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CENX > SEC Filings for CENX > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for CENTURY ALUMINUM CO

Form 10-Q for CENTURY ALUMINUM CO


8-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Mt. Holly gave notice to Santee Cooper to terminate its power contract effective December 31, 2015
In June 2014, Mt. Holly notified Santee Cooper, as allowed by the power contract, to reduce its contract demand to zero effective December 31, 2015, which was necessary to cut off liabilities under the tariff after December 31, 2015 if there is no new contract. Mt. Holly will continue to work with Santee Cooper towards a new power agreement, and remains committed to securing a competitive, long-term power agreement that will allow it to continue to operate the facility beyond 2015.

Century appoints Rick T. Dillon as Executive Vice President and Chief Financial Officer

In June 2014, we announced that our Board of Directors had appointed Rick T. Dillon as Executive Vice President and Chief Financial Officer of Century. Prior to joining Century, Mr. Dillon served as Vice President of Finance - Surface Mining Group at Joy Global Inc. Mr. Dillon joined Joy Global in 2009 as Vice President - Corporate Controller & Chief Accounting Officer. Prior to that, Mr. Dillon served as Vice President - Business Planning and Analysis for Newell Rubbermaid, Inc. He has also held the Chief Accounting Officer role at Newell Rubbermaid, Inc. and Briggs & Stratton Corporation.

Results of Operations
The following discussion reflects our historical results of operations.
Century's financial highlights include:
                                      Three months ended June 30,     Six months ended June 30,
                                          2014            2013            2014           2013
                                                (In thousands, except per share data)
NET SALES:
Third-party customers               $       169,751   $   220,950   $      305,015   $   409,464
Related parties                             288,573       110,987          574,156       243,747
Total                               $       458,324   $   331,937   $      879,171   $   653,211
Gross profit (loss)                 $        38,504   $    (5,698 ) $       36,746   $    11,884
Net income (loss)                   $        20,344   $   (29,384 ) $          240   $   (21,131 )
EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted                   $          0.21   $     (0.33 ) $         0.00   $     (0.24 )



                                        Three months ended June 30,   Six months ended June 30,
                                             2014           2013          2014           2013
Shipments - primary aluminum (tonnes):
Direct                                        183,032      106,284         356,328      199,756
Toll                                           33,012       69,986          66,501      135,290
Total                                         216,044      176,270         422,829      335,046



Net sales (in millions)       2014     2013    $ Difference   % Difference
Three months ended June 30, $ 458.3  $ 331.9  $       126.4        38.1 %
Six months ended June 30,   $ 879.2  $ 653.2  $       226.0        34.6 %

In the three months ended June 30, 2014, higher shipment volumes, due to the acquisition of the Sebree smelter on June 1, 2013 and the replacement of a tolling contract that expired December 31, 2013 with a direct sale contract at Grundartangi, had a $115.1 million positive impact on net sales. Direct shipments from our four operating smelters increased 76,748 tonnes in the three months ended June 30, 2014 compared to the same period in 2013. Toll shipments decreased 36,974 tonnes relative to the


same period last year. Higher price realizations for our primary aluminum shipments in the three months ended June 30, 2014 were due to higher regional and product premiums, which more than offset lower LME prices for primary aluminum. The higher price realizations resulted in a $11.3 million increase in sales.
In the six months ended June 30, 2014, higher shipment volumes, due to the acquisition of the Sebree smelter on June 1, 2013 and the replacement of a tolling contract that expired December 31, 2013 with a direct sale contract at Grundartangi, had a $251.3 million positive impact on net sales. Direct shipments from our four operating smelters increased 156,572 tonnes in the six months ended June 30, 2014 compared to the same period in 2013. Toll shipments decreased 68,789 tonnes relative to the same period last year. Lower price realizations for our primary aluminum shipments in the six months ended June 30, 2014 were due to lower LME prices for primary aluminum which were partially offset by higher regional and product premiums. The lower price realizations resulted in a $25.3 million decrease in sales.

