Century Aluminum Company — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. Century produces primary aluminum at smelters in the United States and Iceland.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $473.1 million | $470.0 million | $963.2 million | $924.5 million |
| Gross profit (loss) | $(4.1) million | $33.7 million | $(16.9) million | $48.3 million |
| Operating income (loss) | $(16.3) million | $21.5 million | $(44.1) million | $25.0 million |
| Net income (loss) | $(20.7) million | $19.4 million | $(55.3) million | $19.1 million |
| Basic and diluted EPS | $(0.23) | $0.20 | $(0.63) | $0.20 |
- Gross margin was approximately negative 0.9% in Q2 2019, versus 7.2% in Q2 2018; for the first half it was negative 1.8%, versus 5.2%.
- Cash from operating activities was $(25.6) million for the first half, compared with $(30.4) million in 2018. Investing cash flow was $(12.8) million; financing cash flow was $25.2 million. Cash, cash equivalents and restricted cash ended at $26.5 million, down $13.2 million from the beginning of the year.
- At June 30, cash and cash equivalents were $25.7 million; current assets were $501.6 million and current liabilities $204.6 million. The company reported $176.5 million of net availability across its revolving credit facilities, after borrowings and letters of credit.
- Total debt was $304.8 million, including $248.9 million of 7.5% senior notes due June 2021, $40.0 million under a new term loan, $8.1 million drawn on the U.S. revolver and $7.8 million of industrial revenue bonds.
Material changes and operating drivers
- Q2 sales increased 0.7% year over year; first-half sales increased 4.2%. Higher volume and product mix were offset by weaker aluminum price realizations: management attributed the Q2 sales movement to $54.4 million of favorable volume and mix and $69.3 million of unfavorable LME and regional premium realizations. For the first half, the corresponding impacts were $97.0 million favorable and $92.1 million unfavorable.
- Gross profit deteriorated substantially. For Q2, weaker aluminum realizations and raw material price realization reduced gross profit by $69.3 million and $4.4 million, respectively; improved volume/mix and power prices provided $24.2 million and $13.5 million of offsets. First-half pressure also included $92.1 million of unfavorable aluminum realization and $21.2 million of unfavorable alumina realization, partly offset by volume and power improvements.
- Shipments of primary aluminum were 203,380 tonnes in Q2, up from 180,220 tonnes; first-half shipments were 409,831 tonnes, up from 367,458 tonnes. The filing attributes much of the volume increase to the Hawesville restart.
- Q2 derivative-contract gains were $6.1 million, versus $1.2 million a year earlier; first-half gains were $0.4 million, versus $1.9 million. These gains partly offset operating weakness and reflect market movements, not solely underlying operations.
- First-half operating cash use improved by $4.8 million year over year, mainly because of working-capital improvements, despite the net loss. Capital expenditures were $23.3 million in cash-flow reporting; MD&A separately reports $17.4 million excluding $8.1 million associated with the Hawesville restart.
Outlook, risks and unusual items
- The filing does not provide specific earnings or revenue guidance. Management said it believes operating cash flow and financing sources will cover needs over the next 12 months, while warning that adverse aluminum prices or production costs could materially affect cash generation.
- The Hawesville restart project is projected to require approximately $150 million in total through expected completion in 2020. The first phase, restarting 150,000 tonnes of capacity, was completed early in 2019 for approximately $75 million; the second phase is expected to cost another $75 million. A $40 million Glencore loan is intended to partially finance the second phase.
- Glencore, which owned 42.9% of common shares (47.0% on a fully diluted basis), purchased 64.5% of Q2 sales and 64.0% of first-half sales. The company states that related-party transactions are believed to approximate market prices.
- Century sold its 40% interest in Baise Haohai Carbon Co. (BHH) for RMB 144.9 million payable in two installments. It received the first installment and recorded a $10.6 million receivable for the second, due by December 31, 2019, and a $4.3 million loss on sale.
- First-half cash-flow reporting included a $13.4 million lower-of-cost-or-net-realizable-value inventory adjustment. The company adopted lease accounting in 2019 and reported $24.3 million of lease right-of-use assets and $25.3 million of lease liabilities.
- Key exposures include LME aluminum prices, regional premiums, alumina and power costs, production levels, foreign exchange, and the availability and cost of power. The filing highlights market-based power arrangements and estimates a $15.8 million annual cost impact for each $1/MWh change across expected normal-capacity usage.
- Contingencies include environmental and legal matters, pension obligations, and power-related commitments. Management did not expect currently known matters to have a material adverse effect, but noted outcomes and potential losses can be uncertain. The company also disclosed an ongoing Vernon environmental lawsuit with a trial scheduled for Q2 2020; it could not estimate a loss range.
Important facts for investors to verify
- Whether aluminum prices and regional premiums recover enough to restore positive operating margins, and how alumina and power costs move relative to selling prices.
- Hawesville phase-two spending, timing, production ramp, and the resulting cash needs and expected benefits.
- Liquidity and refinancing plans ahead of the $250 million senior notes’ June 2021 maturity, including compliance with borrowing-base and credit-facility covenants.
- Reliance on Glencore for sales and financing, and the timing and collection of the remaining BHH sale proceeds.
- Developments in significant legal, environmental, pension, power-contract and labor matters, and whether any change requires additional accruals or cash payments.