Century Aluminum Company — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2014; comparisons are with the same 2013 periods. Century operates primary aluminum smelters. Comparisons are affected by the June 2013 acquisition of the Sebree smelter and a shift at Grundartangi from tolling to direct sales. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $458.3 | $331.9 | $879.2 | $653.2 |
| Gross profit (loss) | $38.5 | ($5.7) | $36.7 | $11.9 |
| Gross margin | 8.4% | (1.7%) | 4.2% | 1.8% |
| Operating income (loss) | $26.0 | ($23.9) | $11.8 | ($23.7) |
| Net income (loss) | $20.3 | ($29.4) | $0.2 | ($21.1) |
| EPS, basic and diluted | $0.21 | ($0.33) | $0.00 | ($0.24) |
| Operating cash flow | Not separately presented | Not separately presented | $8.6 | $23.0 |
Cash, debt and liquidity at June 30, 2014: Cash and cash equivalents were $61.4 million, down from $84.1 million at year-end 2013. Total debt was $257.1 million, including $246.7 million of 7.5% secured notes due 2021, $7.8 million of industrial revenue bonds and $2.6 million of 7.5% unsecured notes due August 2014. Revolving facilities had no borrowings outstanding at quarter-end and approximately $129 million aggregate net availability, subject to borrowing-base limits; about $70.5 million of U.S. letters of credit were outstanding. Shareholders’ equity was $1.00 billion.
Six-month investing cash outflow was $25.5 million and financing outflow was $5.9 million, producing a $22.7 million decline in cash. Operating cash flow fell year over year, primarily reflecting working-capital and other cash uses (about $35 million higher), a roughly $10 million former-CEO separation payment, and lower cash generation; improved adjusted operating income partly offset these pressures. Adjusted operating income, a non-GAAP measure, was $43.7 million for the first half versus $19.3 million.
Changes versus the prior comparable period
- Q2 sales increased 38.1%; first-half sales rose 34.6%. Management attributed the increase mainly to higher shipment volumes from Sebree and the Grundartangi sales-contract mix shift. Higher premiums more than offset lower LME prices in Q2; first-half price realizations were lower year over year.
- Q2 gross profit improved by $44.2 million from the prior-year loss, supported by higher price realizations, volume and lower U.S. power and natural-gas costs. First-half gross profit increased by $24.8 million.
- First-half results include a $5.5 million credit from amortization of the unfavorable Sebree power contract liability, which terminated in January 2014. Prior-year results included a $5.3 million Sebree bargain-purchase gain, a $3.3 million debt-extinguishment loss and a $16.1 million inventory valuation charge; first-half 2014 included a $1.2 million inventory reserve release.
- SG&A declined to $10.6 million in Q2 and $20.7 million for the first half, reflecting lower external legal/professional costs, no repeat of 2013 headquarters relocation and severance costs, and the shift of Vlissingen anode facility costs into cost of goods sold.
Outlook, commentary and risks
- Management expected 2014 capital spending of approximately $50–$60 million, excluding any expansion of current Vlissingen production capacity. First-half capital expenditures were $24.2 million, including $7.4 million for the Grundartangi expansion and $7.2 million for the Vlissingen restart.
- Helguvik major construction activity remained on hold pending power availability and other factors. Management expected spending below $0.5 million annually until construction restarts; estimated cancellation and other costs were about $20 million, with $13.4 million accrued. Timing of a restart was not provided.
- Mt. Holly notified Santee Cooper that it would reduce contract demand to zero effective December 31, 2015. The company said it was seeking a competitive long-term power agreement to continue operating the facility beyond that date.
- Power is a major operating cost. Hawesville and Sebree rely on market-based MISO power arrangements; a $1/MWh change was estimated to affect annual costs by about $7.6 million combined. The company had no forward contracts to mitigate this market-power exposure at quarter-end.
- Risks include aluminum and regional premium prices, power availability and cost, foreign exchange, pension and postretirement obligations, and the ability to finance development projects. U.S. and certain foreign deferred tax assets remained subject to valuation allowances.
- The E.ON contingent obligation had $17.5 million of principal and accrued interest, fully offset by a derivative asset at quarter-end. Management expected no payments through the agreement’s 2028 term based on its price assumptions, but stated that future conditions could change.
- Subsequent events: Sebree’s final acquisition working-capital adjustment resulted in an approximately $1.0 million payment to RTA and a $1.0 million gain; the company also agreed to pay $625,000 to settle specified St. Croix matters and paid OR $3.6 million under a power-dispute settlement. In July, HS Orka initiated arbitration challenging the Helguvik power contract; Century said it would defend the claim.
- The filing reported no material changes to the risk factors in the 2013 Form 10-K. Management stated disclosure controls were effective and no material internal-control changes occurred during the quarter.
Important facts for investors to verify
- Whether MISO power costs and availability at Hawesville and Sebree, and a replacement power agreement for Mt. Holly, support sustainable smelter economics.
- Progress and potential costs for Helguvik, including the HS Orka arbitration and power-contract conditions.
- Cash conversion and working-capital trends, planned capital spending, and the remaining pension contributions and benefit obligations.
- Completion of the August 2014 unsecured-note repayment and continued access to revolving-credit availability under borrowing-base limits.
- Whether aluminum prices, regional premiums, foreign exchange, or changes in operating levels alter the E.ON obligation or other contingencies.
- The effect of the Sebree acquisition and contract-mix changes when assessing year-over-year performance; first-half results were not necessarily indicative of full-year results.