Gross profit (loss) (in millions)  2014     2013    $ Difference   % Difference
Three months ended June 30,       $ 38.5  $ (5.7 ) $         44.2     (775.4 )%
Six months ended June 30,         $ 36.7  $ 11.9   $         24.8      208.4  %

During the three months ended June 30, 2014, higher price realizations, net of LME-based power cost and alumina, increased gross profit by $22.9 million, while increased volume due to the acquisition of the Sebree smelter and the mix shift between toll and direct sales at Grundartangi increased gross profit by $2.2 million. In addition, we experienced $11.5 million in net cost decreases at our smelters relative to the same period in 2013, comprised of: lower costs for power and natural gas at our U.S. smelters, $13.0 million; lower costs for materials, supplies and maintenance, $2.7 million; other cost increases, $2.6 million; increased depreciation, $1.1 million and an increase in our accrual for legal matters, $0.5 million.
During the six months ended June 30, 2014, lower price realizations, net of LME-based power cost and alumina, decreased gross profit by $1.3 million, while increased volume due to the acquisition of the Sebree smelter and the mix shift between toll and direct sales at Grundartangi increased gross profit by $7.2 million. In addition, we experienced $1.2 million in net cost increases at our smelters relative to the same period in 2013, comprised of: lower costs for power and natural gas costs at our U.S. smelters, $1.8 million; lower costs for materials, supplies and maintenance, $6.4 million; other cost increases, $2.6 million; increased depreciation, $3.2 million and an increase in our accrual for legal matters, $3.6 million.
As part of the accounting for the purchase of the Sebree smelter, we recorded a $36.6 million estimated liability for the power contract we assumed based on the difference between the forecasted contract rates and market power rates through the contract termination date in January 2014. This liability was fully amortized over the period from June 1, 2013 through January 31, 2014, resulting in a credit to our depreciation and amortization expense. During the three and six months ended June 30, 2013, the credit for the amortization of the power contract was $2.7 million. During the three and six months ended June 30, 2014, the credit for the amortization of the power contract was $0.0 million and $5.5 million, respectively. This resulted in a quarter to quarter decrease in gross profit of $2.7 million and six month period to period increase in gross profit of $2.8 million.
As of June 30, 2014, the market value of our inventory was above its cost basis, resulting in the release of a lower of cost or market ("LCM") inventory reserve of $0.1 million that was recorded at March 31, 2014. This resulted in a credit to cost of goods sold for the three months ended June 30, 2014 of $0.1 million. As of June 30, 2013, the market value of our inventory was below its cost basis, resulting in the recording of an LCM inventory reserve of $16.1 million and a charge to cost of goods sold for the three months ended June 30, 2013 of $10.2 million. This resulted in a quarter to quarter increase in gross profit of $10.3 million.
As of June 30, 2014, the market value of our inventory was above its cost basis, resulting in the release of an LCM inventory reserve of $1.2 million that was recorded at December 31, 2013. This resulted in a credit to cost of goods sold for the six months ended June 30, 2014 of $1.2 million. As of June 30, 2013, the market value of our inventory was below its cost basis, resulting in the recording of an LCM inventory reserve of $16.1 million and a charge to cost of goods sold for the six months ended June 30, 2013 of $16.1 million. This resulted in a period to period increase in gross profit of $17.3 million.


Other operating expense - net (in millions)  2014   2013   $ Difference   % Difference
Three months ended June 30,                 $ 1.9  $ 3.0  $      (1.1 )      (36.7 )%
Six months ended June 30,                   $ 4.3  $ 4.1  $       0.2          4.9  %

Other operating expense - net is primarily related to items associated with Ravenswood. Period to period charges at the facility have been relatively stable, but some post-employment benefits and other support charges are starting to trend downwards. In addition, in the first quarter of 2013 we reduced an accrual for a legal liability that was ultimately settled for an amount lower than the original accrual.
Selling, general and administrative

expenses (in millions)                     2014         2013      $ Difference   % Difference
Three months ended June 30,            $     10.6   $     15.2   $       (4.6 )     (30.3 )%
Six months ended June 30,              $     20.7   $     31.5   $      (10.8 )     (34.3 )%

During the three and six months ended June 30, 2014, we experienced decreased selling, general and administrative charges due to a reduction in external legal and outside professional service support and the absence of the relocation and severance expenses we incurred in 2013 to move our corporate headquarters to Chicago. In addition, we incurred $5.3 million of general and administrative expenses that were evenly spread in 2013 that relate to the integration of the Century Vlissingen anode facility into our business. The Century Vlissingen anode facility is now producing anodes and its costs are included in cost of goods sold in 2014.
Net gain (loss) on forward and derivative

contracts
(in millions)                                 2014         2013      $ Difference  % Difference
Three months ended June 30,               $      0.4   $      0.2   $        0.2       100.0  %
Six months ended June 30,                 $     (0.5 ) $     15.7   $      (16.2 )    (103.2 )%

The net gain (loss) on forward and derivative contracts for the six months ended June 30, 2014 was primarily the result of settlements of contracts put in place to provide partial downside price protection for our domestic facilities. As of March 31, 2014, all of these contracts were settled.
The net gain (loss) on forward and derivative contracts for the six months ended June 30, 2013 was primarily the result of an increase in the fair value of a derivative asset embedded in the E.ON contingent liability. This change in fair value resulted in unrealized gains of $16.1 million for the six months ended June 30, 2013.

