Century Aluminum Company — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise.
Business context and performance
Century produces primary aluminum, with smelting operations at Hawesville, Mt. Holly and Grundartangi. Ravenswood remained curtailed. Q2 direct shipments increased following the restart of idled Hawesville capacity.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $323.6 | $366.3 | $649.8 | $692.6 |
| Gross profit | $6.0 | $49.5 | $26.5 | $91.8 |
| Gross margin | 1.8% | 13.5% | 4.1% | 13.3% |
| Operating income (loss) | $(5.0) | $36.2 | $3.4 | $73.8 |
| Net income (loss) | $(12.3) | $24.0 | $(16.7) | $49.0 |
| Diluted EPS | $(0.14) | $0.24 | $(0.19) | $0.48 |
| Operating cash flow | Not separately presented for the quarter | $(1.6) | $(16.1) |
Financial position and liquidity
- At June 30, cash and cash equivalents were $156.5 million, down from $183.4 million at year-end 2011. Current assets were $464.8 million and current liabilities were $182.1 million.
- Reported debt and contingent obligation totaled $272.5 million: $250.0 million of senior notes, $7.8 million of industrial revenue bonds and a $14.7 million E.ON contingent obligation. The senior notes mature in 2014; the notes carry 8.0% and 7.5% coupons.
- The $100 million revolving facility had no borrowings and approximately $58 million of availability, net of $42.0 million of letters of credit. July 2012 letters of credit increased by $4 million, reducing availability correspondingly.
- Six-month investing cash use was $21.2 million, including the purchase of carbon-anode assets. Financing cash use was $4.0 million, primarily for share repurchases. Cash declined by $26.9 million during the half-year.
Material changes versus the prior comparable period
- Sales fell 11.7% in Q2 and 6.2% in the first half. Lower LME aluminum prices reduced sales by $69.1 million in Q2 and $107.9 million in the first half; higher shipment volumes partly offset the decline.
- Gross profit fell $43.5 million in Q2 and $65.3 million in the first half. Management attributed the decline principally to lower aluminum price realizations, partly offset by higher shipments and lower costs.
- SG&A declined to $7.2 million in Q2 and $15.6 million in the first half, partly because $7.7 million of 2011 charges related to board and executive-management changes did not recur.
- Six-month shipments rose to 320,795 metric tons from 295,661, including increased direct shipments associated with Hawesville’s restart.
Outlook, management commentary and risks
- The filing provides no earnings or revenue guidance. Management expected 2012 capital spending of $20–25 million, excluding Century Anodes and Helguvik.
- Century bought the former Zalco anode facility for approximately $12.5 million. It planned an approximately $45 million total investment, including capital expenditures, restart costs and working capital, to target restart of 75,000 metric tons of annual capacity in Q3 2013. Approximately $30 million of capital expenditure was contemplated over the following 12 months; management could defer the program if economic conditions were unfavorable.
- Helguvik construction timing remained uncertain, with power-supply conditions and financing among the factors. The company expected to fund about $1 million monthly from cash and operating cash flow until major construction resumed; estimated contract-cancellation exposure was approximately $20 million.
- Risks include aluminum-price and foreign-exchange volatility, power and raw-material costs, take-or-pay power commitments, and uncertainty surrounding Ravenswood’s potential restart. Arbitration with Icelandic power suppliers over power-purchase arrangements was expected in Q1 2013. A PBGC determination of cessation of operations at Ravenswood could require accelerated pension contributions or collateral.
- In July 2012, a court granted summary judgment to Ingram Barge in a contract dispute; Century intended to seek reconsideration and estimated possible loss exposure at $0–5 million. The former CEO’s arbitration claim seeks severance payments exceeding $20 million, plus unspecified damages; the company disputed the claims and could not estimate a loss range.
- Management reported a $5.4 million Q2 inventory write-down from lower LME prices, partly offset by first-quarter inventory valuation effects; the combined first-half effect increased gross profit by $11.6 million. A roughly $21 million customer receivable due June 29 was collected in July and was not included in quarter-end cash.
Important facts for investors to verify
- Aluminum-price assumptions, realized premiums, and the durability of Hawesville’s shipment recovery and margins.
- Availability under the revolver after the July letter-of-credit increase, and the company’s ability to address 2014 note maturities.
- Funding, timing and return assumptions for the Century Anodes investment, as well as Helguvik power, financing and cancellation exposure.
- Developments in Ravenswood restart discussions, PBGC engagement, retiree-benefit arrangements and related potential cash obligations.
- Outcomes of the Ingram Barge litigation, former CEO arbitration, and other environmental and legal contingencies.