Century Aluminum Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Century produces primary aluminum. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance and position
- Revenue: $326.3 million, up 14.3% from $285.4 million. Related-party sales were $138.0 million, up from $92.5 million; third-party sales were $188.3 million, down from $192.9 million. Higher aluminum prices and Midwest premiums drove most of the increase.
- Profitability: Gross profit was $42.3 million versus $34.0 million; gross margin was approximately 13.0% versus 11.9%. Operating income was $37.6 million versus $17.3 million; operating margin was approximately 11.5% versus 6.0%. Net income was $25.0 million versus $6.3 million, and diluted EPS was $0.25 versus $0.06.
- Costs and operating results: Higher price realizations added $20.8 million to gross profit, while net cost increases reduced it by $12.6 million. Shipments were 144,178 metric tons, nearly unchanged from 144,677 metric tons. Direct shipments rose and toll shipments fell, partly reflecting a shift at Grundartangi.
- Cash flow: Operating cash flow was negative $3.6 million, compared with positive $21.7 million. Investing cash outflow was $7.2 million, including $4.1 million for Helguvik; cash declined $10.8 million to $293.5 million. Operating cash flow was pressured by Icelandic withholding tax payments, pension contributions and the absence of a prior-year E.ON contractual-receivable benefit.
- Liquidity and debt: Current assets were $582.3 million and current liabilities $242.2 million (current ratio approximately 2.4). Total debt was $316.1 million; cash less reported debt was approximately negative $22.6 million. The $100 million revolving facility had no borrowings and approximately $48.6 million available, net of letters of credit. Availability depends on eligible receivables and inventory and is affected by production curtailments.
- Balance sheet: Cash was $293.5 million, down from $304.3 million at year-end 2010. Shareholders’ equity was $1,168.7 million, up from $1,154.5 million. Pension and postretirement benefit liabilities remained significant.
Material changes and unusual items
- Revenue increased mainly because higher LME aluminum prices and Midwest premiums added $37.8 million; higher shipment volumes added $3.1 million. Total shipments were slightly lower year over year.
- Other operating income included net credits of $9.5 million associated with amortization of prior-service credits and actuarial losses following changes to Ravenswood retiree medical benefits. The filing also reports net operating credits of $5.9 million overall, versus $4.5 million of expense in Q1 2010.
- The $4.8 million net loss on forward contracts, versus $2.0 million a year earlier, primarily reflected mark-to-market declines in aluminum options as LME prices rose. These options provide partial downside protection on domestic production.
- Cash paid for income taxes was $27.2 million, including $26.9 million of Icelandic withholding taxes. Century expected the withholding-tax refund in Q4 2011.
Outlook, risks and contingencies
- No consolidated earnings or revenue guidance was provided. Management estimated 2011 capital spending, excluding Helguvik, at $20–25 million, versus $12.3 million in 2010. Helguvik spending from existing cash and operating cash flow was expected at approximately $1–2 million per month during 2011 until major construction restarts.
- Helguvik restart remained conditional on resolving power-supplier disputes and confirming firm financing and power delivery. Cancellation was estimated to entail a further $20 million in contract cancellation costs; substantial future contractual commitments remain.
- Management expected approximately $18 million of 2011 contributions to its sponsored defined-benefit plans, including $13 million contributed in Q1. It also provided $2.1 million of funding for Mt. Holly plans. Retiree medical plan amendments were expected to reduce future cash payments.
- Century gave notice in April to redeem all outstanding 1.75% convertible senior notes on May 19, 2011, at par plus accrued interest, using cash on hand. The notes’ carrying value was $46.1 million at quarter-end.
- The E.ON contingent obligation was $13.5 million, accruing interest at 10.94%; repayment depends on Hawesville operating criteria and aluminum prices. Based on then-current estimates, Century expected approximately $2.4 million of principal and interest payments over the next 12 months, beginning in May 2011.
- Key operating exposures include aluminum prices, energy and raw-material costs, foreign exchange, power-contract terms and labor negotiations. Big Rivers sought a rate increase; Century opposed it and expected a Kentucky regulator ruling in Q3 2011. Ravenswood labor negotiations were ongoing, and Grundartangi wage negotiations were also underway.
- Environmental and other lawsuits remain, including St. Croix-related matters and an appeal of the dismissal of securities class actions. Management did not expect pending matters to have a material adverse effect, but some potential outcomes or damages could not be estimated. Environmental liabilities accrued were $0.8 million.
- The filing states that Q1 results are not necessarily indicative of full-year results. Management reported disclosure controls were effective as of March 31, 2011.
Most important facts for investors to verify
- Whether the planned May 2011 note redemption was completed as intended and its effect on cash and debt.
- Whether the anticipated $26.9 million Icelandic tax refund was received in Q4 2011, and whether the expected pension contributions and operating cash needs matched actual results.
- Developments in Helguvik’s power arrangements, financing, construction restart and cancellation exposure.
- Changes in borrowing-base availability, especially if domestic production remains curtailed or is further reduced.
- Actual outcomes of the Big Rivers rate proceeding, labor negotiations, E.ON repayment conditions and material legal or environmental matters.
- The sustainability of improved margins given aluminum-price exposure, rising power, gas, materials and maintenance costs, and the large share of related-party sales.