Gain on bargain purchase (in millions)  2014   2013   $ Difference  % Difference
Three months ended June 30,            $   -  $ 5.3  $      (5.3 )      N/A
Six months ended June 30,              $   -  $ 5.3  $      (5.3 )      N/A

On June 1, 2013, we acquired the Sebree smelter. The allocation of the purchase price to the assets acquired and liabilities assumed is based on the estimated fair values at the date of acquisition. We have finalized the purchase price allocation for the assets acquired and liabilities assumed, the purchase price and gain on bargain purchase. Based on the final purchase price allocation, we recorded a gain on bargain purchase of $5.3 million in 2013. See Note 2 Acquisition of Sebree aluminum smelter to the consolidated financial statements included herein for additional information. Loss on early extinguishment of debt

(in millions)                                2014          2013       $ Difference   % Difference
Three months ended June 30,             $          -   $      (3.3 ) $         3.3       N/A
Six months ended June 30,               $          -   $      (3.3 ) $         3.3       N/A

In 2013, as a result of the tender offer and redemption of our 8% senior secured notes due 2014 (the "8.0% Notes"), we recorded charges of $3.3 million for loss on early extinguishment of debt. We determined the tender and redemption of the 8.0% Notes should be treated as an extinguishment of the debt and accordingly, we recorded a loss on early extinguishment of


debt in the second quarter of 2013. The loss on early extinguishment of debt consisted of the write-off of deferred financing costs and the debt discount associated with the 8.0% Notes, as well as the tender premium paid as part of the tender offer and redemption of the 8.0% Notes.

Income tax expense (in millions)   2014     2013    $ Difference   % Difference
Three months ended June 30,      $ (1.7 ) $ (0.8 ) $      (0.9 )      112.5  %
Six months ended June 30,        $ (0.6 ) $ (3.3 ) $       2.7        (81.8 )%

Our income tax expense is based on a forecasted annual effective tax rate applied to current period results, as well as the tax effects of certain discrete items. The application of the requirements for accounting for income taxes in interim periods, after consideration of our valuation allowance against all of Century's U.S. and certain foreign deferred tax assets, can cause significant variations in the typical relationship between income tax expense and pretax income.
Liquidity and Capital Resources
Liquidity
Our principal sources of liquidity are available cash, cash flow from operations and available borrowings under our revolving credit facilities. We have also raised capital in the past through the public equity and debt markets and we regularly explore various other financing alternatives. Our principal uses of cash are the funding of operating costs (including post-retirement benefits), maintenance of curtailed production facilities, payments of principal and interest on our outstanding debt, the funding of capital expenditures, investments in our growth activities and in related businesses, working capital and other general corporate requirements.
Our consolidated cash and cash equivalents balance at June 30, 2014 was approximately $61 million compared to approximately $84 million at December 31, 2013. Century's U.S. revolving credit facility matures in May 2018 and our Iceland revolving credit facility matures in November 2016. As of June 30, 2014, our credit facilities had no outstanding borrowings and approximately $129 million of aggregate net availability. As of June 30, 2014, we had approximately $71 million of letters of credit outstanding under our U.S. revolving credit facility. We borrow and make repayments under our credit facilities in the ordinary course based on a number of factors, including the timing of payments from our customers and payments to our suppliers. Borrowings and repayments under our credit facilities for the six months ended June 30, 2014 on a gross basis were approximately $86.6 million and $92.6 million, respectively. During the same period, total outstanding indebtedness under our credit facilities at any given time did not exceed $16.7 million. The availability of funds under our credit facilities is limited by a specified borrowing base consisting of certain accounts receivable and inventory. Future changes to our sales agreements which have shorter payment terms could reduce our accounts receivable. In addition, any future curtailments of production capacity would reduce accounts receivable and inventory, which comprise the borrowing base of our revolving credit facilities, and could result in a corresponding reduction in availability under the revolving credit facilities. The acquisition of the Sebree smelter increased domestic accounts receivable and inventory and resulted in a corresponding increase in availability under the U.S. revolving credit facility.

