Century Aluminum Company — Q3 2012 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The company produces primary aluminum and also earns tolling revenue. Ravenswood remained curtailed; Hawesville had restarted idled capacity.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $304.6 million | $345.6 million | $954.4 million | $1,038.3 million |
| Gross profit | $3.3 million | $11.3 million | $29.8 million | $103.2 million |
| Gross margin | 1.1% | 3.3% | 3.1% | 9.9% |
| Operating income (loss) | $(13.3) million | $0.7 million | $(9.9) million | $74.5 million |
| Net income (loss) | $(12.0) million | $(6.6) million | $(28.7) million | $42.4 million |
| Basic and diluted EPS | $(0.14) | $(0.07) | $(0.32) | $0.42 |
- Sales fell 11.9% in Q3 and 8.1% year to date. Lower LME aluminum prices reduced sales, partly offset by higher premiums and greater shipment volumes. Nine-month shipments rose to 484,226 metric tons from 446,493.
- Lower price realizations were the main driver of sharply lower gross profit. Cost reductions partly offset the pressure. Q3 gross profit also benefited from an $8.2 million inventory valuation credit; the prior-year quarter had a $13.5 million charge. The nine-month inventory credits were $19.8 million in 2012 versus charges of $13.5 million in 2011.
- Q3 other income included a $7.9 million insurance settlement for a damaged Grundartangi transformer and related business interruption. Nine-month operating cash flow was $21.1 million, compared with $11.1 million in 2011.
- Cash and cash equivalents were $173.4 million at September 30, down from $183.4 million at year-end 2011. Investing cash outflow was $27.1 million and financing cash outflow was $4.0 million for the first nine months.
- Total debt and the E.ON contingent obligation were $273.1 million, including $250.3 million of senior notes and $7.8 million of industrial revenue bonds. The 8.0% secured and 7.5% unsecured notes mature in 2014. The $100 million revolving facility had no borrowings and $42.3 million of net availability; $46.0 million of letters of credit were outstanding.
- Total assets were $1.78 billion and shareholders’ equity was $1.01 billion. Current assets of $465.7 million exceeded current liabilities of $198.9 million.
Changes, outlook and material risks
- Power and operating viability: Hawesville gave 12 months’ notice in August to terminate its Big Rivers power agreement. Management said current power pricing made the smelter uneconomic at prevailing LME prices; if more favorable power terms cannot be secured, the facility may close. The company would owe demand charges during the notice period, even if it stopped operating.
- Ravenswood: In October 2012, the West Virginia PSC established a new special-rate mechanism, but Century said it did not enable a restart under current conditions. Century sought reconsideration. Ravenswood remains curtailed.
- Capital plans: 2012 capital spending was expected to be approximately $20–25 million, excluding Century Vlissingen and Helguvik. The company planned about $30 million of Vlissingen capital expenditures over the next 12 months and approximately $45 million over three years, targeting an anode-facility restart in Q3 2013; spending and timing could be deferred. A $65 million Grundartangi expansion is expected to add 40,000 metric tons of annual capacity over four years.
- Helguvik: Major construction timing remained uncertain, dependent on power availability and financing. Estimated cancellation exposure was approximately $20 million; the filing does not provide a restart date.
- Other commitments and contingencies: A potential PBGC determination regarding Ravenswood could accelerate approximately $17.4 million of pension contributions or require collateral. A barging-contract case has a disclosed reasonably possible loss range of $0–$5 million. The former CEO alleges severance payments exceeding $20 million; the company disputes the claim and cannot estimate a loss range. Other environmental and legal matters remain unresolved.
- Other developments: The company purchased former Zalco anode assets in the Netherlands for approximately $12.5 million and expects to relocate its headquarters from Monterey to Chicago by the first half of 2013. Management cautioned that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether Hawesville can obtain viable power pricing before its termination notice period expires, and the potential financial effects of a closure.
- Whether the Ravenswood PSC rate decision changes, and whether a restart becomes economically feasible.
- Progress, funding, costs and timing for Vlissingen and Helguvik, including anode-facility restart assumptions and Helguvik cancellation exposure.
- The 2014 senior-note maturities and the adequacy of liquidity, including borrowing-base availability and letters of credit.
- Developments in the PBGC discussions, litigation and other contingencies, and the impact of aluminum prices, power costs and inventory valuation on margins.