Century Aluminum(CENX) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This part presents unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition Item 1. Financial Statements. This section presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and detailed notes Consolidated Statements of Operations (Unaudited) | Metric | Three months ended March 31, 2022 ($ millions) | Three months ended March 31, 2021 ($ millions) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total net sales | 753.6 | 444.0 | | Cost of goods sold | 660.4 | 464.7 | | Gross profit (loss) | 93.2 | (20.7) | | Operating income (loss) | 81.3 | (36.9) | | Income (loss) before income taxes | 19.4 | (142.3) | | Net income (loss) allocated to common stockholders | 16.6 | (140.0) | | Basic EPS | 0.18 | (1.55) | | Diluted EPS | 0.18 | (1.55) | Consolidated Balance Sheets (Unaudited) | Metric | March 31, 2022 ($ millions) | December 31, 2021 ($ millions) | | :--------------------------------- | :-------------------------- | :----------------------------- | | Total current assets | 728.5 | 618.2 | | Total assets | 1,688.7 | 1,569.9 | | Total current liabilities | 574.0 | 547.4 | | Total noncurrent liabilities | 674.9 | 601.5 | | Total shareholders' equity | 439.8 | 421.0 | Consolidated Statements of Cash Flows (Unaudited) | Metric | Three Months Ended March 31, 2022 ($ millions) | Three Months Ended March 31, 2021 ($ millions) | | :----------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by (used in) operating activities | 37.4 | (49.8) | | Net cash used in investing activities | (26.0) | (7.4) | | Net cash provided by (used in) financing activities | (3.9) | 0.4 | | Change in cash, cash equivalents and restricted cash | 7.5 | (56.8) | | Cash, cash equivalents and restricted cash, end of period | 48.2 | 27.5 | Note 1. General This note clarifies interim financial statements are unaudited, reflect normal adjustments, and are not indicative of full-year results - The interim financial statements are unaudited and reflect normal, recurring adjustments. Operating results for Q1 2022 are not necessarily indicative of the full year[23] Note 2. Related Party Transactions This note details significant transactions with Glencore, a 42.9% beneficial owner, including sales and purchases of aluminum and raw materials - Glencore beneficially owned 42.9% of Century's outstanding common stock as of March 31, 2022[25] - Sales to Glencore accounted for approximately 57% of consolidated net sales for the three months ended March 31, 2022, down from 60% in the prior year period[26] Summary of Related Party Transactions | Transaction | Three Months Ended March 31, 2022 ($ millions) | Three Months Ended March 31, 2021 ($ millions) | | :-------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net sales to Glencore | 433.1 | 268.3 | | Purchases from Glencore | 54.5 | 72.3 | Note 3. Revenue This note disaggregates net sales by geographical region, highlighting the United States and Iceland as primary revenue sources Net Sales by Geographical Region | Region | Three Months Ended March 31, 2022 ($ millions) | Three Months Ended March 31, 2021 ($ millions) | | :------------- | :--------------------------------------------- | :--------------------------------------------- | | United States | 506.1 | 276.2 | | Iceland | 247.5 | 167.8 | | Total | 753.6 | 444.0 | Note 4. Fair Value Measurements This note details fair value measurements for assets and liabilities, categorizing them by input observability (Level 1, 2, 3) Recurring Fair Value Measurements (Assets) as of March 31, 2022 | Asset | Level 1 ($ millions) | Level 2 ($ millions) | Level 3 ($ millions) | Total ($ millions) | | :----------------------- | :------------------- | :------------------- | :------------------- | :----------------- | | Cash equivalents | 10.9 | — | — | 10.9 | | Trust assets | 1.5 | — | — | 1.5 | | Derivative instruments | — | 84.7 | — | 84.7 | | TOTAL | 12.4 | 84.7 | — | 97.1 | Recurring Fair Value Measurements (Liabilities) as of March 31, 2022 | Liability | Level 1 ($ millions) | Level 2 ($ millions) | Level 3 ($ millions) | Total ($ millions) | | :----------------------- | :------------------- | :------------------- | :------------------- | :----------------- | | Contingent obligation – net | — | — | — | — | | Derivative instruments | — | 206.8 | 16.7 | 223.5 | | TOTAL | — | 206.8 | 16.7 | 223.5 | - Level 3 fair value measurements for LME forward financial