Century Aluminum Company — Q1 2018 Form 10-Q
Business and period: Global primary aluminum producer with smelters in the United States and Iceland. This unaudited filing covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Grundartangi and Sebree operated at full capacity, while Hawesville and Mt. Holly operated at approximately 40% and 50% of capacity.
Financial highlights
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $454.5 million | $365.8 million; up $88.7 million (24%) |
| Gross profit / margin | $14.5 million / 3.2% | $16.9 million / 4.6% |
| Operating income / margin | $3.5 million / 0.8% | $5.2 million / 1.4% |
| Net loss | $0.3 million; EPS $0.00 | $15.1 million; EPS $(0.17) |
| Operating cash flow | $(33.0) million | $(11.3) million |
| Capital expenditures | $3.5 million | $9.0 million |
| Cash and cash equivalents | $130.8 million | $167.2 million at Dec. 31, 2017 |
| Total debt | $256.1 million | $256.0 million at Dec. 31, 2017 |
| Shareholders’ equity | $830.4 million | $829.6 million at Dec. 31, 2017 |
Cash, cash equivalents and restricted cash declined $36.4 million to $131.6 million. Current assets were $568.6 million versus current liabilities of $197.2 million. The company reported $160.9 million of net availability across its revolving credit facilities after letters of credit; no revolving borrowings were outstanding. The $250 million principal amount of 7.5% senior secured notes is due June 2021; $7.8 million of industrial revenue bonds is classified as current because it is remarketed weekly and could become payable upon failed remarketing.
Changes and operating drivers
- Sales growth primarily reflected $80.7 million of higher price realizations and $8.0 million from favorable product mix and premiums. Aluminum shipments were 187,238 tonnes versus 186,395 tonnes.
- Gross profit fell $2.4 million despite higher realizations. Management attributed the decline mainly to higher raw-material costs ($62.9 million), unfavorable operating expenses ($8.9 million), higher power costs ($7.7 million), adverse foreign exchange ($2.9 million), and other costs, partly offset by higher aluminum price realizations.
- Derivative results swung to a $0.7 million gain from a $16.1 million loss in Q1 2017, primarily because of forward aluminum contracts that settled in 2017.
- Operating cash use increased, chiefly reflecting a $40.3 million rise in receivables as direct sales to end users with longer payment terms grew, and a $10.0 million inventory increase. Q1 2017 investing cash flow included $13.5 million of proceeds from the Ravenswood facility sale.
- Glencore accounted for approximately 65% of consolidated sales, down from 77% a year earlier. Glencore owned 42.9% of common stock (47.4% on a fully diluted basis) and all outstanding Series A convertible preferred stock. The company said related-party transactions were believed to approximate market prices.
Outlook, risks and contingencies
- Hawesville restart: Announced plans to restart three curtailed potlines, targeting full capacity by early 2019. The company expected approximately $20 million of cash costs in Q2 2018, funded from operating cash flows and existing cash. Completion, budget, economics and schedule remain uncertain and depend on aluminum prices, premiums, input costs and operating execution.
- Capital spending and liquidity: Management estimated 2018 capital spending of approximately $30 million, excluding Hawesville restart costs, and believed operating cash flow and financing capacity would cover needs over the next 12 months. This outlook is subject to operating and market conditions.
- Aluminum tariffs and trade: A 10% U.S. tariff on imported primary aluminum took effect March 23, 2018, with temporary exemptions for Canada, the EU and Mexico through June 1. The company expected significant U.S. import needs to persist in the short term; ultimate exemptions, quotas and tariff effects were uncertain.
- Raw materials: Alumina costs were exposed to a published index and could not necessarily be passed through to customers. The filing cites market disruptions and sanctions-related volatility; the alumina index reached approximately $710 per tonne in April 2018, compared with a 2017 average of approximately $354 per tonne. Elevated or disrupted alumina, carbon and other supplies could pressure margins and production.
- Power and market risk: Power is the largest operating cost. At normal capacity, a $1/MWh power-price change was estimated to affect annual costs by approximately $15.8 million across the facilities. Market prices, transmission constraints, grid stability, fuel prices and weather could affect profitability and operations.
- Commitments and legal matters: The company had a $23 million, 10-year retiree medical settlement, with $2.0 million classified as current and $11.1 million as noncurrent liabilities. Approximately $9.6 million remained under a PBGC pension contribution agreement. Environmental and legal matters include the Vernon site case and St. Croix refinery matters; management said it could not estimate certain potential losses and generally did not expect these matters to be material. The Hawesville-related contingent obligation had principal and accrued interest of $22.8 million, fully offset by a derivative asset; management did not expect payments under its market assumptions but noted circumstances could change.
- Taxes: A valuation allowance remained against U.S. and certain foreign deferred tax assets. The company reported no adjustments to provisional Tax Cuts and Jobs Act amounts through March 31, 2018.
Important facts for investors to verify
- Whether the Hawesville restart stays on schedule and within the estimated cost, and whether its economics remain attractive.
- How alumina prices, U.S. trade measures and the resolution of sanctions-related market disruption affect input costs, selling prices and margins.
- Whether increased direct sales and longer customer payment terms continue to consume working capital and pressure operating cash flow.
- Actual power costs and availability, particularly at market-priced facilities, and the status of relevant supply arrangements.
- Liquidity and covenant headroom, including revolving-facility availability, letter-of-credit requirements, and the 2021 notes maturity and refinancing needs.
- Updates to environmental, litigation, pension and retiree-benefit obligations, including amounts not currently estimable.