Century Aluminum Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Century produces primary aluminum at smelters in the United States and Iceland. Results are driven principally by aluminum prices and premiums, power and raw-material costs, and production and shipment volumes. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $470.0 | $388.8 | $924.5 | $754.6 |
| Gross profit | $33.7 | $22.5 | $48.3 | $39.3 |
| Operating income | $21.5 | $12.9 | $25.0 | $18.1 |
| Net income (loss) | $19.4 | $7.1 | $19.1 | $(8.0) |
| Diluted EPS | $0.20 | $0.07 | $0.20 | $(0.09) |
| Gross margin | 7.2% | 5.8% | 5.2% | 5.2% |
- Q2 sales increased $81.2, primarily from $71.7 of higher price realizations and $9.5 of favorable product mix. First-half sales increased $169.9, including $145.1 from higher price realizations and $24.8 from favorable mix.
- Gross profit improved $11.2 in Q2 and $9.0 for the first half. Higher aluminum realizations were partly offset by higher raw-material and power costs, unfavorable operating expenses, and equipment-failure and restart costs.
- Net derivative-contract gains were $1.2 in Q2 and $1.9 for the first half, compared with $3.0 and a $13.2 loss in the respective 2017 periods. The first-half comparison was significantly affected by prior-year losses on forward contracts.
- Net cash used in operating activities was $30.4 for the first half, versus $3.1 provided in 2017. Working-capital investment—particularly receivables and inventory—more than offset net income. Capital expenditures were $13.0 in cash-flow reporting; the MD&A separately reports $10.1 of capital expenditures excluding Hawesville restart spending.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $124.0, down from $167.2 at year-end; cash, cash equivalents and restricted cash totaled $124.8. Total assets were $1,616.9 and shareholders’ equity was $853.1.
- Total reported debt was $256.2: $248.4 carrying value of 7.5% senior secured notes due June 2021 and $7.8 of industrial revenue bonds. The bonds are classified as current and may be repayable on demand if remarketing fails.
- The amended U.S. revolving facility provides up to $175.0 and matures in May 2023; net availability after letters of credit and borrowings was $136.7. The Iceland facility provides up to $50.0, with no borrowings. Combined net availability was $186.7. No borrowings were outstanding, and the company reported compliance with facility covenants.
- Management stated that cash from operations and financing activities should cover operations and business needs for the next 12 months. Operating cash use and planned restart investment remain important to that assessment.
Operations, outlook and material developments
- Hawesville and Mt. Holly were operating at approximately 40% and 50% of full capacity, respectively; Grundartangi was at full capacity. Sebree operated below full production after an equipment failure affecting one potline.
- The Hawesville restart and technology-upgrade project is projected to require approximately $150.0 through 2020. Phase one is expected to restart 150,000 tonnes by early 2019 at an estimated $75.0; phase two is expected to cost a further $75.0 and address 100,000 tonnes of existing production in late 2019 or early 2020. Century had invested $11.7 through June 30 and expected to fund the project with operating cash flows and existing cash.
- The Sebree failure’s estimated Q2 impact was $8.5, including $7.0 of lost profit and $1.5 of repairs. The company estimated a further $10.0–$15.0 impact in Q3, expected full production by the end of Q3, and expected insurance coverage of losses less $7.0 of deductibles.
- Century estimated 2018 capital spending of approximately $30.0, excluding Hawesville restart costs. No formal earnings or aluminum-price guidance is provided in the filing.
- The company cited the U.S. 10% tariff on imported primary aluminum, effective March 23, 2018, and expected short-term import needs to support demand and higher prices for its products. Actual effects depend on implementation, exemptions, market prices and other trade actions.
- Glencore owned 42.9% of common stock (47.4% on a fully diluted basis) and all outstanding Series A convertible preferred stock. Glencore accounted for approximately 60% of Q2 sales and 63% of first-half sales in 2018, down from 76% in both 2017 periods. Related-party sales concentration remains material.
Risks, contingencies and unusual items
- Power is the company’s largest operating cost. Hawesville and Sebree power costs are market-based; the filing warns that price increases, transmission problems or grid instability could impair margins or disrupt production. A $1/MWh change was estimated to affect annual costs by approximately $15.8 at normal expected load.
- Raw-material inflation, aluminum-price volatility, foreign-exchange movements, production interruptions and the execution and funding of the Hawesville restart are key operating risks. Section 232 tariff outcomes and market effects are uncertain.
- The company had $23.1 of principal and accrued interest related to a contingent power-contract obligation, fully offset by a derivative asset. Based on its market assumptions, management did not expect payments during the agreement term through 2028, but noted circumstances could change.
- Remaining additional pension contributions under the PBGC agreement were approximately $9.6; certain payments had been deferred with security provided. A retiree medical settlement requires annual payments of $2.0 for nine years after an initial $5.0 payment; related recorded liabilities totaled $13.3 at June 30.
- Environmental and legal matters include the Vernon dispute and St. Croix-related matters. Outcomes and possible losses could not be estimated for certain cases; management did not believe reasonably possible losses beyond accruals would be material based on current knowledge.
- All U.S. and certain foreign deferred tax assets, net of deferred tax liabilities, remained subject to a valuation allowance. The filing says the company continued assessing the effects of U.S. tax reform.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Sebree returned to full production by the end of Q3 and whether insurance proceeds cover the estimated losses, beyond the $7.0 deductible.
- Hawesville restart spending, schedule, funding sources and progress toward the planned production increases.
- Whether cash conversion improves as receivables and inventory normalize, given first-half operating cash outflow and declining cash balances.
- Aluminum, alumina and power-price movements, including their effects on margins and the company’s market-based power exposure.
- Glencore-related sales concentration and the status of customer diversification, contracts and related-party transactions.
- Liquidity and covenant headroom, the 2021 note maturity and refinancing options, and developments in pension, environmental and legal obligations.