sales contracts and FX Swaps use a significant unobservable input of an 8.58% discount rate. The contingent obligation uses expected monthly Hawesville production levels (14,000 - 16,000 MT/month) as a significant unobservable input[45] Note 5. Earnings (Loss) per Share This note details basic and diluted earnings per share calculations, showing a significant improvement to positive EPS in Q1 2022 Basic and Diluted Earnings (Loss) Per Share | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) allocated to common stockholders ($ millions) | 16.6 | (140.0) | | Weighted average common shares outstanding (millions) | 91.2 | 90.1 | | Basic EPS | $0.18 | $(1.55) | | Diluted EPS | $0.18 | $(1.55) | | Dilutive securities (millions of shares) | 5.9 (Convertible preferred shares) | 6.4 (Convertible preferred shares) | | | 0.7 (Share-based compensation) | 2.2 (Share-based compensation) | | | 4.8 (Convertible senior notes) | — | - In periods of net loss, share-based compensation awards, convertible preferred shares, and convertible senior notes are excluded from diluted EPS calculation due to their anti-dilutive effect[54] Note 6. Shareholders' Equity This note details common and preferred stock, Glencore's ownership of Series A Convertible Preferred Stock, and the stock repurchase program - As of March 31, 2022, 91,231,611 shares of common stock were outstanding, and 58,542 shares of Series A Convertible Preferred Stock were outstanding, all held by Glencore[56][59] - The stock repurchase program has $43.7 million remaining under authorization as of March 31, 2022, with no repurchases made since April 2015[67] Common and Preferred Stock Activity (in shares) | Metric | Series A Convertible | Treasury | Outstanding | | :------------------------------------ | :------------------- | :------- | :---------- | | Balance, December 31, 2021 | 58,542 | 7,186,521 | 91,231,611 | | Balance, March 31, 2022 | 58,542 | 7,186,521 | 91,231,611 | | Balance, December 31, 2020 | 63,589 | 7,186,521 | 90,055,797 | | Conversion of convertible preferred stock | (137) | — | 13,697 | | Issuance for share-based compensation plans | — | — | 18,220 | | Balance, March 31, 2021 | 63,452 | 7,186,521 | 90,087,714 | Note 7. Income Taxes This note reports a $1.7 million income tax expense for Q1 2022, a shift from a prior-year benefit due to improved operational results - Income tax expense was $1.7 million for Q1 2022, compared to a $2.3 million benefit in Q1 2021, driven by improved operational results[68] - All U.S. and certain foreign deferred tax assets, net of deferred tax liabilities, are subject to a valuation allowance as of March 31, 2022[70] Note 8. Inventories This note breaks down inventory components, valued at the lower of cost or Net Realizable Value using FIFO or weighted average methods Inventories Composition | Inventory Component | March 31, 2022 ($ millions) | December 31, 2021 ($ millions) | | :------------------------ | :-------------------------- | :----------------------------- | | Raw materials | 133.8 | 132.9 | | Work-in-process | 76.0 | 76.1 | | Finished goods | 44.0 | 43.9 | | Operating and other supplies | 172.7 | 172.7 | | Total inventories | 426.5 | 425.6 | Note 9. Debt This note details the Company's debt structure, including revolving credit facilities, senior secured notes, and convertible senior notes Debt Balances | Debt Type | March 31, 2022 ($ millions) | December 31, 2021 ($ millions) | | :----------------------------------------- | :-------------------------- | :----------------------------- | | Hancock County industrial revenue bonds | 7.8 | 7.8 | | U.S. Revolving Credit Facility | 35.3 | 63.6 | | Iceland Revolving Credit Facility | 35.0 | 50.0 | | Grundartangi casthouse facility | 39.4 | — | | 7.5% senior secured notes due 2028 | 246.0 | 245.8 | | 2.75% convertible senior notes due 2028 | 84.1 | 84.0 | | Total Debt | 447.6 | 451.2 | - The U.S. revolving credit facility has $35.3 million in outstanding borrowings and $102.1 million in outstanding letters of credit as of March 31, 2022, with a maturity of May 2023[83] - The Grundartangi casthouse debt facility, with $40.0 million outstanding as of March 31, 2022, will fund the new billet casthouse project and matures in December 2029[87] Note 10. Commitments and Contingencies This note outlines commitments and contingencies, including legal, environmental, power supply, labor agreements, and a contingent obligation - The Ravenswood