Century Aluminum Company — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited interim results; amounts are in millions of dollars unless stated otherwise. Century produces primary aluminum at smelters in the United States and Iceland.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $481.8 | $400.6 | $1,406.3 | $1,155.2 |
| Gross profit (loss) | $(11.8) | $41.4 | $36.4 | $80.7 |
| Gross margin, approximate | (2.4%) | 10.3% | 2.6% | 7.0% |
| Operating income (loss) | $(15.6) | $32.5 | $9.4 | $50.6 |
| Net income (loss) | $(20.3) | $20.8 | $(1.2) | $12.8 |
| Basic and diluted EPS | $(0.23) | $0.22 | $(0.01) | $0.13 |
- Q3 sales increased 20% year over year, primarily from $84.0 million of favorable price realizations, partly offset by $2.8 million of unfavorable volume and product mix. Nine-month sales rose 22%, driven primarily by $240.0 million of favorable price realizations.
- Q3 gross profit deteriorated by $53.2 million, mainly due to $106.0 million of unfavorable raw-material prices and $19.6 million of higher operating expenses, partly offset by favorable aluminum price realizations. Nine-month gross profit fell $44.3 million, with raw-material prices, operating expenses and power prices weighing on results.
- Cash and cash equivalents were $73.4 million at September 30, 2018, down from $167.2 million at year-end 2017. Nine-month operating cash flow was $(59.0) million, investing cash flow $(49.3) million and financing cash flow $14.5 million; cash, cash equivalents and restricted cash decreased $93.8 million.
- Working capital use included higher inventory and receivables. Inventory rose to $390.4 million from $317.5 million, and net receivables rose to $91.4 million from $43.1 million, partly reflecting longer payment terms on increased direct sales to end users.
- Total debt was $270.6 million, including $248.5 million of 7.5% senior secured notes due 2021, $14.3 million drawn on the U.S. revolver and $7.8 million of industrial revenue bonds. Approximate net debt, using reported cash and excluding restricted cash, was $197.2 million.
- Reported net availability under the revolving credit facilities was $170.5 million after outstanding letters of credit. The company reported compliance with credit-facility covenants.
- Primary aluminum shipments were 182,926 tonnes in Q3 2018 versus 184,974 tonnes a year earlier. Nine-month shipments were 550,384 tonnes versus 554,198 tonnes.
Material changes and operating developments
- Sebree returned to full capacity by the end of Q3 after one potline was temporarily curtailed in May following equipment failure. Management expects related losses to be covered by insurance, less a $7.0 million deductible.
- Century began restarting curtailed Hawesville capacity, with initial incremental production from one line. It reported 6,900 tonnes of incremental volume from the restart during the first nine months.
- The Hawesville project is expected to require approximately $150 million through 2020. Phase one is expected to cost about $75 million and restart 150,000 tonnes by early 2019; $39.4 million had been invested in phase one through September 30. A further $75 million phase is expected in 2019 or 2020.
- Q3 earnings included a $4.5 million Helguvik gain; nine-month results also included that gain. The comparative 2017 periods included a $5.5 million Ravenswood gain. Derivative results improved to a $0.8 million Q3 gain and $2.8 million nine-month gain, versus losses of $3.9 million and $17.1 million in 2017.
- Glencore beneficially owned 42.9% of common shares (47.4% on a fully diluted basis) and all outstanding Series A convertible preferred stock. Sales to Glencore represented approximately 63% of consolidated sales in both the Q3 and nine-month 2018 periods.
Outlook, risks and contingencies
- Management said cash from operations and financing activities should be adequate for operations and business needs over the next 12 months. It expected approximately $30 million of 2018 capital spending for maintenance and other projects, excluding Hawesville restart costs. The company planned to fund Hawesville from operating cash flow and existing cash; no formal earnings guidance was provided.
- Power is the company’s largest operating cost. At normal capacity, management estimated that a $1/MWh power-price change would affect annual costs by approximately $15.8 million across the facilities. Market power prices, fuel costs, grid constraints and weather are key risks.
- Aluminum sales prices and regional premiums generally affect results with an approximately two-month lag; alumina costs generally affect results with an approximately three-month lag. The filing attributes substantial margin pressure to unfavorable raw-material prices and operating costs.
- The U.S. implemented a 10% tariff on imported primary aluminum in March 2018, subject to exceptions and product exclusions. The filing discusses potential effects but does not quantify a specific earnings benefit.
- U.S. and certain foreign deferred tax assets remained subject to valuation allowances. Accounting for the Tax Cuts and Jobs Act transition tax was not finalized; a $0.9 million provisional adjustment and $0.8 million refundable AMT credit were recorded, with an immaterial net tax effect.
- Legal and environmental matters include the Vernon indemnity litigation, St. Croix-related matters and other claims. Management could not estimate possible losses for certain cases, but did not expect currently assessed matters to have a material adverse effect. The company also has remaining PBGC contributions of approximately $9.6 million and retiree-medical settlement liabilities.
- The filing identifies uncertainty around Helguvik power-agreement conditions, labor negotiations, aluminum and power markets, Hawesville execution, access to financing, and litigation and environmental obligations. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Hawesville meets restart, cost and timing targets, and how the project is funded amid negative operating cash flow and reduced cash balances.
- Whether Sebree insurance proceeds cover the equipment-failure losses beyond the $7.0 million deductible, and when any proceeds will be recognized or received.
- How aluminum realizations, raw-material costs and power prices evolve, including the effects of contractual pricing lags and the Section 232 tariff.
- Whether working-capital investment and direct-customer payment terms continue to pressure cash conversion and borrowing needs.
- The extent of customer and counterparty concentration: Glencore accounted for about 63% of sales and holds substantial voting and conversion rights through its preferred-stock ownership.
- Progress on tax-accounting finalization and material developments in environmental, legal, PBGC, labor and power-contract contingencies.