CENTURY ALUMINUM CO quarterly report, Q1 FY2019

Century Aluminum Company — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019. Amounts are in U.S. dollars; financial figures are in millions unless noted.

Business context and reporting period

Century Aluminum produces primary aluminum at smelters in the United States and Iceland. Results are driven principally by aluminum prices and premiums, production costs—especially power and alumina—and shipment volume. The quarter included the restart of three previously curtailed potlines at Hawesville; Sebree had returned to full capacity by the end of Q3 2018.

Financial results and liquidity

Metric	Q1 2019	Q1 2018
Net sales	$490.0	$454.5
Cost of goods sold	$502.8	$440.0
Gross profit (loss)	$(12.8)	$14.5
Operating income (loss)	$(27.8)	$3.5
Net income (loss)	$(34.6)	$(0.3)
Basic and diluted EPS	$(0.39)	$0.00
Operating cash flow	$(21.5)	$(33.0)
Cash used in investing activities	$(10.6)	$(3.5)

Sales increased 7.8%. Primary aluminum shipments rose to 206,451 tonnes from 187,238 tonnes; U.S. shipments increased while Iceland shipments declined.
Gross margin was approximately negative 2.6%, compared with positive 3.2% in Q1 2018. SG&A was $14.7 versus $10.7; the company also recorded a $5.7 net loss on forward and derivative contracts, compared with a $0.7 gain.
Cash and cash equivalents were $22.2 at March 31, 2019, down from $38.9 at year-end; cash, cash equivalents and restricted cash totaled $23.0. Current assets were $483.3 and current liabilities $229.6.
Total reported debt was $295.3, including $248.8 of 7.5% senior notes due June 2021, $35.3 drawn on the U.S. revolving facility, $7.8 of industrial revenue bonds, and $3.4 of other short-term borrowings. The U.S. facility had $102.0 of availability after borrowings and letters of credit; the Iceland facility had $50.0 available. The company reported compliance with its credit-facility covenants.
Operating lease liabilities were $24.8 at quarter-end. Adoption of the new lease standard added a $24.6 right-of-use asset; comparative periods were not restated.

Material changes versus the prior comparable period

Sales increased $35.5, primarily from favorable shipment volume and product mix ($47.5) and regional premiums ($21.9), partly offset by lower LME price realization ($44.8).
Gross profit fell $27.3. Management attributed the decline mainly to lower LME price realization ($22.9) and higher operating expense ($12.4), partly offset by favorable volume and mix ($7.1). Higher expense primarily reflected increased Hawesville production; Sebree insurance proceeds partly offset costs.
Operating cash use improved by $11.5 year over year, mainly due to working-capital improvements, despite a higher net loss. Investing cash use increased, primarily reflecting Hawesville restart and Vlissingen furnace-rebuild spending.

Outlook, management commentary, risks and contingencies

Management said operating cash and financing sources were expected to cover operations and business needs for the next 12 months, while warning that adverse aluminum prices or higher production costs could materially affect cash generation and financing capacity. No specific earnings guidance was provided.
The Hawesville restart and technology-upgrade project was estimated to require about $150.0 in total cash through expected completion in 2020. The first phase, restarting 150,000 tonnes of capacity, was completed ahead of schedule and on budget for about $75.0; the second phase was expected to cost a further $75.0 during 2019–2020.
Management estimated 2019 capital spending at approximately $30 million, excluding the Hawesville restart project. It separately reported Q1 capital expenditures of $9.0 million excluding $5.6 million associated with the restart; cash purchases of property, plant and equipment were $10.6 million.
On April 29, 2019, after quarter-end, Century borrowed $40.0 from Glencore. The unsecured loan bears interest at LIBOR plus 5.375%, matures December 31, 2021, and requires 24 equal monthly principal installments beginning January 31, 2020.
Glencore owned 42.9% of common stock (47.0% on a fully diluted basis) and all outstanding Series A convertible preferred stock. It accounted for approximately 64% of Q1 consolidated sales, creating significant customer concentration.
Power-price exposure is material: at normal capacity, a $1/MWh change was estimated to affect quarterly costs by about $4.0 and annual costs by about $15.8. Aluminum, alumina, power, currency and production disruptions are key sensitivities; derivatives are used for risk management, not speculation.
Environmental and legal matters include the Vernon case, for which the company could not estimate a possible loss range, and St. Croix-related matters, whose outcomes and loss ranges were also not estimable. Management did not expect environmental liabilities or other pending matters to have a material adverse effect based on current information.
The company had $9.6 of remaining contributions under its PBGC settlement and deferred certain payments with security provided. Its contingent power-related obligation was $24.2, fully offset by a derivative asset; management did not expect payments under then-current market assumptions but noted circumstances could change.
All U.S. and certain foreign deferred tax assets, net of deferred tax liabilities, remained subject to a valuation allowance. Management reported no material change in risk factors since its 2018 Form 10-K and concluded disclosure controls were effective.

Important facts for investors to verify

Whether aluminum prices, regional premiums and production costs support a return to positive operating margins after Q1’s sharp deterioration.
Hawesville project spending, completion timing, production ramp and resulting cash needs, alongside the company’s 2019 capital-spending estimate.
Liquidity and covenant headroom, including the effect of the April 29 Glencore loan and the 2021 senior-note maturity.
Glencore’s share of sales and related-party transactions, and the company’s ability to maintain or diversify customer relationships.
Power-cost exposure, contract changes and operational risks, including the scheduled transition of part of Grundartangi’s power pricing to Nord Pool-linked rates from November 2019.
Developments in environmental and legal matters, PBGC contributions, and the contingent power obligation.