Century Aluminum Company — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; amounts below are U.S. dollars.
Business context and financial performance
Century produces primary aluminum and operates smelters in the U.S. and Iceland. On June 1, 2013, it acquired the Sebree, Kentucky smelter, with annual capacity of 205,000 metric tons.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $331.9 million | $323.6 million | $653.2 million | $649.8 million |
| Gross profit (loss) | ($5.7 million) | $6.0 million | $11.9 million | $26.5 million |
| Operating income (loss) | ($23.9 million) | ($5.0 million) | ($23.7 million) | $3.4 million |
| Net income (loss) | ($34.6 million) | ($12.3 million) | ($26.3 million) | ($16.7 million) |
| Loss per common share | ($0.39) | ($0.14) | ($0.30) | ($0.19) |
Q2 gross margin was approximately -1.7%, versus 1.8% a year earlier; first-half gross margin was approximately 1.8%, versus 4.1%. Aluminum shipments increased to 176,270 metric tons in Q2 and 335,046 in the first half. Management attributed higher sales primarily to shipment growth, partly offset by lower LME aluminum prices; acquired Sebree contributed to higher direct shipments.
Cash flow, debt and liquidity
- First-half operating cash flow was $23.0 million, compared with cash use of $1.6 million in 2012. Investing cash use was $71.1 million, including $48.1 million for Sebree; financing cash use was $8.4 million. Cash declined by $56.4 million to $127.5 million.
- At June 30, total debt was $256.8 million, including $248.96 million carrying value of senior notes and $7.82 million of industrial revenue bonds. Century issued $250 million principal amount of 7.5% secured notes due 2021 and used proceeds plus cash to retire its 8% secured notes due 2014. The refinancing generated a $3.3 million extinguishment loss.
- The amended revolving facility runs to May 2018, with commitments up to $137.5 million. There were no borrowings outstanding; net availability was approximately $64.0 million after letters of credit. Availability depends on eligible receivables and inventory.
- Capital expenditures were $22.9 million in the first half. The company estimated 2013 spending of $40–$45 million excluding Helguvik and Vlissingen projects; it expected to spend $30–$35 million in 2013 to restart Vlissingen anode capacity.
Material changes, outlook and notable items
- Lower aluminum price realizations reduced Q2 gross profit by $18.0 million, net of LME-linked alumina and power costs. A $16.1 million lower-of-cost-or-market inventory reserve was recorded in the first half, including a $10.2 million Q2 charge.
- First-half results included a $15.7 million net gain on forward and derivative contracts, primarily a $16.1 million noncash gain from remeasurement of the E.ON contingent obligation; a $2.0 million preliminary bargain-purchase gain on Sebree; and the $3.3 million debt extinguishment loss. The E.ON liability’s net fair value was zero at June 30 based on management’s aluminum-price assumptions; future price increases could reverse the gain.
- Sebree’s preliminary purchase-price allocation included a $36.6 million estimated liability for its assumed power contract, which is being amortized through January 2014. The seller retained historical environmental liabilities and agreed to fund the pension plan assumed in the transaction.
- Hawesville’s existing power agreement was scheduled to end August 20, 2013. A proposed market-priced arrangement required third-party approvals; without an approved replacement, the plant faced curtailment. Sebree’s power agreement was scheduled to end January 31, 2014, and replacement power was not assured. The filing gives no broader earnings guidance.
- Other risks include proposed LME warehouse rules that could depress aluminum prices and premiums; execution and integration risks from Sebree; Helguvik power and construction uncertainty, with estimated cancellation exposure of approximately $20 million; and currency exposure, particularly to the Icelandic krona.
- Century agreed to make approximately $17.4 million of additional Ravenswood pension contributions through 2016 under a PBGC settlement. A former CEO’s arbitration claim seeks severance payments exceeding $20 million; Century disputes the claim. Environmental and other proceedings remain, with certain potential losses not estimable from the filing.
Most important facts for investors to verify
- Whether Hawesville received required approvals and secured competitively priced power before its August 2013 contract expiry, and the subsequent operating status of Hawesville and Sebree.
- Whether Sebree delivered expected operating and financial benefits, and how final working-capital adjustments and purchase accounting changed the acquisition figures.
- How aluminum prices, regional premiums and inventory valuation affect margins, cash flow and the E.ON contingent obligation.
- Actual liquidity and borrowing-base availability, alongside planned capital spending, pension contributions and Icelandic tax-payment/refund timing.
- Developments in the former CEO arbitration and other material legal, environmental and pension contingencies.