Century Aluminum Company — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Century produces primary aluminum in the U.S. and Iceland, with one operating carbon-anode facility in the Netherlands and a 40% interest in a Chinese carbon-products joint venture.
Financial and operating performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $1,931.0 million | $1,454.3 million |
| Gross profit / margin | $202.5 million / 10.5% | $39.5 million / 2.7% |
| Operating income (loss) | $140.8 million | $(36.6) million |
| Net income (loss) | $112.5 million | $(40.3) million |
| Diluted EPS | $1.15 | $(0.45) |
| Cash from operating activities | $196.4 million | $19.7 million |
| Capital expenditures | $55.1 million | $68.1 million |
| Cash and cash equivalents at year-end | $163.2 million | $84.1 million |
| Total debt, as defined in selected financial data | $254.7 million | $262.9 million |
Q4 2014: Net sales were $551.2 million, gross profit $90.0 million, net income $61.8 million, and diluted EPS $0.63. Q4 included a $7.9 million gain on remeasurement of Mt. Holly contingent consideration and a $1.3 million gain on remeasurement of the previously held Mt. Holly interest; it also included $5.0 million in non-cash pension charges and $2.6 million in executive separation costs.
Primary aluminum production was approximately 881,000 tonnes. Shipments totaled approximately 867,000 tonnes, including 728,377 tonnes of direct shipments and 138,748 tonnes of toll shipments. Adjusted EBITDA, a non-GAAP measure, was $215.9 million versus $12.2 million in 2013.
Changes and significant developments
- Sales rose about 33% year over year, reflecting higher shipment volumes, a full year of Sebree ownership, the December 2014 acquisition of the remaining 50.3% of Mt. Holly, and a shift from toll to direct sales at Grundartangi. Higher price realizations also contributed.
- Average LME aluminum price increased to $1,867 per tonne from $1,846; the average U.S. Midwest premium rose to $450 from $244 per tonne. Management cited lower U.S. power and natural-gas costs and higher realized prices as key gross-profit drivers.
- Operating cash flow improved substantially, principally alongside higher adjusted EBITDA. Cash increased by $79.2 million during the year. Investing activities used $109.1 million, including $53.8 million for the Mt. Holly acquisition; financing activities used $8.2 million.
- Century acquired full ownership of Mt. Holly for a stated purchase price of $67.5 million, subject to adjustments. The preliminary acquisition accounting included an expected additional payment of approximately $40.8 million in Q2 2015, primarily related to pension funding, and contingent consideration tied to aluminum prices and production.
- Debt consisted principally of $250 million face value of 7.5% senior secured notes due 2021, carried at $246.9 million net of discount, plus $7.8 million of industrial revenue bonds. No revolving-facility borrowings were outstanding at year-end.
Outlook, risks and unusual items
- Management expected 2015 capital spending of approximately $80–$90 million, mainly for the Grundartangi expansion, restarting Vlissingen’s second baking furnace, and North American facility projects. No specific earnings or aluminum-price guidance is provided.
- Century expected to sell substantially all North American production to Glencore in 2015 and 2016 under a take-or-pay agreement at market-based prices. Glencore purchased 65.4% of 2014 sales; Glencore and Southwire together accounted for approximately 77%.
- Mt. Holly’s Santee Cooper power agreement ran through December 2015. Century had given notice to reduce contract demand to zero after that date and was negotiating future power arrangements; management warned that failure to secure suitable power could make the smelter unprofitable or unable to operate.
- Hawesville and Sebree rely on market-priced electricity, exposing them to power-price volatility, transmission constraints and outages. A $1/MWh change in their combined power price was estimated to affect annual costs by approximately $7.6 million.
- Helguvik construction remained significantly curtailed pending resolution of power-supply conditions. HS had initiated arbitration challenging its power agreement. Century had invested approximately $147.6 million through year-end and estimated cancellation exposure at about $20 million, with $12.1 million accrued. Project completion, timing, financing and returns remain uncertain.
- Ravenswood, with a year-end carrying value of approximately $45.7 million, has been curtailed since 2009. Restart depends on market conditions, competitive power, labor arrangements and other objectives; failure to restart could require an impairment.
- Other exposures include aluminum and raw-material price volatility, take-or-pay contracts, labor negotiations, Icelandic currency-transfer restrictions, environmental and legal contingencies, pension and retiree-benefit obligations, and potential limits on using approximately $1.3 billion of federal NOLs after an ownership change. The filing reports a $748.3 million valuation allowance against deferred tax assets.
- One-time or non-recurring items affected comparability, including Sebree power-contract amortization credits of $5.5 million in 2014 versus $31.0 million in 2013, the Mt. Holly remeasurement and contingent-consideration gains, pension settlement charges, and executive separation costs.
Most important facts for investors to verify
- Progress and terms of Mt. Holly’s post-2015 power supply, related security requirements, and final acquisition/pension settlement amounts.
- Whether the reported profit and cash-flow improvement is sustainable after acquisition effects, lower prior-year comparables, and non-recurring gains and amortization credits.
- Actual power costs and availability at Hawesville and Sebree, and the sensitivity of margins to LME prices and regional premiums.
- Resolution of Helguvik power arbitration and contract conditions, project impairment/cancellation exposure, and future funding requirements.
- Customer concentration and the commercial terms, performance and renewal prospects of Glencore and Southwire arrangements.
- Labor contract outcomes, pension funding needs, NOL usability, and material developments in environmental or legal matters.
The independent auditor issued an unqualified opinion on the financial statements. Management and the auditor reported effective internal control over financial reporting, although Mt. Holly was excluded from the control assessment because it was acquired late in 2014.