Century Aluminum Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Century produces primary aluminum and operates smelters in the U.S. and Iceland. Results include Sebree, acquired in June 2013; the quarter also reflects a shift at Grundartangi from tolling to direct sales.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $420.8 million | $321.3 million |
| Gross profit (loss) | $(1.8) million | $17.6 million |
| Operating income (loss) | $(14.2) million | $0.2 million |
| Net income (loss) | $(20.1) million | $8.3 million |
| Diluted EPS | $(0.23) | $0.09 |
| Operating cash flow | $(10.7) million | $22.4 million |
- Gross margin was approximately negative 0.4%, compared with positive 5.5% a year earlier. Adjusted operating income (loss), a company-defined non-GAAP measure, was approximately break-even ($(0.007) million), versus $21.7 million.
- Shipments increased 30% to 206,785 tonnes. Net sales rose 31%, primarily from higher volumes following the Sebree acquisition and the Grundartangi sales mix shift. Lower aluminum price realizations reduced sales by $37.8 million.
- Cash and cash equivalents were $52.5 million at quarter-end, down from $84.1 million at December 31, 2013. Investing cash outflow was $14.9 million and financing cash outflow was $6.0 million; total cash decreased $31.6 million.
- Total reported debt was approximately $257.0 million, including $246.6 million carrying value of 7.5% secured notes due 2021, $7.8 million of industrial revenue bonds, and $2.6 million of unsecured notes due August 2014. Revolving facilities had no quarter-end borrowings and approximately $129 million aggregate net availability, subject to borrowing bases and letters of credit.
- Total assets were $1.787 billion and shareholders’ equity was $983.1 million. Working capital was approximately $214.0 million.
Material changes and unusual items
- Despite higher volume, gross profit fell by $19.3 million. Management attributed pressure chiefly to lower price realizations net of LME-linked power and alumina costs, and higher costs at owned smelters. Price/cost effects reduced gross profit by $29.9 million; volume and sales-mix effects added $5.7 million.
- Q1 2014 included a $5.5 million non-recurring credit from amortization of the unfavorable Sebree power-contract liability. A $1.1 million inventory reserve release also benefited cost of goods sold; the comparable 2013 period had a $5.8 million inventory charge.
- Derivative results swung from a $15.5 million gain in Q1 2013 to a $0.9 million loss in Q1 2014. The prior-year gain was mainly an unrealized change in the E.ON contingent-obligation derivative; the 2014 loss primarily reflected settlements of downside-price-protection contracts, all settled by quarter-end.
- Cash from operations was lower, reflecting weaker adjusted operating performance, approximately $10 million paid to the former CEO under an arbitration award, and greater working-capital use. These effects were partly offset by lower tax and withholding-tax payments than in Q1 2013.
Outlook, risks and contingencies
- Management expected 2014 capital spending of approximately $50 million, excluding any expansion of Century Vlissingen capacity. Q1 capital expenditures were $15.5 million, including $6.1 million for Grundartangi expansion and $5.7 million for the Vlissingen restart.
- Hawesville and Sebree now obtain power under market-based arrangements tied to MISO prices plus transmission and other costs. Power is the company’s largest operating cost; management estimated each $1/MWh price change would affect annual costs by approximately $7.6 million across the two smelters. No forward contracts were in place to hedge this exposure at quarter-end.
- Century was discussing Mt. Holly power arrangements beyond December 2015. The notice deadline to reduce contracted demand to zero effective December 31, 2015 was June 30, 2014.
- Management believed no E.ON contingent-obligation payments would be required based on then-current aluminum-price expectations, but future LME prices and Hawesville operating levels could trigger payments. The $17.1 million principal and accrued-interest obligation was fully offset by a derivative asset at March 31, 2014; the offset may change with market conditions.
- The company had deferred approximately $3.7 million of PBGC-related 2014 pension contributions and provided required security. It also expected approximately $4.6 million of minimum qualified-plan contributions and $1.8 million to its supplemental executive retirement plan during 2014.
- Helguvik remained dependent on resolution of power-supply conditions and other factors before major construction could resume. Estimated cancellation exposure was approximately $20 million, with $12.8 million accrued; spending was expected to remain below $0.5 million annually until major construction restarted.
- Other matters include the Sebree purchase-price working-capital dispute, environmental and other litigation, and Icelandic tax examinations. Management said it could not estimate potential losses for certain cases, but did not believe reasonably possible outcomes beyond accruals would be material. The filing reported no material changes to the risk factors in the 2013 Form 10-K.
Important facts for investors to verify
- Whether aluminum prices, regional premiums, and market-based power costs support improved margins and cash generation.
- Actual 2014 capital spending, pension contributions, and availability under borrowing-base-limited credit facilities.
- Resolution and payment, if any, of the Sebree working-capital adjustment, and the August 2014 unsecured-note maturity.
- Developments in Mt. Holly power negotiations, Helguvik power availability, and the potential cancellation exposure.
- Changes in the E.ON contingent obligation, environmental and legal contingencies, and realization of deferred tax assets subject to valuation allowances.