Century Aluminum Company — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Century produces primary aluminum at smelters in the U.S. and Iceland. Unless noted, financial amounts below are in millions of dollars.
Financial performance
- Q3 revenue: $454.5, down 9.2% from $500.6 a year earlier. Higher shipment volumes added $44.8, but lower price realization reduced sales by $90.9. Related-party sales to Glencore were $428.0, or about 94% of quarterly revenue.
- Q3 earnings: Gross loss was $42.4 versus gross profit of $75.7; operating loss was $55.5 versus income of $62.2; net loss was $56.1, or $0.65 per diluted share, versus net income of $50.4, or $0.52 per share. Gross margin was approximately negative 9.3%, compared with 15.1%.
- Nine-month results: Revenue was $1,565.9, up 13.5%; gross profit was $60.0 versus $112.5; operating loss was $10.6 versus income of $73.9; net loss was $16.2, or $0.19 per share, versus net income of $50.6, or $0.52 per share. Gross margin was approximately 3.8%, compared with 8.2%.
- Key cost and earnings items: Nine-month gross profit was pressured by $59.0 of higher alumina costs, inventory valuation impacts, and $13.1 of Hawesville labor-disruption costs. Century recorded a $30.9 Ravenswood impairment. A noncash $18.3 gain on Mt. Holly contingent consideration partly offset other losses.
- Cash flow: Nine-month operating cash flow was $32.5, down from $97.7. Investing used $36.4, including $47.6 of capital expenditures; financing used $36.4, primarily for share repurchases. Cash declined $40.3 to $123.0.
- Liquidity and debt: Cash was $123.0 at quarter-end. The company reported approximately $100 of net availability under revolving facilities after letters of credit, with no borrowings outstanding. Debt totaled $255.0, including $247.2 of 7.5% senior secured notes due 2021 and $7.8 of industrial revenue bonds classified as current because of weekly remarketing. Shareholders’ equity was $1,071.3.
- Other measures: Adjusted EBITDA, a non-GAAP measure, was negative $24.9 for Q3 versus $79.8, and $125.7 for nine months versus $123.5.
Material changes and management commentary
- Mt. Holly was acquired in December 2014, increasing consolidated production and shipments. The company also shifted Grundartangi shipments from tolling to direct sales; lower realized prices offset volume benefits.
- Century permanently closed its long-idled Ravenswood smelter, citing the lack of competitive power and weak aluminum-market economics. The related assets, valued at $32.1, were classified as held for sale; sale was expected within twelve months.
- Hawesville continued at approximately 40% of capacity after Century revised its earlier full-curtailment plan. The company issued a WARN notice for curtailment of one Sebree potline by December 31, 2015.
- Century issued a WARN notice for possible full curtailment of Mt. Holly by December 31, 2015 if it could not secure competitively priced power before its existing contract expired. No new power arrangement had been secured as of the filing.
- Management announced a cost-reduction and cash-preservation program, including curtailments, headcount and operating-cost reductions, lower capital spending, and working-capital liquidation. It expected 2015 capital spending of approximately $60.
- Management stated it expected no E.ON contingent-obligation payments through 2028 based on aluminum forward prices and operating assumptions; the $19.3 obligation was fully offset by a derivative asset at quarter-end. Future market changes could alter this assessment.
Risks, contingencies, and unusual items
- Power availability and cost are central risks: market-based power exposes Hawesville and Sebree to MISO price volatility, while Mt. Holly’s contract expiration threatened continued operations. Curtailments may leave fixed costs and take-or-pay obligations in place.
- Weak aluminum prices, lower premiums, and elevated alumina costs contributed to the loss and inventory write-downs. At September 30, Century recorded a $31.0 lower-of-cost-or-market inventory charge.
- Century reported approximately $20 of estimated Helguvik cancellation exposure, with about $12.3 accrued. Major construction restart timing remained uncertain, pending power-contract discussions.
- Other exposures include pension funding, environmental and legal matters, labor negotiations, and foreign-currency movements. Management did not expect currently assessed environmental or legal matters to be material, but noted uncertainty in outcomes and estimates.
- Century reported compliance with credit-facility covenants and effective disclosure controls as of September 30, 2015. Management cautioned that interim results are not necessarily indicative of full-year results; no specific earnings guidance was provided.
Investor facts to verify
- Whether Mt. Holly secured competitively priced power and the resulting operating, curtailment, and letter-of-credit implications.
- Actual timing and costs of the Sebree and Hawesville curtailments, and whether planned cost savings offset continuing fixed and take-or-pay costs.
- Aluminum price and premium trends, alumina pricing, inventory valuation effects, and the company’s reliance on Glencore for sales and supplies.
- Cash generation, borrowing-base availability as production changes, and funding needs for pensions, capital expenditures, and other commitments.
- Final Mt. Holly contingent-consideration settlement, Ravenswood asset-sale proceeds, and potential impairment or cancellation costs related to Helguvik.