Century Aluminum Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed August 5, 2016. Amounts below are in U.S. dollars. Century produces primary aluminum at smelters in the United States and Iceland. Results reflect production curtailments at Hawesville and Mt. Holly.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $326.8 million | $523.5 million | $645.6 million | $1,111.4 million |
| Gross profit | $5.6 million | $8.3 million | $2.5 million | $102.4 million |
| Operating income (loss) | $(4.9) million | $(35.1) million | $(18.5) million | $44.9 million |
| Net income (loss) | $(9.5) million | $(33.9) million | $(25.7) million | $39.9 million |
| Basic EPS | $(0.11) | $(0.39) | $(0.29) | $0.42 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $23.6 million | $60.8 million |
Gross margin was approximately 1.7% in Q2 and 0.4% for the first half, compared with 1.6% and 9.2% in the respective 2015 periods. Sales fell 37.6% in Q2 and 41.9% in the first half. Management attributed the first-half sales decline to lower shipment volumes from curtailments (negative $261.2 million) and lower price realization (negative $204.6 million). First-half shipments of direct primary aluminum were 212,063 tonnes versus 326,679 tonnes a year earlier.
For the first half, cash from operations was $23.6 million, capital spending was $7.7 million, investing cash outflow was $9.6 million, and cash increased by $14.0 million. Cash and cash equivalents were $129.4 million at June 30, versus $115.4 million at year-end 2015. Current assets were $450.3 million and current liabilities $165.3 million. Debt totaled $255.3 million: $247.5 million carrying value of 7.5% senior notes due 2021 and $7.8 million of industrial revenue bonds. Revolving facilities had $89.0 million net availability after letters of credit; there were no outstanding borrowings on those facilities. The company reported covenant compliance.
Material changes and notable items
- Lower aluminum price realization and production volumes sharply reduced year-over-year sales and first-half gross profit. Favorable alumina and power prices partially offset the pressure.
- Q2 2016 included a $4.9 million lower-of-cost-or-market inventory charge. The filing says comparative inventory valuation adjustments increased gross profit by $20.8 million for Q2 and $26.6 million for the first half versus 2015.
- The 2015 comparison included a $30.9 million Ravenswood impairment and gains on Mt. Holly contingent consideration of $10.3 million in Q2 and $16.8 million in the first half. The earn-out was settled in March 2016, when Alcoa paid Century $12.5 million.
- Glencore owned 42.9% of common stock and all outstanding Series A convertible preferred stock, representing 47.5% economic ownership. Related-party sales to Glencore were $290.3 million in Q2, about 89% of total sales. The North American production sales agreement runs through December 31, 2016.
Outlook, risks and contingencies
- No earnings or revenue guidance is provided. Management estimated 2016 capital spending of $20–25 million, primarily for maintenance and smelter projects.
- Hawesville and Mt. Holly were operating at approximately 40% and 50% of full capacity, respectively. Century identifies aluminum prices, production levels, alumina costs, and power costs as key performance drivers. A $1/MWh power-price change was estimated to affect annual costs by about $11.1 million at full capacity across Hawesville, Sebree and Mt. Holly.
- Helguvik construction restart timing remains uncertain while Century negotiates with power suppliers and awaits resolution of power-contract conditions. Estimated cancellation and other costs were approximately $20 million, with about $12 million accrued. An arbitration decision on a supplier’s challenge to a power agreement was pending.
- Century expects approximately $1.8 million of 2016 contributions to qualified defined-benefit and supplemental executive retirement plans; $0.9 million had been contributed by June 30. Approximately $9.6 million remained under its PBGC settlement contribution commitment.
- The E.ON contingent obligation was $20.0 million, offset by a derivative asset. Based on aluminum-price assumptions, management did not expect payments during the agreement term, but noted circumstances could change.
- Environmental and legal matters include reopened litigation concerning a former California facility and claims related to the St. Croix refinery; outcomes or possible losses were not estimable for certain matters. Management said currently known environmental and legal liabilities were not expected to materially affect the company, while acknowledging uncertainty.
- Management highlighted liquidity and financing risks, market-based domestic power exposure, foreign-currency exposure, inventory valuation uncertainty, and the dependence of results on market conditions. It cautioned that first-half results are not necessarily indicative of full-year results.
Investor verification priorities
- Confirm subsequent operating levels and the economics of Hawesville and Mt. Holly curtailments, including whether power costs or aluminum prices changed materially.
- Verify the outcome of Helguvik power-supply negotiations and arbitration, and any change in the project’s restart plans or cancellation exposure.
- Check renewal or replacement arrangements after Glencore’s North American sales agreement expires at year-end 2016, given the high related-party sales concentration.
- Monitor cash generation, borrowing-base availability, covenant headroom, and debt-service needs against the company’s operating and capital requirements.
- Track developments in environmental and legal matters, pension contributions, and the E.ON contingent obligation.