Century Aluminum Company — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts are U.S. dollars; financial statement amounts are in millions unless otherwise noted. The company produces primary aluminum and reports results affected by aluminum prices, power and raw-material costs, and plant operations.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $366.3 | $287.9 | $692.6 | $573.2 |
| Gross profit | $49.5 | $21.5 | $91.8 | $55.5 |
| Operating income | $36.2 | $5.9 | $73.8 | $23.2 |
| Net income | $24.0 | $5.1 | $49.0 | $11.5 |
| EPS, basic and diluted | $0.24 | $0.05 | $0.48 | $0.11 |
- Q2 gross margin was approximately 13.5%, compared with 7.5% a year earlier; operating margin was approximately 9.9%, compared with 2.1%.
- For the first half, gross margin was approximately 13.3%, compared with 9.7% in 2010.
- First-half operating cash flow was negative $16.1 million, versus positive $72.1 million in 2010. Investing cash use was $8.5 million and financing cash use was $47.2 million, chiefly from redeeming the convertible notes. Cash declined $71.9 million to $232.4 million.
- At June 30, total debt was $270.1 million, including $249.0 million of senior notes and a $13.3 million contingent E.ON obligation. The company had no revolver borrowings and approximately $58.5 million available, net of outstanding letters of credit. The $100 million facility matures July 2014.
- Total current assets were $558.0 million and current liabilities $200.1 million. Shareholders’ equity was $1,177.8 million.
Changes versus prior comparable periods
- Q2 sales rose 27.2% and first-half sales rose 20.8%. Management attributed the increase primarily to higher LME aluminum prices and Midwest premiums, with higher shipment volumes also contributing.
- Gross profit increased 130.2% in Q2 and 65.4% in the first half. Higher realizations helped, while higher U.S. power and natural-gas costs and increased materials, supplies, and maintenance expenses offset part of the benefit.
- First-half shipments totaled 295,661 metric tons, up from 289,256. Direct shipments increased while toll shipments declined.
- Forward-contract results shifted from gains of $9.3 million in Q2 2010 and $7.3 million in first-half 2010 to losses of $1.6 million and $6.4 million, respectively, primarily from changes in the fair value of aluminum options.
- Other operating income included benefit-plan credits related to retiree medical changes. SG&A included $7.7 million of charges related to Board and executive changes; accelerated vesting separately resulted in $5.2 million of compensation expense.
Outlook, commentary, risks, and contingencies
- U.S. production was below expectations because Hawesville’s restarted potline returned to stable operations more slowly than planned. The company estimated approximately $12 million of Q2 unabsorbed costs and restart expenditures, expected stable operations by year-end 2011, and said the inefficiencies could weigh on operating cash flow through Q4.
- Management estimated 2011 capital spending, excluding Helguvik, of $20–25 million. Helguvik spending was expected to run about $1–2 million per month from existing cash and operating cash flow until major construction restarts. Cancellation could entail approximately $20 million in additional costs; restart depends partly on resolving power-supply issues.
- Management expected approximately $34.5 million in qualified pension and non-qualified SERB contributions during 2011, including a $16.7 million contribution to a Rabbi trust triggered by a change-of-control provision. A further approximately $3.4 million contribution to qualified plans was expected.
- The PBGC questioned whether Ravenswood’s curtailment constituted a cessation of operations under ERISA. If so, accelerated pension contributions, collateral, or another agreement could be required. Discussions were ongoing.
- Big Rivers sought a power-rate increase; Century opposed it and expected a regulatory ruling in Q3 2011. Ravenswood’s special power-rate terms were extended through June 2012, with longer-term discussions ongoing.
- Labor negotiations continued at Grundartangi and Ravenswood. The company also reported environmental and other litigation, including an appeal of the dismissal of securities class actions and several St. Croix-related matters. Management did not expect currently assessed outcomes to materially harm the company, but some outcomes and potential damages could not be estimated.
- The company expected a $26.9 million Icelandic withholding-tax refund in Q4 2011, while also expecting to pay $12.5 million in Icelandic withholding tax in Q3. First-half operating cash flow was affected by tax payments, benefit contributions, working-capital growth, and the absence of a prior-year contractual receivable benefit.
- Aluminum-price exposure, power and raw-material costs, foreign exchange, plant reliability, and reliance on related-party sales and arrangements remain relevant risks. Related-party sales were $159.2 million in Q2.
Important facts for investors to verify
- Whether Hawesville achieved stable operations by year-end and how restart costs affected subsequent production, margins, and cash flow.
- Actual revolver availability and liquidity after working-capital needs, pension contributions, tax payments, and any changes to the borrowing base.
- Developments in Helguvik’s power-supply arrangements, construction timetable, funding needs, and potential cancellation exposure.
- Regulatory outcomes for Big Rivers and Ravenswood power rates, and any resulting effects on smelter economics.
- The outcome of the PBGC discussions and any required accelerated contributions or collateral.
- Updates on the listed environmental, labor, and legal matters, including the securities-litigation appeal.
- Actual realization and timing of the Icelandic tax refund, and the continuing impact of related-party transactions and aluminum-price hedges.