Century Aluminum Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Century produces primary aluminum at smelters in the United States and Iceland. Results are sensitive to aluminum prices, power and raw-material costs, and production volumes. Dollar amounts below are in millions unless noted.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $318.9 | $587.9 |
| Gross profit (loss) | $(3.1) | $94.1 |
| Operating income (loss) | $(13.6) | $80.0 |
| Net income (loss) | $(16.2) | $73.8 |
| Diluted EPS | $(0.19) | $0.76 |
| Adjusted EBITDA (non-GAAP) | $1.9 | $100.7 |
| Cash provided by operating activities | $14.9 | $116.3 |
| Capital expenditures | $3.8 | $12.6 |
- Sales fell 45.8%. Management attributed the decrease to $118.2 million of lower price realization and $150.8 million of lower shipment volumes, following production curtailments announced in 2015.
- Gross loss reflected lower realized prices and reduced shipments, partly offset by lower alumina and power prices. Consumption of inventory previously written down to market increased gross profit by $5.8 million year over year.
- Cash and cash equivalents were $126.5 million at March 31, up from $115.4 million at year-end. Total debt was $255.2 million: $247.4 million of 7.5% senior notes due 2021 and $7.8 million of industrial revenue bonds.
- Revolver availability, net of letters of credit and borrowings, was $86.5 million: $41.1 million in the U.S. and $45.4 million in Iceland. No revolver borrowings were outstanding at quarter-end; the company reported covenant compliance.
- Total current assets were $435.2 million and current liabilities were $158.8 million. Shareholders’ equity was $1,002.9 million.
Material changes and operating developments
- Primary aluminum shipments declined in the U.S. to 105,089 tonnes from 169,306, while Iceland direct shipments rose to 55,030 tonnes from 45,967; Iceland toll shipments declined to 22,500 tonnes from 29,985.
- Management cited favorable gross-profit effects of $18.0 million from lower alumina prices and $14.2 million from lower power prices. SG&A declined to $9.6 million from $12.0 million, partly due to lower headcount and the absence of prior-year executive separation costs.
- Alcoa paid $12.5 million in March to settle the Mt. Holly acquisition earn-out. Glencore, which held 42.9% of common stock and all Series A preferred stock, purchased $280.4 million of aluminum sales; purchases from Glencore were $44.0 million. The 2015–2016 sales agreement covers substantially all North American primary aluminum production.
- Mt. Holly was operating at about 50% capacity under a short-term power arrangement while Century pursued a longer-term solution. Hawesville was operating at about 40% capacity; the filing also describes partial production curtailments at domestic smelters.
Outlook, risks and contingencies
- The filing gives no earnings or revenue guidance. Management estimated 2016 capital spending of approximately $20 million, primarily for maintenance and smelter projects.
- Power is the company’s largest operating cost. Market-based power exposure at Hawesville and Sebree, and the unresolved long-term power solution at Mt. Holly, create material cost and operating risks. A $1/MWh change across the three U.S. sites at full capacity would change estimated quarterly power costs by about $2.8 million; Hawesville and Mt. Holly were operating below full capacity.
- Helguvik construction remained dependent on power-supply issues and other factors. Estimated cancellation and related costs were approximately $20 million, of which $12.3 million was accrued; the timing of any restart was uncertain.
- Management estimated approximately $9.6 million of remaining contributions under the PBGC pension settlement. The filing also describes environmental, litigation, retiree-benefit, and power-contract contingencies; certain outcomes or loss ranges could not be estimated.
- The $20.0 million E.ON contingent obligation was fully offset by a derivative asset at quarter-end. Management estimated no payments would be required based on aluminum-price assumptions, while cautioning that circumstances could change.
- Management identified aluminum prices, production levels, power prices and availability, raw-material costs, currency movements, financing access, and pension and environmental obligations as risks. No material changes to the prior annual-report risk factors were reported.
Important facts for investors to verify
- Whether aluminum prices, premiums, shipment volumes, and production utilization recover sufficiently to improve margins and cash generation.
- Progress and economics of long-term power arrangements for Mt. Holly and the operating outlook for Hawesville and Sebree.
- Available borrowing capacity and borrowing-base effects if production curtailments continue; the U.S. facility’s fixed-charge coverage ratio was below 1.1, although availability remained above the covenant trigger.
- Developments in the Helguvik project, including power-provider disputes, restart prospects, and potential cancellation costs.
- Actual timing and amount of pension contributions, E.ON-related obligations, environmental or legal costs, and the expected Icelandic withholding-tax refund.