We have $250 million in 7.5% senior secured notes payable that will mature on June 1, 2021. Our remaining 7.5% senior unsecured notes due August 2014 will reach maturity this year, and we expect to make a $2.6 million repayment to retire these notes in the third quarter of 2014.
As of June 30, 2014, the principal and accrued interest for the E.ON contingent obligation was $17.5 million, which was fully offset by a derivative asset. We may be required to make installment payments for the E.ON contingent obligation in the future. These payments are contingent based on the LME price of primary aluminum and the level of Hawesville's operations. Based on the LME forward market at June 30, 2014 and management's estimate of the LME forward market beyond the quoted market period, we currently believe that we will not be required to make payments on the E.ON contingent obligation during the term of the agreement through 2028. There can be no assurance that circumstances will not change thus accelerating the timing of such payments. See Note 4 Derivative and hedging instruments and Note 9 Debt to the consolidated financial statements included herein for additional information. In August 2011, our Board of Directors approved a $60 million common stock repurchase program. Through June 30, 2014, we had expended approximately $50 million under the program, but no repurchases have been made since March 2012.


At June 30, 2014, we had approximately $10 million remaining under the repurchase program authorization. The repurchase program may be suspended or discontinued by our Board, in its sole discretion, at any time.
In April 2013, we entered into a settlement agreement with the PBGC regarding an alleged "cessation of operations" at our Ravenswood facility as a result of the curtailment of operations at the facility. Pursuant to the terms of the agreement, we will make additional contributions (above any minimum required contributions) to our defined benefit pension plans over the term of the agreement. The remaining contributions under this agreement are approximately $10.7 million, of which approximately $3.7 million was scheduled to be made in 2014. Under certain circumstances, in periods of lower primary aluminum prices relative to our cost of operations, we may defer one or more of these payments, but we would be required to provide the PBGC with acceptable security for any deferred payments. In the first quarter of 2014, we elected to defer contributions under the PBGC agreement and have provided the PBGC with the appropriate security.
In addition to the contributions required pursuant to the PBGC settlement, based on current actuarial and other assumptions, we expect to make minimum required contributions to the qualified defined benefit plans and unqualified supplemental executive retirement benefits ("SERB") plan of approximately $4.6 million and $1.8 million, respectively, during 2014. We may choose to make additional contributions to these plans from time to time at our discretion. In May 2014, we received a one-time payment of approximately $5.5 million from receivables related to adjustments under our Hawesville and Sebree power contracts.
In May 2014, we paid Icelandic withholding taxes on intercompany dividends of approximately $2.8 million and we expect to pay another approximately $2.8 million in August 2014. We anticipate both payments will be refunded in November 2015. In November 2014, we expect to receive a refund for Icelandic withholding taxes paid in 2013 of $9.8 million. The withholding taxes and associated refunds are payable in ISK and we are subject to foreign currency risk associated with fluctuations in the value of the U.S. dollar as compared the ISK. On June 1, 2013, we acquired the Sebree aluminum smelter from a subsidiary of RTA. In July 2014, we received an arbitration ruling that established the final determination of the applicable working capital adjustments for the Sebree acquisition. As a result of this determination, we will pay RTA approximately $1.0 million in the third quarter of 2014 as final consideration for the acquisition.
In June 2014, we reached a settlement with Orkuveita Reykjavikur ("OR") related to a power contract dispute. Under the agreement, among other things, Nordural Grundartangi ehf paid $3.6 million to OR in July 2014 and OR will release Nordural Grundartangi ehf and Nordural Helguvik ehf from and against all claims related to the reduction in the power purchased under the existing power contracts. As part of the settlement, Nordural Helguvik ehf and OR entered into a supplemental power contract to provide power at LME-based rates, and as may be requested from Grundartangi or Helguvik from time to time, during the remaining term of the existing Nordural Helguvik ehf power contract. Power provided under the supplemental power contract may be used at Helguvik or Grundartangi. In June 2012, Nordural Grundartangi ehf entered into a supplemental power contract with Landsvirkjun. The supplemental power contract, which will expire in October 2029 (or upon the occurrence of certain earlier events), will provide Nordural Grundartangi ehf with supplemental power, as Nordural Grundartangi ehf may request from time to time, at LME-based variable rates. Nordural Grundartangi ehf has agreed to make certain prepayments to Landsvirkjun for power expected to be used at a later date in connection with the contract, which will reduce the price paid for power at the time of consumption. As of June 30, 2014, these power prepayments totaled approximately $2.0 million. We do not expect to make any additional prepayments in connection with this agreement. Capital Resources
We intend to finance our future recurring capital expenditures from available cash, cash flow from operations and available borrowings under our revolving credit facilities. For major investment projects, such as the Helguvik project, we would likely seek financing from various capital and loan markets, and may potentially pursue the formation of strategic alliances. We may be unable, however, to issue additional debt or equity securities, or enter into other financing arrangements on attractive terms, or at all, due to a number of factors including a lack of demand, unfavorable pricing, poor economic conditions, unfavorable interest rates, or our financial condition or credit rating at the time. Future uncertainty in the U.S. and international markets and economies may adversely affect our liquidity, our ability to access the debt or capital markets and our financial condition.


