Century Aluminum Company — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Dollar amounts below are in millions unless stated otherwise. Century produces primary aluminum; operations include U.S. smelters and Grundartangi in Iceland. Ravenswood remained curtailed, while Hawesville was restarting a previously curtailed potline. Glencore is a significant related party and holds all Series A convertible preferred shares.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $345.6 | $279.2 | $1,038.3 | $852.4 |
| Gross profit | $11.3 | $15.8 | $103.2 | $71.3 |
| Operating income | $0.7 | $0.2 | $74.5 | $23.4 |
| Net income (loss) | $(6.6) | $(16.8) | $42.4 | $(5.3) |
| Basic and diluted EPS | $(0.07) | $(0.18) | $0.42 | $(0.06) |
Gross margin was approximately 3.3% in Q3 and 9.9% for the nine-month period; operating margin was approximately 0.2% and 7.2%, respectively. Q3 sales rose 23.8% year over year, while gross profit declined 28.5%. Nine-month sales rose 21.8% and gross profit rose 44.7%.
- For the first nine months, operating cash flow was $11.1, down from $100.3 in 2010. Investing cash outflow was $13.0; financing cash outflow was $86.0. Cash declined $87.9 from year-end 2010 to $216.4.
- At September 30, current assets were $526.0 and current liabilities $213.0. Total debt was $270.7, including the $13.6 contingent E.ON obligation; cash exceeded reported debt by about $54.3. The $100.0 revolving facility had no borrowings and approximately $55.0 available after letters of credit.
- Capital spending for the nine months was $21.2, including $10.3 for Helguvik. Shareholders’ equity was $1,133.0.
Changes and notable items
- Higher aluminum prices and Midwest premiums increased nine-month sales by $161.9; higher shipment volumes added $24.0. Total nine-month primary aluminum shipments rose to 446,493 metric tons from 436,472.
- Q3 gross profit was pressured by $31.6 of net cost increases, including higher materials, supplies and maintenance costs, and by restart inefficiencies and under-absorption at Hawesville. A $13.5 inventory lower-of-cost-or-market charge in 2011 compared with a $7.3 inventory write-up benefit in Q3 2010, a $20.8 unfavorable year-over-year swing.
- Nine-month operating results included $18.1 of net benefits at Ravenswood, substantially reflecting amortization of prior-service credits and actuarial losses related to retiree medical changes. A Glencore-related change-of-control provision accelerated incentive awards and contributed $5.2 of compensation expense; related contractual charges also included $7.7 in SG&A for the nine-month period.
- In May, Century used $47.1 of cash to redeem all 1.75% convertible notes. In August, it authorized a $60.0 share-repurchase program and bought 3.63 million shares for $38.8 through September 30, leaving $21.2 authorized.
Outlook, risks and contingencies
- Management expected Hawesville to return to full stable operations in Q1 2012; restart-related inefficiencies were expected to weigh on operating cash flow through that quarter. No specific earnings guidance was provided.
- 2011 capital spending, excluding Helguvik, was estimated at $20–25. Century expected to spend approximately $1–2 monthly on Helguvik until major construction restarts, but could not predict the restart timing. Cancellation was expected to incur about $20 in contract costs. Power-supply disputes and arbitration remained unresolved.
- Century expected approximately $34.4 of 2011 contributions to qualified defined-benefit plans and the non-qualified SERB, and reported $2.1 of Mt. Holly plan funding. It expected a $26.9 Icelandic withholding-tax refund in Q4 2011.
- Big Rivers’ proposed Hawesville power-rate increase became effective September 1; Century opposed it and expected a ruling in Q4 2011. The PBGC questioned whether Ravenswood’s curtailment constituted a cessation of operations under ERISA; an adverse determination could accelerate pension contributions or require collateral.
- Environmental and legal matters include Kentucky air-quality notices, St. Croix-related environmental and personal-injury litigation, and an appeal in the securities class action previously dismissed in Century’s favor. Management did not expect pending matters to materially affect the company, but some outcomes and potential costs could not be estimated clearly.
- Aluminum prices, energy and input costs, foreign exchange, power-contract terms, labor negotiations, pension obligations and dependence on related-party sales remain relevant risks. Management stated that Q3 disclosure controls were effective and that no material internal-control changes occurred during the quarter.
Investor verification priorities
- Track Hawesville’s restart progress, production stability and the associated cost and cash-flow effects.
- Assess liquidity after the debt redemption, share repurchases, benefit contributions and expected tax refund; confirm borrowing-base availability under the revolving facility.
- Monitor aluminum prices, inventory valuation and the effectiveness and remaining coverage of price hedges.
- Verify the timing, funding requirements and power-supply resolution for Helguvik, including potential cancellation costs.
- Follow the Big Rivers rate proceeding, PBGC discussions, and material environmental and litigation developments.