Century Aluminum Company — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Century produces primary aluminum at smelters in the United States and Iceland. All dollar amounts are U.S. dollars in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $438.0 | $481.8 | $1,401.2 | $1,406.3 |
| Gross profit (loss) | $(13.7) | $(11.8) | $(30.6) | $36.4 |
| Operating income (loss) | $(25.2) | $(15.6) | $(69.2) | $9.4 |
| Net income (loss) | $(20.7) | $(20.3) | $(76.0) | $(1.2) |
| Basic and diluted EPS | $(0.23) | $(0.23) | $(0.86) | $(0.01) |
| Operating cash flow | Not separately stated for the quarter | $(4.4) | $(59.0) |
- Q3 gross margin was approximately negative 3.1%, versus negative 2.4% a year earlier. Nine-month gross margin was approximately negative 2.2%, versus positive 2.6%.
- Q3 revenue declined 9.1% year over year. Lower LME and regional premiums reduced revenue by $93.4, partly offset by $49.6 of favorable volume and product-mix effects. For nine months, unfavorable premiums of $184.9 were substantially offset by favorable volume and mix of $179.8.
- Primary aluminum shipments were 198,543 tonnes in Q3, up from 182,926 tonnes. Nine-month shipments were 608,374 tonnes versus 550,384 tonnes.
- Nine-month investing cash outflow was $29.4, including $39.9 of property, plant and equipment purchases and $10.5 proceeds from the BHH joint-venture sale. Financing cash inflow was $17.4. Cash, cash equivalents and restricted cash fell $16.4 to $23.3; unrestricted cash was $22.5.
- At September 30, total debt was $297.2, compared with $279.7 at year-end 2018. This included $249.0 of 7.5% senior notes due June 2021 and $40.0 borrowed under the Hawesville term loan. Net availability under the U.S. and Iceland revolving facilities was reported as $177.6; the company was in compliance with covenants.
- Current assets were $474.1 and current liabilities $212.3. These include inventory of $322.3, so liquidity depends in part on working capital conversion and continued access to borrowing capacity.
Material changes and operating developments
- Nine-month net loss widened to $76.0 from $1.2, and operating results shifted from $9.4 of income to a $69.2 loss. Management cited lower aluminum prices and premiums and higher operating expense, particularly at Hawesville.
- In Q3, weaker LME and regional premiums and $4.0 of unfavorable operating expense were partly offset by lower raw-material costs ($63.5), lower power costs ($13.0), and favorable volume ($14.2). For nine months, unfavorable premiums ($184.9) and operating expense ($20.4) were partly offset by lower raw-material costs ($67.5), lower power costs ($33.2), and favorable volume ($37.0).
- Derivative contracts generated gains of $10.3 in Q3 and $10.7 for nine months, primarily due to declining LME prices. These gains partially cushioned operating losses and are market-sensitive.
- Glencore owned 42.9% of common shares, or 47.0% on a fully diluted basis, and held all outstanding Series A convertible preferred stock. It purchased 64.5% of Q3 sales and 64.1% of nine-month sales.
- The company sold its 40% interest in BHH and recorded a $4.3 loss; the remaining $10.1 installment was receivable at quarter-end and due by December 31, 2019.
- Adoption of the new lease standard resulted in right-of-use assets of $24.2 and lease liabilities of $24.7 at September 30, 2019.
Outlook, risks and contingencies
- Management expected the Hawesville restart and technology upgrade to require approximately $150.0 in total cash through completion, then expected during 2020 subject to market conditions. The first phase, restarting 150,000 tonnes of capacity, was completed in early 2019 for approximately $75.0; the second phase was expected to cost a further $75.0. A $40.0 Glencore term loan partially finances phase two; principal repayment begins January 2020 and the loan matures December 2021.
- Management estimated 2019 capital spending, excluding the Hawesville restart project, at approximately $30.0. It stated that cash from operations and financing should cover needs over the next 12 months, but adverse aluminum-price or production-cost movements could materially affect cash generation and financing access.
- Key exposures include volatile LME and regional premiums, alumina and power costs, and foreign currency. A $1/MWh change in power prices was estimated to affect annual costs by approximately $15.8 at normal capacity.
- Power arrangements and labor agreements create operating and renewal risks. The Grundartangi labor agreement was due to expire December 31, 2019; Hawesville’s was effective through April 1, 2020. The 2021 notes’ maturity is a significant refinancing consideration.
- Environmental and legal matters include the Vernon indemnity case, with trial then set for March 2020, and St. Croix-related matters. The company said it could not estimate certain potential losses, while stating that it did not expect currently known matters to have a material adverse effect. It also had approximately $9.6 of remaining PBGC contributions, with certain payments deferred and secured.
- U.S. Section 232 aluminum tariffs, possible changes to trade remedies, and exposure to market-based electricity prices may affect the business. The filing provided no formal earnings or revenue guidance.
Most important facts for investors to verify
- Whether Hawesville’s second-phase rebuild remains on schedule and within the estimated $75.0 cost, and whether the full restart is completed as planned.
- Current LME prices, regional premiums, alumina and power costs, and how these translate into operating margins after contractual pricing lags.
- Liquidity and borrowing-base availability, covenant headroom, and the company’s plan to repay or refinance the $249.0 of 2021 notes.
- Glencore-related sales concentration, financing terms and derivative positions, including the sensitivity of reported results to market movements.
- Receipt of the remaining BHH sale installment and developments in material litigation, environmental obligations and deferred pension contributions.