Century Aluminum Company — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Century produces primary aluminum and reports one segment. Results include Sebree from its acquisition on June 1, 2013; therefore, comparisons with 2012 are not fully like-for-like.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1,454.3 million | $1,272.1 million |
| Gross profit / margin | $39.5 million / 2.7% | $46.3 million / 3.6% |
| Operating income (loss) | $(36.6) million | $(7.3) million |
| Net income (loss) | $(40.3) million | $(35.6) million |
| Loss per share, basic and diluted | $(0.45) | $(0.40) |
| Cash from operating activities | $19.7 million | $37.1 million |
| Cash and cash equivalents, year-end | $84.1 million | $184.0 million |
| Total debt, year-end | $262.9 million | $273.8 million |
Net sales rose 14.3%, primarily due to higher shipment volumes following the Sebree acquisition. Lower aluminum realizations reduced sales by $81.0 million; the average LME price was $1,846 per tonne, down from $2,020. Total direct shipments increased to 485,690 tonnes from 377,314; toll shipments were 278,908 tonnes versus 269,215.
Gross profit fell $6.8 million. Lower price realizations, net of LME-linked input cost decreases, and volume/mix reduced gross profit by a combined $57.3 million, partly offset by $40.5 million of net cost decreases. Operating loss widened, with higher SG&A—including relocation, Sebree integration, Vlissingen-related costs and former CEO severance—contributing to the deterioration.
Fourth-quarter 2013 net sales were $401.2 million, gross profit $15.3 million, and net loss $9.7 million, or $(0.11) per share. Fourth-quarter 2012 sales were $317.7 million, gross profit $16.5 million, and net loss $6.9 million, or $(0.08) per share. The 2013 quarter included a $16.6 million deferred power-contract amortization benefit and a $9.0 million inventory adjustment benefit, as well as an $8.4 million former-CEO separation charge.
Operating cash flow declined to $19.7 million from $37.1 million. Investing cash outflow increased to $117.2 million, including $48.1 million for Sebree and capital expenditures. Capital expenditures were $68.1 million. Cash declined by $99.9 million during the year. At year-end, the company reported approximately $112 million of net availability under its revolving facilities, including $68.1 million under the U.S. facility and $44 million under the Iceland facility; $6 million was drawn under the Iceland facility and none under the U.S. facility. Approximately $71 million of letters of credit reduced U.S. facility availability.
Century issued $250 million of 7.5% senior secured notes due 2021 and used proceeds and cash to tender and redeem its 8.0% notes due 2014. Remaining 2014 debt included $2.6 million of 7.5% notes and $6.0 million drawn under the Iceland revolver. No common dividends were declared; management said it did not plan cash dividends in the foreseeable future.
Material changes and notable items
- Sebree was acquired for a stated purchase price of $61 million, subject to working-capital adjustments; approximately $48 million had been paid by year-end. Century recorded a $5.3 million bargain-purchase gain and a $36.6 million unfavorable power-contract liability, of which $31.0 million was amortized as a cost-of-goods-sold benefit in 2013. The final working-capital amount remained disputed.
- Hawesville moved to market-based power in August 2013; Sebree followed on February 1, 2014. These arrangements expose the U.S. smelters to MISO market-price and transmission-cost volatility. Hawesville still faced unresolved regulatory and transmission matters and retained a conditional WARN notice through March 31, 2014.
- Century received $21.7 million of Icelandic withholding-tax refunds in November 2013 and credited approximately $9.5 million of prepaid Icelandic taxes against 2013 taxes. Management expected a further $9.8 million withholding-tax refund in November 2014.
- The PBGC settlement requires approximately $17.4 million of additional pension contributions through 2016; about $6.7 million was contributed in 2013. The company estimated total 2014 pension contributions of approximately $10.1 million.
- The former CEO arbitration resulted in an award of approximately $8.7 million plus interest; Century recorded an $8.4 million net charge and paid the severance in the first quarter of 2014.
Outlook, risks and contingencies
Management estimated 2014 capital spending of approximately $50 million, excluding any expansion of Vlissingen’s capacity. It expected Helguvik spending to remain below $0.5 million annually until major construction restarts. The restart depends on resolving power-supply conditions and related transmission arrangements; the filing gives no clear restart date. Approximately $149 million had been capitalized to Helguvik, and estimated cancellation exposure was about $20 million, with $12.8 million accrued.
Key risks include volatile LME prices and regional premiums, historically high aluminum inventories and the potential effect of LME warehouse-rule changes; market-based domestic power prices, reliability and grid access; and the possibility that Hawesville could be curtailed if outstanding issues are not resolved. The company also identified customer concentration: four customers accounted for approximately 85% of 2013 consolidated sales, while sales arrangements with RTA and BHP Billiton expired at year-end. Glencore is a major customer, holds approximately 41.8% of common shares and all Series A preferred shares, and has an overall 46.6% economic interest.
Other material exposures include take-or-pay supply commitments, labor-contract renewals, Icelandic currency-transfer and foreign-exchange risks, potential impairment if Ravenswood is not restarted or Helguvik is abandoned, environmental and litigation matters, and the ability to fund operations and capital requirements. The company reported $1.3 billion of federal net operating loss carryforwards, but a change in ownership could limit their use; a $765 million valuation allowance applied to specified U.S., Netherlands and Icelandic deferred tax assets. Management reported no long-lived asset impairment in 2013. Deloitte issued an unqualified opinion on the financial statements and internal controls; the Sebree operation was excluded from the control assessment and represented approximately 7% of consolidated assets and 17% of net sales.
Most important facts for investors to verify
- Whether Hawesville’s outstanding regulatory, transmission and grid-stability issues were resolved, and the resulting power costs and operating status.
- How MISO power-price volatility affects Hawesville and Sebree margins, and whether Century adopts hedges or faces production curtailments.
- Changes in LME prices, Midwest and European premiums, warehouse inventories, and their effect on realized prices and cash generation.
- Final Sebree purchase-price and working-capital adjustments, integration performance, and the durability of the power-contract accounting benefit.
- Progress on Helguvik power agreements and construction, related commitments, and any impairment or cancellation decisions.
- Customer concentration and the terms, volumes and credit exposure under Glencore and Southwire agreements; also monitor Glencore’s influence and related-party transactions.
- Cash balance, revolver availability, debt service, pension contributions, and the company’s ability to fund capital spending while generating positive operating cash flow.