Century Aluminum Company — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter 2011 results. Financial amounts below are in U.S. dollars; millions are used unless noted.
Business context
Century produces primary aluminum, with operations in the U.S. and Iceland and a 49.7% interest in the Mt. Holly facility. Rated capacity was 785,000 metric tons per year, including 170,000 tons at fully curtailed Ravenswood. Hawesville restarted a previously curtailed potline during 2011; Century produced approximately 602,000 metric tons for the year. The Helguvik, Iceland smelter project remained at significantly reduced construction activity pending resolution of power-supply conditions.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $1,356.4 million | $1,169.3 million |
| Gross profit | $89.5 million (6.6% margin) | $112.4 million (9.6% margin) |
| Operating income | $47.3 million (3.5% margin) | $103.0 million (8.8% margin) |
| Net income | $11.3 million; $0.11 per share | $60.0 million; $0.59 per share |
| Cash from operating activities | $(2.9) million | $131.5 million |
| Cash and cash equivalents at year-end | $183.4 million | $304.3 million |
| Total assets | $1,811.1 million | $1,923.1 million |
| Total debt, including contingent obligations | $271.3 million | $314.9 million |
Sales rose 16%, reflecting $148.9 million of higher price realizations and $38.2 million from higher net sales volume. Average LME aluminum price was $2,398 per metric ton, versus $2,173 in 2010. Despite improved pricing and volume, gross profit fell as production-input and operating costs increased; a $19.8 million inventory valuation charge also weighed on results. U.S. power costs increased $18.0 million, while maintenance, supplies and materials costs rose $82.2 million, partly due to carbon and bath products and Hawesville restart inefficiencies.
Operating cash flow fell sharply, with management citing Icelandic withholding-tax payments, pension and benefit contributions, higher working capital associated with the Hawesville restart, and the expiration of E.ON-related benefits. Investing cash outflow was $24.9 million; financing cash outflow was $93.1 million, primarily reflecting the $47.1 million redemption of convertible notes and $45.9 million of share repurchases. Current assets were $488.3 million and current liabilities $193.4 million at year-end. The revolving credit facility had no borrowings and approximately $57.5 million of net availability after letters of credit.
Debt included $249.6 million principal amount of 8.0% senior secured notes due May 2014, $2.6 million of 7.5% notes due August 2014, $7.8 million of industrial revenue bonds, and a $14.0 million E.ON contingent obligation. The 1.75% convertible notes were redeemed in May 2011. The company reported no common dividends in 2011 or 2010.
Material changes and fourth-quarter results
- FY 2011 net income declined to $11.3 million from $60.0 million; gross and operating margins also contracted despite higher sales.
- Hawesville’s restarted potline brought the facility essentially to full production by year-end, but unstable operations reduced efficiency and raised costs. Management expected these effects to continue through the first quarter of 2012.
- Ravenswood remained fully curtailed. The company said a restart depends on, among other factors, a new power arrangement and labor agreement.
- Fourth-quarter 2011 sales were $318.2 million, gross loss was $13.6 million, and net loss was $31.1 million, or $0.35 per share. Quarterly results included a $6.3 million inventory valuation charge; the quarter also recorded a $3.1 million benefit from mark-to-market gains, primarily on aluminum price-protection options.
- Cash declined by $120.9 million during 2011. Century repurchased 4.39 million shares for $45.9 million under a $60 million authorization, leaving $14.1 million available at year-end.
Outlook, risks and contingencies
- Operating and capital outlook: Management expected Hawesville to return to stable operations in Q1 2012. It estimated 2012 capital spending of $25–30 million excluding Helguvik, and approximately $1 million per month of Helguvik spending until major construction restarts. No specific aluminum-price, revenue or earnings guidance is provided.
- Helguvik: Approximately $138 million had been capitalized through year-end, including $13 million in 2011. A power arbitration decision found the HS Orka contract remained in force, subject to remaining conditions; discussions with suppliers continued. If the project were cancelled, Century estimated an additional $20 million in contract-cancellation costs. Completion, schedule, financing, power availability and project economics remained uncertain.
- Market and cost exposure: Results are highly sensitive to aluminum prices, electricity and raw-material costs. The filing cites historically high aluminum inventories and possible industry surplus as sources of downward price pressure. Take-or-pay power and supply commitments may remain costly even if production is curtailed.
- Concentration and funding: Three customers—Glencore, Southwire and BHP Billiton—accounted for approximately 80% of consolidated sales. Revolver availability is borrowing-base dependent; further domestic production curtailments could reduce it. The company also faces a significant 2014 note maturity.
- Pensions and legal matters: Pension plans were underfunded; the PBGC questioned whether Ravenswood’s curtailment constituted a cessation of operations under ERISA, which could accelerate contributions or require collateral. A former CEO sought severance payments exceeding $20 million plus other damages; the company disputed the claims, and the potential loss was not estimable. A securities class-action dismissal was on appeal.
- Other exposures: Management estimated 2012 environmental operating costs of $11–12 million. Icelandic currency-transfer restrictions, foreign-exchange exposure, weather and power interruptions, environmental regulation, and impairment risk at Ravenswood and Helguvik could affect results and liquidity.
Important facts for investors to verify
- Whether Hawesville achieved stable operations after Q1 2012 and what effect restart costs had on production and cash generation.
- Progress on Helguvik power conditions, construction schedule, financing needs, cancellation exposure and potential impairment.
- Liquidity and borrowing-base availability as aluminum prices, domestic output and working capital change; plans for the 2014 debt maturities.
- Developments in aluminum prices and premiums, U.S. electricity costs, and the company’s concentrated customer relationships.
- Outcomes of the PBGC discussions and the former CEO and securities litigation matters.
- Auditors issued an unqualified opinion on the financial statements and internal controls; verify subsequent filings for developments after the 10-K date.