Century Aluminum Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Century produces primary aluminum at smelters in the United States and Iceland and reports one segment.
Financial performance and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $1,893.2 million | $1,589.1 million |
| Gross profit (loss) | $(22.9) million | $131.3 million |
| Operating income (loss) | $(59.0) million | $97.2 million |
| Net income (loss) | $(66.2) million | $48.6 million |
| Diluted EPS | $(0.76) | $0.51 |
| Cash from (used in) operations | $(69.1) million | $51.5 million |
| Capital expenditures | $83.0 million | $31.8 million |
| Cash and cash equivalents at year-end | $38.9 million | $167.2 million |
| Total debt | $279.7 million | $256.0 million |
Revenue rose 19% year over year, but gross margin turned negative, at approximately -1.2% versus 8.3% in 2017. The net margin was approximately -3.5%, compared with 3.1% the prior year. Primary aluminum shipments were 749,850 tonnes, up from 743,198 tonnes. Reported average LME aluminum price was $2,110 per tonne versus $1,968; the U.S. Midwest premium averaged $420 versus $199. Alumina index pricing averaged approximately $473 per tonne versus $354.
Management attributed the gross-profit decline chiefly to higher alumina and other raw-material costs ($301.7 million unfavorable), operating expenses ($92.7 million unfavorable) and power costs ($28.8 million unfavorable), partly offset by improved LME and Midwest premium realizations ($265.1 million favorable). A $36.5 million inventory lower-of-cost-or-net-realizable-value adjustment was recorded, including $30.6 million in the fourth quarter.
Fourth quarter: Net sales were $486.9 million; gross loss was $59.3 million; net loss was $65.0 million, or $0.74 per share. The fourth-quarter loss was significantly affected by the inventory valuation adjustment.
Year-end current assets were $506.7 million and current liabilities were $224.3 million. Revolving facilities had $156.9 million of combined net availability, including $106.9 million under the U.S. facility and $50.0 million under the Iceland facility. Century was in compliance with its credit-facility covenants at year-end. The $250 million 7.5% senior secured notes mature in June 2021. No common dividends were declared in 2018, and the company said it does not plan cash dividends in the foreseeable future.
Material changes versus 2017
- Sales increased by $304.1 million, driven by higher aluminum price realizations ($265.1 million) and volume and product mix ($39.0 million).
- Results swung from $48.6 million net income to a $66.2 million net loss as higher raw-material and operating costs outweighed improved selling prices.
- Operating cash flow fell from $51.5 million provided to $69.1 million used. Inventory and receivables growth contributed to working-capital cash use.
- Cash declined by $128.3 million, while total debt increased by $23.7 million.
- Two Hawesville potlines were restarted during 2018; the third was expected to restart in the first quarter of 2019. Sebree’s temporarily curtailed potline returned to service in the third quarter.
Outlook, management commentary and principal risks
- Management said cash from operations and financing was expected to cover operating and business needs over the next 12 months, while cautioning that aluminum prices and production costs could materially affect cash generation.
- Century had invested $68.3 million of an expected $75.0 million for phase one of the Hawesville restart by year-end. A further $75.0 million for potline rebuilding and technology improvements was contemplated, subject to market conditions. Management planned to fund the project from cash and operating cash flow.
- Estimated 2019 capital spending, excluding the Hawesville restart, was approximately $30 million, primarily for maintenance and facility investment.
- Mt. Holly was operating at approximately 50% of capacity because of uncompetitive power costs. Its existing power arrangements run through December 2020; failure to secure competitive long-term power could lead to further curtailments or closure.
- Alumina and energy prices, aluminum-market volatility, global oversupply, tariffs and other trade actions, and production interruptions are material risks. The filing notes aluminum prices fell during 2018 after May, despite higher full-year averages.
- Customer concentration is substantial: Glencore accounted for approximately 64% of 2018 sales and Southwire approximately 11%. Glencore also owned 42.9% of common shares (47.2% on a fully diluted basis) and all outstanding Series A convertible preferred stock.
- The Sebree equipment failure caused a temporary potline outage. Century reported $8 million of insurance proceeds received by year-end and expected covered losses to be reimbursed except for $7 million in deductibles.
- Other notable matters include the planned exit from the 40% BHH carbon joint venture, the curtailed Helguvik project and unresolved conditions under its power agreement, pension and retiree-benefit obligations, and environmental and legal contingencies. Management stated that current environmental liabilities and pending legal matters were not expected to have a material adverse effect, but outcomes remain uncertain.
Important facts for investors to verify
- Whether alumina costs and inventory valuation normalize, and how price movements affect margins and working capital.
- Whether Hawesville’s remaining restart milestones, costs and production targets are achieved within available funding.
- Whether Mt. Holly secures competitive power and what that means for continued operations and asset values.
- Liquidity trends, borrowing-base availability, covenant headroom and a refinancing plan for the 2021 notes.
- Actual insurance recoveries for the Sebree outage and the remaining uninsured costs.
- Ongoing Glencore sales dependence, related-party dealings and the implications of Glencore’s ownership and influence.
- Progress on BHH divestiture, Helguvik power commitments, and pension, environmental and litigation obligations.