Century Aluminum Company — Q1 2013 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Century produces primary aluminum and operates smelters in the U.S. and Iceland; Ravenswood was curtailed. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior period |
|---|---|---|
| Net sales | $321.3 million | $326.2 million; down 1.5% |
| Gross profit / margin | $17.6 million / 5.5% | $20.6 million / 6.3% |
| Operating income / margin | $0.2 million / 0.1% | $8.4 million / 2.6% |
| Net income (loss) | $8.3 million; $0.09 per common share | $(4.4) million; $(0.05) per share |
| Operating cash flow | $22.4 million | $4.9 million |
| Investing cash flow | $(10.9) million | $(1.7) million |
- Cash and cash equivalents were $195.5 million at March 31, 2013, versus $184.0 million at year-end 2012. Current assets were $509.3 million and current liabilities $201.5 million.
- Debt carrying value totaled $258.7 million, including $248.3 million of 8.0% senior secured notes due May 2014, $2.6 million of 7.5% notes due August 2014, and $7.8 million of industrial revenue bonds classified as current. The $100 million revolving facility had no borrowings and approximately $50.6 million of net availability, with $46.1 million of letters of credit outstanding; it matures in July 2014.
- Primary aluminum shipments were 158,776 metric tons, down from 159,967. Capital expenditures were $11.3 million, including $1.7 million for Helguvik.
Material changes and unusual items
- Sales declined because lower LME aluminum prices reduced realizations by $2.3 million and lower shipments reduced sales by $2.6 million. Increased premiums partly offset lower LME prices.
- Gross profit was affected by a $5.8 million inventory write-down in Q1 2013. Q1 2012 included a $17.1 million cost-of-goods-sold benefit from inventory previously written down; the resulting year-over-year gross-profit comparison was adversely affected by $22.9 million.
- Operating expenses included SG&A of $16.3 million, up $7.8 million, reflecting headquarters relocation and severance, litigation accruals, variable compensation, and integration costs for the Vlissingen anode facility.
- A $15.5 million net gain on forward and derivative contracts chiefly reflected a $15.7 million unrealized fair-value gain on the E.ON contingent obligation. The company estimated no E.ON payments would be due under then-current aluminum price assumptions through 2028, but higher forward prices could reverse some or all of the gain.
- Operating cash flow improved year over year; management cited lower power and carbon costs and lower pension and benefit contributions, partly offset by lower LME prices. Investing cash use rose mainly due to the Grundartangi expansion.
- Domestic and certain foreign deferred tax assets remained subject to valuation allowances. A $14.3 million reduction in prior-year unrecognized tax benefits was offset by an increase in the valuation allowance and did not affect the effective tax rate.
Outlook, commitments and risks
- Management estimated 2013 capital spending of $40–$45 million, excluding Century Vlissingen and Helguvik projects. It expected $30–$35 million of 2013 spending to restart the first 75,000 metric tons of Vlissingen anode capacity, targeted for late 2013. Helguvik timing remained dependent on power availability, financing and other factors; cancellation costs were estimated at approximately $20 million.
- After quarter-end, Century agreed to acquire substantially all assets of the Sebree smelter for approximately $61 million cash, after a purchase-price reduction, and to receive $71 million in working capital, subject to adjustments. Closing conditions include third-party consents; the smelter’s existing power contract ends January 2014. The company expected to fund the transaction with cash and revolver availability.
- Hawesville’s current power contract was due to expire August 20, 2013. A tentative framework for market-priced power required definitive agreements and approvals. Century issued a conditional WARN notice and notice to terminate its Southwire supply contract; without competitively priced power, the company said it intended to curtail the smelter.
- A post-quarter PBGC agreement requires approximately $17.4 million of additional pension contributions through 2016; $5.9 million was paid in April 2013. The schedule may accelerate under certain conditions.
- Legal exposures include a former CEO’s claim for severance payments exceeding $20 million, which Century disputes, and environmental matters for which some outcomes and potential losses could not be estimated. The Ingram Barge matter was settled after quarter-end for approximately $1.6 million.
- The filing states that Q1 results are not necessarily indicative of full-year results. Aluminum prices, power costs and availability, currency movements, project funding, pension obligations, litigation and acquisition execution are key uncertainties.
Key facts for investors to verify
- Whether Hawesville secured definitive, approved market-priced power and avoided curtailment.
- Whether the Sebree acquisition closed, required consents and power arrangements were secured, and expected working capital and operating benefits materialized.
- How Century planned to refinance or repay the 2014 senior notes and revolving facility maturities.
- Whether planned project spending, particularly Vlissingen and Helguvik, remained within estimates and funding capacity.
- The effect of aluminum-price changes on the E.ON contingent obligation, inventory valuations and operating profitability.
- Actual pension contributions and developments in the former CEO, environmental and other legal matters.