Century Aluminum Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The quarter’s results include Mt. Holly, consolidated after Century acquired the remaining 50.3% interest on December 1, 2014, so comparisons with Q1 2014 are not fully like-for-like.
Financial results and liquidity
- Revenue: $587.9 million, up 39.7% from $420.8 million. Related-party sales, principally to Glencore, were $575.7 million versus $285.6 million; third-party sales were $12.2 million versus $135.3 million. Management attributed the revenue increase to $90.1 million from higher shipment volumes and $77.0 million from improved price realizations.
- Profitability: Gross profit was $94.1 million, compared with a $1.8 million gross loss; gross margin was approximately 16.0%, versus negative 0.4%. Operating income was $80.0 million versus an operating loss of $14.2 million. Net income was $73.8 million, or $0.76 per diluted share, versus a $20.1 million net loss, or $0.23 per share. Q1 2015 net income included a $6.5 million noncash gain from remeasuring Mt. Holly contingent consideration.
- Adjusted EBITDA: $100.7 million versus a $0.0 million loss (reported as negative $7,000). This is a non-GAAP measure; the filing reconciles it to operating income.
- Cash flow: Operating activities provided $116.3 million, versus $10.7 million used in Q1 2014. Management cited higher adjusted EBITDA and working-capital changes; cash flow also reflected a substantial reduction in receivables. Investing activities used $33.6 million, including a $21.0 million restricted-cash deposit later released in April. Financing activities used $19.4 million, mainly for share repurchases. Cash and cash equivalents ended the quarter at $226.4 million.
- Balance sheet and debt: Current assets were $672.7 million and current liabilities $315.4 million. Debt totaled $254.8 million: $247.0 million carrying value of 7.5% senior secured notes due 2021 and $7.8 million of industrial revenue bonds. There were no revolving-credit borrowings at quarter end. The company reported approximately $101 million of combined availability under its U.S. and Iceland facilities, net of letters of credit; U.S. facility availability was $50.6 million.
- Capital returns: Century repurchased 1.2 million shares for $19.4 million during the quarter. The repurchase authorization was expanded to $130 million, with approximately $60.6 million remaining at March 31.
Material changes and operating developments
- Shipment volumes increased, including the contribution of Mt. Holly and a shift at Grundartangi from tolling to direct sales. Direct shipments rose 41,977 tonnes year over year; toll shipments fell 3,503 tonnes.
- Management attributed $61.1 million of gross-profit improvement to higher price realizations net of alumina and LME-indexed power costs, and $2.8 million to volume and sales mix. Lower U.S. power and natural-gas costs contributed to net smelter cost decreases of $38.7 million, partly offset by other cost increases.
- SG&A rose to $12.0 million from $10.1 million, primarily due to professional services and costs related to a former senior executive.
- In March, Century signed a labor agreement at Grundartangi effective through December 31, 2019. Hawesville’s union agreement expired April 8, 2015, and negotiations were ongoing at the filing date.
Outlook, risks, and contingencies
- The filing does not provide earnings or revenue guidance. Management expected 2015 capital spending of approximately $80–$90 million, primarily for the Grundartangi expansion, the Vlissingen furnace restart, and North American facility projects.
- The Vlissingen second-furnace restart was expected to be completed by year-end 2015 at an estimated cost of $12 million. The Hawesville anode-rodding project was expected to cost $16 million and finish in Q4 2015.
- Helguvik construction remains curtailed while Century negotiates power-contract conditions. Management could not predict when major construction would resume; annual spending was expected to remain below $0.5 million until then. Estimated cancellation and related costs were approximately $20 million, with about $12.1 million accrued. Power supplier HS was pursuing arbitration challenging its contract; Century said it considered the claims without merit.
- Mt. Holly’s power agreement with Santee Cooper runs through December 2015. Century had given notice to reduce contract demand to zero from that date and was discussing future power arrangements. Power availability and market prices are significant risks: a $1/MWh change was estimated to affect annual costs by about $7.6 million at Hawesville and Sebree combined.
- Century paid an additional $38.2 million for the Mt. Holly acquisition in April 2015. The purchase agreement includes a contingent payment based on aluminum prices and production; management estimated Alcoa would pay Century about $0.7 million in Q1 2016 under then-current market conditions, while contractual maximum payments run in either direction.
- The E.ON contingent obligation, with principal and accrued interest of $18.5 million, was fully offset by a derivative asset at quarter end. Management expected no payments through the agreement’s 2028 term based on its aluminum-price assumptions, but noted circumstances could change.
- Other exposures include pension funding, environmental and legal matters, foreign-exchange risk, and reliance on Glencore: the customer purchased substantially all North American primary aluminum production under a 2015–2016 take-or-pay agreement. Management did not expect pending legal matters or current environmental liabilities to have a material adverse effect, while noting some outcomes and potential losses could not be estimated.
Most important facts for investors to verify
- Whether improved aluminum prices, premiums, shipment volumes, and lower U.S. energy costs persist, and how much Q1 profit was attributable to the noncash contingent-consideration gain.
- Mt. Holly’s final acquisition economics, including the April payment, earn-out outcome, and power supply arrangements after December 2015.
- Progress and potential commitments at Helguvik, including the HS arbitration and remaining cancellation exposure.
- Power-price sensitivity, facility operating levels, Hawesville labor negotiations, and the availability of credit after letters of credit and borrowing-base limits.
- Actual 2015 capital spending and pension contributions versus management’s estimates; the filing states interim results are not necessarily indicative of full-year results.