Century Aluminum Company — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2014. Amounts below are in millions of dollars unless otherwise noted. Century produces primary aluminum; Sebree was acquired in June 2013, Ravenswood remained curtailed, and Helguvik was still a development project.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $500.6 | $399.9 | $1,379.8 | $1,053.1 |
| Gross profit | $75.7 | $12.4 | $112.5 | $24.2 |
| Gross margin | 15.1% | 3.1% | 8.2% | 2.3% |
| Operating income (loss) | $62.2 | $(4.2) | $73.9 | $(27.9) |
| Net income (loss) | $50.4 | $(9.5) | $50.6 | $(30.6) |
| Diluted EPS | $0.52 | $(0.11) | $0.52 | $(0.35) |
| Adjusted EBITDA | $79.8 | $(4.5) | $123.5 | $14.8 |
Q3 sales rose 25.2%; nine-month sales rose 31.0%. Related-party sales were $324.8 million in Q3 and $898.9 million year to date, compared with $128.9 million and $372.7 million, respectively, in 2013. Direct aluminum shipments increased, while toll shipments declined. Management attributed sales and profit improvement primarily to higher aluminum price realizations, Sebree-related volume, and a shift at Grundartangi from tolling to direct sales. Lower U.S. power and natural-gas costs also contributed.
Cash from operations was $97.7 million for the first nine months, versus $42.5 million in 2013. Investing used $39.9 million and financing used $8.5 million; cash increased $49.3 million to $133.4 million. Capital expenditures were $39.4 million, including approximately $10.5 million for Grundartangi expansion and $12.3 million for Vlissingen.
Balance sheet and liquidity
At September 30, cash and cash equivalents were $133.4 million and total current assets were $522.1 million, against current liabilities of $217.3 million. Total debt was $254.6 million: $246.8 million net carrying value of 7.5% senior secured notes due 2021 and $7.8 million of industrial revenue bonds. Revolving facilities had no outstanding borrowings and approximately $126 million of aggregate net availability, subject to borrowing-base limits; U.S. letters of credit outstanding were $72.2 million. The remaining 2014-maturity senior unsecured notes were repaid.
Material changes, outlook, and risks
- Improved results reflect higher prices and operating volumes, but comparisons are affected by the Sebree acquisition and product-mix changes. The Sebree power-contract amortization credit was $5.5 million in the first nine months of 2014 versus $14.5 million in 2013; there was no Q3 2014 credit. The prior-year period also included a $5.3 million bargain-purchase gain and $16.4 million of nine-month derivative gains. These items limit comparability.
- Management estimated 2014 capital spending at approximately $60 million, excluding any expansion of current Vlissingen capacity. The second Vlissingen baking furnace project was expected to finish by the end of 2015. Major Helguvik construction timing remained uncertain; spending was expected to stay below $0.5 million annually until construction resumes. Estimated Helguvik cancellation exposure was approximately $20 million, with $12.4 million accrued.
- On October 23, 2014, Century agreed to acquire Alcoa’s 50.3% stake in Mt. Holly for $67.5 million, subject to adjustments and customary closing conditions, with closing expected in Q4 2014. Century expected to fund it with cash and revolver borrowings. The same day, lenders consented to the acquisition, revised certain covenants temporarily, and increased the letter-of-credit sub-facility to $100 million.
- Mt. Holly notified Santee Cooper that it would reduce contract demand to zero effective December 31, 2015. Century was negotiating a replacement power arrangement; the filing warns that failure to secure favorable power terms could impair or prevent profitable operations at the plant.
- Hawesville and Sebree depend on market-priced power. Management estimated that a $1/MWh change would affect annual costs by about $7.6 million across the two smelters. Helguvik power-contract conditions are disputed, and HS commenced arbitration in July 2014; Century’s subsidiary intends to defend its position.
- The E.ON contingent obligation was $17.8 million, fully offset by a derivative asset at quarter-end. Management expected no payments through the agreement’s 2028 term under its price and operating assumptions, but future market changes could cause payments or a loss from remeasurement.
- Other exposures include pension and postretirement obligations, environmental and legal matters, foreign-exchange movements, and labor agreements. Century deferred 2014 PBGC-related pension contributions after providing required security. Management stated that current environmental and legal matters were not expected to have a material adverse effect, while noting certain outcomes and potential losses could not be estimated.
- No specific earnings forecast was provided. U.S. and certain foreign deferred tax assets remained subject to a valuation allowance because realization depends on substantial future taxable income.
Important facts for investors to verify
- Whether the Mt. Holly acquisition closed as expected, its final cost and funding, and the resulting debt and liquidity position.
- Progress and economics of a replacement Mt. Holly power agreement before the current arrangement ends in 2015.
- Aluminum price realizations, market power costs, shipment mix, and the proportion of sales to related parties.
- Helguvik power-contract arbitration, project commitments, and any change in expected restart or cancellation costs.
- Future pension contributions, E.ON obligation assumptions, and the realization of deferred tax assets.