Century Aluminum Company - 10-Q Summary (Period Ended June 30, 2010)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2010, for Century Aluminum Company, a Delaware corporation engaged in the production of primary aluminum. The company operates smelters in Hawesville, Kentucky; Ravenswood, West Virginia (curtailed); and Grundartangi, Iceland. The filing includes unaudited consolidated financial statements and management discussion.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Net Sales | $287.9 million | $573.2 million |
| Gross Profit | $21.5 million | $55.5 million |
| Operating Income | $5.9 million | $23.2 million |
| Net Income | $5.1 million | $11.5 million |
| Diluted EPS | $0.05 | $0.11 |
| Cash and Cash Equivalents (End of Period) | $256.3 million | |
| Net Cash Provided by Operating Activities | $72.1 million (Six Months) | |
| Total Debt | $300.2 million | |
| Available Credit Facility | ~$51.0 million (as of June 30, 2010) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 52.2% for the quarter and 38.6% for the six-month period compared to 2009, driven primarily by higher LME aluminum prices.
- Profitability Turnaround: The company reported a net income of $5.1 million for the quarter, a significant improvement from a net loss of $107.1 million in the same period in 2009. Gross profit swung from a loss of $5.2 million in Q2 2009 to a profit of $21.5 million in Q2 2010.
- Derivative Gains: Net gain on forward contracts was $9.3 million for the quarter (vs. a $3.3 million loss in 2009), largely due to mark-to-market adjustments on put options protecting the Hawesville facility.
- Curtailment Costs: Other operating expenses (primarily curtailment costs for the Ravenswood facility) decreased to $4.6 million for the quarter from $9.2 million in the prior year period.
- Joint Venture Impact: Equity in earnings of joint ventures improved to $0.5 million (vs. a $68.7 million loss in 2009), as the 2009 loss included a $73.2 million impairment charge related to the transfer of Gramercy and St. Ann interests.
Guidance, Outlook, and Risks
- Helguvik Project: The company is pursuing the Helguvik smelter project in Iceland. Capital expenditures for the project were $10.1 million in the first six months of 2010. The project faces risks regarding power supply contracts; arbitration was commenced in August 2010 with one power supplier (HS Orka) regarding contract conditions.
- Liquidity and Financing: On July 1, 2010 (subsequent to the period end), the company entered into a new four-year, $100 million senior secured revolving credit facility, replacing the facility maturing in September 2010.
- Operational Risks: The Ravenswood facility remains curtailed. A new special rate mechanism for power was extended for one year, aiding potential restart discussions. Labor negotiations at Hawesville are ongoing following the expiration of the collective bargaining agreement in May 2010.
- Legal Contingencies: Stockholder class actions regarding accounting practices were dismissed without prejudice in April 2010 but amended complaints were filed in May and June 2010. Environmental matters, including an EPA Notice of Violation at Hawesville, are under investigation but are not expected to be material.
- Tax Attributes: The company holds approximately $1.7 billion in tax attributes (NOLs). A Tax Benefit Preservation Plan is in place to prevent an "ownership change" that would limit the use of these assets; the plan is expected to expire on September 29, 2010.
Investor Verification Checklist
- Power Contract Viability: Verify the status of the arbitration with HS Orka and negotiations with Orkuveita Reykjavikur regarding the Helguvik power supply, as this is critical to the project's feasibility.
- Debt Covenants: Review the covenants of the new $100 million credit facility and the impact of the borrowing base (accounts receivable and inventory) on liquidity, especially given the curtailed Ravenswood operations.
- Derivative Exposure: Assess the remaining exposure on primary aluminum put options and collar contracts, which currently hedge a significant portion of Hawesville's production.
- Legal Proceedings: Monitor the progress of the amended stockholder class actions and the EPA investigation at Hawesville for potential financial impacts.
- Helguvik Capital Needs: Confirm the funding strategy for the remaining capital required for the Helguvik project, estimated at $45 million from internal sources for 2010, with the balance to be raised externally.