Century Aluminum Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with Q1 2016. Century produces primary aluminum at smelters in the United States and Iceland. Grundartangi and Sebree operated at full capacity; Hawesville and Mt. Holly operated at approximately 40% and 50% of capacity, respectively. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net sales | $365.8 | $318.9 |
| Gross profit (loss) | $16.9 | $(3.1) |
| Operating income (loss) | $5.2 | $(13.6) |
| Net loss | $(15.1) | $(16.2) |
| Loss per diluted share | $(0.17) | $(0.19) |
| Cash from (used in) operations | $(11.3) | $14.9 |
| Capital expenditures | $9.0 | $3.8 |
| Cash and cash equivalents at period end | $125.9 | $132.4 at Dec. 31, 2016 |
| Total debt carrying value | $255.6 | $255.5 at Dec. 31, 2016 |
| Shareholders’ equity | $742.7 | $756.7 at Dec. 31, 2016 |
Gross margin was approximately 4.6%, compared with approximately negative 1.0% a year earlier. Despite positive operating income, a $16.1 million loss on forward and derivative contracts—substantially related to Glencore transactions—contributed to the net loss. The filing attributes $2.5 million of realized and $13.6 million of unrealized losses primarily to rising LME aluminum prices and their effect on contract fair values.
At March 31, Century had $49.5 million of net availability under its U.S. revolving facility after letters of credit and $50.0 million available under its Iceland facility, for $99.5 million total. It had no outstanding borrowings under either facility. Debt included $247.8 million carrying value of 7.5% senior secured notes due June 2021 and $7.8 million of industrial revenue bonds classified as current because of weekly remarketing and possible repayment on demand.
Changes versus Q1 2016
- Sales rose $46.9 million, or 14.7%, primarily from $33.3 million of higher market-price realizations and $13.6 million from higher shipments and a shift from toll to direct sales at Grundartangi.
- Gross profit improved by $20.0 million. Higher price realizations, shipment volume, and plant spending/performance improvements were partly offset by higher power costs ($14.6 million) and alumina costs ($12.1 million, including inventory valuation adjustments).
- Sales to customers other than related parties increased to $85.2 million from $38.5 million. Glencore represented approximately 77% of consolidated sales, down from 88%.
- Operating cash flow moved from $14.9 million provided to $11.3 million used. Management cited higher receivables associated with changed payment terms, increased inventory primarily from higher alumina prices, and the prior-year receipt of a $12.5 million Mt. Holly earn-out payment.
- Investing cash flow was $4.8 million provided, including $13.6 million proceeds from the January sale of the Ravenswood facility; capital spending increased year over year.
Outlook, risks, and notable items
- Century estimated 2017 capital spending of approximately $25 million to $30 million, primarily for smelter maintenance and investment projects. No earnings or revenue guidance was provided; management cautioned that Q1 results are not necessarily indicative of full-year results.
- Aluminum prices and premiums, power, alumina and other input costs, production, and shipments are key drivers. Power is the largest operating cost; market-based power exposure, transmission disruptions, power availability, and natural gas prices could materially affect results. Hawesville and Mt. Holly were operating below full capacity.
- Century had forward financial sales contracts for 52,590 tonnes and Grundartangi power-price swaps covering 256,200 MWh. Derivatives can produce significant fair-value earnings volatility; the Q1 derivative loss was material to reported results.
- Glencore owned 42.9% of common stock (47.5% on a fully diluted basis) and all Series A convertible preferred stock. Related-party aluminum sales and alumina purchases remain significant; substantially all Q1 derivative losses related to Glencore transactions.
- The $23 million Ravenswood retiree medical settlement was accrued in Q3 2016 and remained subject to final court approval, then expected no earlier than Q3 2017. The agreement calls for $5 million upon approval and $2 million annually for nine years thereafter.
- Approximately $9.6 million of additional pension contributions under the PBGC agreement remained. Century had deferred certain payments with required security; it expected $1.8 million of aggregate 2017 contributions to qualified defined-benefit and supplemental executive plans.
- Environmental and legal matters include the Vernon indemnity litigation, St. Croix refinery-related matters, and other claims. Management said it could not estimate possible losses for certain matters, while stating that current environmental liabilities and known legal contingencies were not expected to have a material adverse effect.
- U.S. and certain foreign deferred tax assets remained subject to a valuation allowance. Century said risk factors were not materially changed from its 2016 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control reported.
Investor verification priorities
- Track whether aluminum price gains and operating improvements persist, and whether power and alumina cost increases offset them.
- Review working-capital trends, especially receivables and inventory, and the company’s ability to convert operating performance into positive cash flow.
- Monitor derivative positions, fair-value losses, and the timing and economic effect of Glencore-related contracts and transactions.
- Verify liquidity and covenant headroom, including borrowing-base changes, letters of credit, and the U.S. facility’s springing fixed-charge coverage covenant.
- Follow smelter utilization, power-contract terms and availability, 2017 capital spending, and the final approval and payment schedule for the retiree settlement.
- Assess the concentration of sales to Glencore and the outcomes of material legal, environmental, pension, and power-related contingencies.