Capital expenditures for the six months ended June 30, 2014 were $24.2 million, of which approximately $7.4 million was related to the Grundartangi expansion project and $7.2 million was related to the Century Vlissingen restart. The remaining amounts are related to upgrading production equipment, improving facilities and complying with environmental requirements. We believe capital spending in 2014, excluding any expansion of the current production capacity at Century Vlissingen, will be approximately $50 to $60 million.
In order to restart the first 75,000 tonnes of annual anode capacity at Century Vlissingen, we have made approximately $25.4 million in aggregate capital expenditures through June 30, 2014. The first 75,000 tonnes of capacity was restarted in late 2013 and provides an anode supply to Grundartangi to replace third-party anode supply contracts that terminated in 2013. We may increase production capacity to 150,000 tonnes when we conclude it is feasible and advantageous to do so.
We have made and continue to make capital expenditures for the construction and development of our Helguvik project. We have substantial future contractual commitments for the Helguvik project. If we were to cancel the Helguvik project, we estimate that our exposure to contract cancellation and other costs would be approximately $20 million, of which we currently have accrued liabilities of approximately $13.4 million. We are continuing to negotiate with the power suppliers to the project to, among other things, remove all the remaining conditions to their obligations to supply contracted power. The timing of the power availability together with other factors will determine the timing of resumption of major construction activity at Helguvik. We expect that capital expenditures for this project will be less than $0.5 million per year until the restart of major construction activities. We cannot, at this time, predict when the restart of major construction activity will occur. Adjusted Operating Income (Loss)
We use certain non-GAAP measures when reviewing our operating results, including adjusted operating income (loss). We define adjusted operating income (loss) as operating income (loss) adjusted for certain non-cash items from the statement of cash flows and certain non-recurring items.
Our calculations of adjusted operating income (loss) may not be comparable to similarly titled measures reported by other companies due to differences in the components used in their calculations. We believe the presentation of adjusted operating income (loss) is a useful measure to help investors evaluate our capacity to fund our ongoing cash operating requirements, including capital expenditures and debt service obligations. Adjusted operating income (loss) should not be considered as a substitute for operating income (loss) as determined in accordance with GAAP. The following table includes a reconciliation of adjusted operating income (loss) to operating income (loss), the most comparable GAAP financial measure.

                                       Three months ended June 30,        Six months ended June 30,
                                          2014             2013             2014             2013
                                                              (in thousands)
Operating income (loss)             $      26,012    $       (23,870 ) $     11,778    $      (23,683 )
Depreciation                               17,375             16,210         35,143            31,898
Sebree power contract amortization              -             (2,741 )       (5,534 )          (2,741 )
LCM adjustment                               (140 )           10,211         (1,247 )          16,049
Legal reserve                                 500                  -          3,600            (2,225 )
Adjusted operating income (loss)    $      43,747    $          (190 ) $     43,740    $       19,298


Historical
Our statements of cash flows for the six months ended June 30, 2014 and 2013 are
summarized below:
                                             Six months ended June 30,
                                                2014            2013
                                                   (in thousands)
Net cash provided by operating activities $       8,628    $      22,976
Net cash used in investing activities           (25,458 )        (71,057 )
Net cash used in financing activities            (5,874 )         (8,364 )
Change in cash and cash equivalents       $     (22,704 )  $     (56,445 )

. . .

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