Century Aluminum Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts below are in millions of dollars unless noted. Century produces primary aluminum; the period included its first full reporting periods consolidating Mt. Holly, whose remaining 50.3% interest it acquired in December 2014.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $523.5 | $458.3 | $1,111.4 | $879.2 |
| Gross profit (margin) | $8.3 (1.6%) | $38.5 (8.4%) | $102.4 (9.2%) | $36.7 (4.2%) |
| Operating income (loss) | $(35.1) | $26.0 | $44.9 | $11.8 |
| Net income (loss) | $(33.9) | $20.3 | $39.9 | $0.2 |
| Diluted EPS | $(0.39) | $0.21 | $0.41 | $0.00 |
| Operating cash flow | Not stated separately | Not stated separately | $110.3 | $8.6 |
- Q2 sales rose 14.2%, and first-half sales rose 26.4%. The company attributed the increase to higher shipments, including Mt. Holly and a shift from tolling to direct sales at Grundartangi, as well as higher price realization. Most sales were to related party Glencore: $513.7 million in Q2 and $1,089.4 million in the first half.
- Q2 gross profit fell 78.4%. Drivers included a $25.7 million inventory lower-of-cost-or-market charge, $23.0 million of gross-profit pressure from higher alumina prices, and $11.7 million of Hawesville labor-disruption costs. Higher prices and volumes provided partial offsets. First-half gross profit improved year over year, benefiting from higher sales and lower power and natural-gas costs.
- Q2 included a $30.9 million Ravenswood impairment and a $10.3 million noncash gain from remeasurement of Mt. Holly contingent consideration. The first-half contingent-consideration gain was $16.8 million. Adjusted EBITDA, a company-defined non-GAAP measure, was $51.4 million in Q2 versus $43.7 million and $150.6 million for the first half versus $43.7 million.
Financial position, debt and liquidity
- At June 30, cash and cash equivalents were $167.4 million, inventories $318.4 million, total current assets $599.5 million and total current liabilities $267.7 million. Shareholders’ equity was $1,116.5 million.
- Total reported debt was $254.9 million: $247.1 million carrying value of 7.5% senior secured notes due 2021 and $7.8 million of industrial revenue bonds. No revolving-credit borrowings were outstanding.
- Credit-facility availability was approximately $123 million net of letters of credit. The amended U.S. facility has a $150 million maximum, matures in June 2020, and had $72.6 million availability after outstanding letters of credit; the Iceland facility had $50 million available and matures in November 2016.
- First-half investing cash outflow was $69.8 million, including the $38.2 million Mt. Holly payment; financing cash outflow was $36.4 million, principally share repurchases. Cash increased $4.2 million during the half.
Material changes, outlook and risks
- On July 27, 2015, Century announced the immediate, permanent closure of the Ravenswood smelter, idle since 2009. It cited the lack of a competitive power contract and weak aluminum-market conditions, including increased Chinese exports. The Q2 impairment included $21.5 million for property and equipment, $7.8 million for inventory and $1.6 million for severance and exit costs.
- On August 6, Century announced a cost-reduction and cash-preservation program, including capacity curtailments, headcount and operating-cost reductions, lower capital spending and working-capital liquidation. Further severance charges were expected, substantially settled in the second half of 2015. The filing does not quantify the program’s total savings or revised capital-spending outlook.
- Before that program announcement, management estimated 2015 capital spending of $55–$65 million. The company also cited ongoing projects at Grundartangi, Vlissingen and Hawesville. Helguvik remained contingent on power-contract issues; estimated cancellation exposure was about $20 million, with $12.7 million accrued.
- Electricity is the company’s largest operating cost. Hawesville and Sebree rely on market-priced power; management estimated that a $1/MWh change would affect annual costs by about $7.6 million in total. Mt. Holly’s power agreement was scheduled to end in December 2015, and replacement arrangements were under discussion. The filing also flags potential power-cost effects of the EPA’s Clean Power Plan, issued August 3, 2015.
- Other notable exposures include the contingent E.ON power obligation, pension funding commitments, environmental and legal matters, foreign-exchange risk, and uncertainty in aluminum and alumina prices. The company said it expected no E.ON payments based on then-current market assumptions, but future price changes could alter that assessment.
- Century repurchased 2.4 million shares for $36.4 million in the first half; about $43.7 million remained under the $130 million authorization. Management stated that the program could be suspended or discontinued.
Most important facts for investors to verify
- Whether the Ravenswood closure and subsequent preservation program lead to additional impairments, restructuring costs or cash savings.
- Replacement power terms and collateral requirements at Mt. Holly, and market-power cost exposure at Hawesville and Sebree.
- Inventory valuation and alumina pricing effects on gross margin, alongside the sustainability of higher shipment volumes and sales prices.
- Actual capital spending and liquidity after curtailments, working-capital actions, acquisition-related payments and share repurchases.
- Final Mt. Holly contingent-consideration settlement, Helguvik power-contract developments, and pension, environmental and other contingent obligations.