 million net availability, with $70.5 million of letters of credit outstanding.
- Total assets were $1.86 billion and shareholders’ equity was $965.5 million. Current liabilities increased to $278.1 million from $181.7 million at year-end, including higher trade payables, affiliate balances and accrued liabilities.
Material changes, outlook and risks
- Century acquired Sebree, with annual capacity of 205,000 metric tons, for a stated $61 million subject to working-capital adjustments; approximately $48 million had been paid by quarter-end. The preliminary purchase allocation generated a $5.3 million bargain-purchase gain. Sebree contributed $140.3 million of revenue and a $2.0 million net loss from acquisition through September 30.
- The company issued $250 million of 7.5% secured notes due 2021 and used proceeds and cash to tender and redeem its 8% notes due 2014. It recorded a $3.3 million early-extinguishment loss. A separate $2.6 million balance of 7.5% unsecured notes remains due August 2014. The amended revolving facility matures in May 2018.
- No earnings or aluminum-price guidance is provided. Management estimated 2013 capital spending of $40–$45 million excluding Vlissingen and Helguvik activity. It planned $30–$35 million of 2013 capital spending to restart the first 75,000 metric tons of Vlissingen anode capacity, then expected to restart that capacity in late 2013. Helguvik major construction timing remained uncertain; cancellation exposure was estimated at about $20 million.
- Power availability and price are central risks. Hawesville began buying market-priced power in August, but grid and regulatory approvals remained outstanding and an appeal was pending. Sebree’s existing power contract ends January 31, 2014; on November 1 the company issued a conditional WARN notice stating the plant would be curtailed if competitively priced power was not secured. The filing reported that a suitable replacement contract was not assured.
- Electricity is the company’s largest operating cost. Management estimated each $1/MWh increase in Hawesville market power prices would add about $4.2 million in annual costs. Aluminum prices and premiums, inventory valuation, currency movements, power-market conditions and potential smelter curtailments may affect results and liquidity.
- Other notable items include $16.4 million of nine-month derivative gain associated with the E.ON contingent obligation; management estimated no payments would be due through 2028 based on its market assumptions. A PBGC settlement requires approximately $17.4 million of additional pension contributions through 2016. The former CEO claims severance payments exceeding $20 million; arbitration had been held, with a ruling expected in late 2013 or early 2014. Management said it could not estimate potential losses on certain other legal matters.
Most important facts for investors to verify
- Whether Sebree secures competitively priced power before January 31, 2014, and the resulting impact on production, costs and cash flow.
- Whether Hawesville receives the remaining regulatory and transmission approvals and how market-priced power affects operating margins.
- Whether shipment growth and cost savings can offset lower aluminum prices, inventory charges and the acquired facility’s operating costs.
- Final Sebree purchase-price allocation and working-capital settlement, as well as actual progress and spending on Vlissingen and Helguvik.
- Liquidity and borrowing-base availability if operations are curtailed, and the company’s ability to meet debt maturities, pension contributions and capital commitments.
- Outcomes of the former CEO arbitration and other contingencies, and the assumptions underlying the E.ON obligation fair-value estimate.