Century Aluminum Company — Q3 2017 Form 10-Q
Business context and period. Global primary aluminum producer with smelters in the U.S. and Iceland. This unaudited report covers the three and nine months ended September 30, 2017, compared with the same 2016 periods. Grundartangi and Sebree operated at full capacity; Hawesville and Mt. Holly operated at approximately 40% and 50% of capacity, respectively. Results are sensitive to aluminum prices and premiums, power and raw-material costs, and production volumes.
Financial performance and liquidity
- Q3 revenue: $400.6 million, up $66.9 million (20%) year over year. Higher price realizations contributed $63.5 million; favorable volume and mix contributed $3.4 million.
- Q3 earnings: Gross profit was $41.4 million versus a $17.6 million loss; operating income was $32.5 million versus a $55.1 million loss; net income was $20.8 million versus a $58.3 million loss. Diluted EPS was $0.22 versus a loss of $0.67. Gross and operating margins were approximately 10.3% and 8.1%, respectively, compared with negative 5.3% and 16.5%.
- Nine-month revenue and earnings: Revenue was $1.155 billion, up $175.9 million (18%). Gross profit was $80.7 million versus a $16.1 million loss; operating income was $50.6 million versus a $74.6 million loss; net income was $12.8 million versus a net loss of $84.0 million. Diluted EPS was $0.13 versus a loss of $0.96.
- Cash flow: Nine-month operating cash flow was $50.7 million, versus $15.3 million. Capital expenditures were $23.6 million; operating cash flow less capital expenditures was $27.1 million. Investing cash outflow was $9.1 million, including $14.5 million of proceeds from asset sales; financing cash inflow was $0.3 million. Cash increased $41.8 million to $174.2 million.
- Liquidity and debt: At September 30, cash was $174.2 million and net availability under revolving facilities was $136.6 million ($86.6 million U.S.; $50.0 million Iceland). Debt totaled $255.9 million, comprising $248.0 million of 7.5% senior notes due 2021 and $7.8 million of industrial revenue bonds. No revolving borrowings were outstanding. The company reported covenant compliance; the U.S. fixed-charge coverage ratio was below 1.1, but the springing test applied only if facility availability fell to $15 million or less.
- Balance sheet: Total assets were $1.563 billion, shareholders’ equity $773.1 million, and inventories $261.8 million at quarter-end. Cash increased from $132.4 million at year-end 2016.
Changes, outlook and material items
- Higher aluminum realizations, including higher LME prices, drove the improvement in gross profit. For the nine months, higher raw-material costs ($49.9 million) and power costs ($30.6 million) partly offset price benefits. Q3 also faced higher raw-material costs ($7.4 million) and power costs ($1.8 million).
- Derivative contracts produced a $3.9 million net loss in Q3 and a $17.1 million loss for the nine months, substantially reflecting higher LME prices. Year-to-date losses included $11.2 million realized and $5.9 million unrealized.
- The Ravenswood retiree medical settlement was approved in August. The company paid $5.0 million in September, recognized a $5.5 million gain, and recorded a $12.5 million liability at quarter-end for the present value of remaining settlement payments. Remaining payments are $2.0 million annually for nine years.
- Management estimated 2017 capital spending of approximately $30 million, primarily for maintenance and smelter investment. The filing provides no earnings or revenue guidance; it cautions that nine-month results are not necessarily indicative of full-year results.
- Risks include market-based power costs and availability, aluminum and alumina price movements, and delivery interruptions. The company said Ohio River lock closures in Q3 disrupted alumina transport to Kentucky operations and increased costs. At normal capacity, each $1/MWh power-price change would affect annual costs by about $11.1 million across Hawesville, Sebree and Mt. Holly; Hawesville and Mt. Holly were operating below normal capacity.
- Glencore owned 42.9% of common stock (47.4% on a fully diluted basis) and held all Series A convertible preferred stock. Glencore accounted for approximately 75% of Q3 sales and 76% of nine-month sales. Management stated related-party transactions approximated market terms. U.S. and certain foreign deferred tax assets remained subject to valuation allowances.
- Environmental and legal matters include the Vernon case and St. Croix-related matters; management could not estimate possible losses for certain cases. The company reported no expected material adverse effect from currently assessed environmental liabilities, while noting inherent uncertainty. Approximately $9.6 million of PBGC-related pension contributions remained, with certain payments deferred and secured.
Important facts for investors to verify
- Whether improved aluminum pricing and realizations persist, and how they compare with power, alumina and other input-cost movements.
- Glencore’s continued role as the principal customer and counterparty, including the terms and duration of purchase and supply agreements.
- Revolving-facility availability, borrowing-base changes, covenant headroom and the November 2018 maturity of the Iceland facility.
- Cash conversion and working-capital needs: receivables and inventories increased, partly due to longer customer payment terms and higher raw-material costs.
- Exposure to power-price volatility, supply disruption and reduced operating rates, plus the status of the Helguvik power agreement and relevant power arrangements.
- Settlement payments, PBGC contributions, litigation and environmental contingencies, and the assumptions underlying derivative valuations and tax valuation allowances.