Retiree Medical Benefits settlement requires annual payments of $2.0 million for nine years, with $2.0 million in current liabilities and $6.3 million in other liabilities as of March 31, 2022[91] - The PBGC Settlement Agreement was amended in October 2021, committing the Company to contribute approximately $2.4 million per year to defined benefit pension plans for four years, starting November 2022[92] - Grundartangi's power purchase agreements expire from 2026 through 2036, with a significant portion of power priced at LME-based variable rates and an extended contract with Landsvirkjun providing fixed rates from January 2024[97] - A contingent obligation of $28.4 million (principal and accrued interest) related to a power contract unwind is fully offset by a derivative asset. Payments are contingent on LME prices and Hawesville's operations, and currently, no payments are expected through 2028[102] Note 11. Components of Accumulated Other Comprehensive Loss This note details components of Accumulated Other Comprehensive Loss (AOCL), including defined benefit plan liabilities and financial instrument gains/losses Components of AOCL | Component | March 31, 2022 ($ millions) | December 31, 2021 ($ millions) | | :----------------------------------------- | :-------------------------- | :----------------------------- | | Defined benefit plan liabilities | (86.0) | (86.7) | | Unrealized gain (loss) on financial instruments | 1.9 | 1.9 | | Other comprehensive loss before income tax effect | (84.1) | (84.8) | | Income tax effect | 2.4 | 2.5 | | Accumulated other comprehensive loss | (81.7) | (82.3) | Changes in AOCL Balances | Metric | Defined benefit plan and other postretirement liabilities ($ millions) | Unrealized gain (loss) on financial instruments ($ millions) | Total, net of tax ($ millions) | | :--------------------------------- | :--------------------------------------------------- | :------------------------------------------- | :----------------------------- | | Balance, January 1, 2022 | (84.0) | 1.7 | (82.3) | | Net amount reclassified to net income (loss) | 0.6 | 0.0 | 0.6 | | Balance, March 31, 2022 | (83.4) | 1.7 | (81.7) | Note 12. Components of Net Periodic Benefit Cost This note details net periodic benefit cost components for defined benefit pension and postretirement plans, reporting a $(1.5) million cost in Q1 2022 Components of Net Periodic Benefit Cost | Component | Three months ended March 31, 2022 ($ millions) | Three months ended March 31, 2021 ($ millions) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Service cost | 1.1 | 1.4 | | Interest cost | 2.5 | 2.4 | | Expected return on plan assets | (5.8) | (5.5) | | Amortization of prior service costs | 0.0 | 0.0 | | Amortization of net loss | 0.7 | 1.5 | | Net periodic benefit cost | (1.5) | (0.2) | Note 13. Derivatives This note describes derivative activities, including open positions for commodity and power swaps, fair values, and net gains/losses - As of March 31, 2022, the Company had open positions of 118,341 tonnes for LME forward financial sales contracts, 152,250 tonnes for MWP forward financial sales contracts, and 1,755,100 MWh for Nord Pool power price swaps[109][110] Derivative Assets and Liabilities (Fair Value) | Category | March 31, 2022 ($ millions) | December 31, 2021 ($ millions) | | :----------------------- | :-------------------------- | :----------------------------- | | Assets: | | | | Commodity contracts | 84.7 | 42.9 | | Foreign exchange contracts | — | — | | Total Assets | 84.7 | 42.9 | | Liabilities: | | | | Commodity contracts | 220.0 | 143.3 | | Foreign exchange contracts | 3.5 | 2.9 | | Total Liabilities | 223.5 | 146.2 | Net (Loss) Gain on Forward and Derivative Contracts | Category | Three months ended March 31, 2022 ($ millions) | Three months ended March 31, 2021 ($ millions) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | | Commodity contracts | (56.0) | (96.0) | | Foreign exchange contracts | (1.0) | (2.1) | | Total | (57.0) | (98.1) | | Net losses with Glencore | 58.9 | 20.3 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's analysis of financial condition and results, covering aluminum pricing, costs, liquidity, and operational developments - The Company is a global producer of primary aluminum, with key determinants of results being primary aluminum price (LME + premiums), cost of goods sold (power, alumina, carbon, labor), and production volume/product mix[121] - A cyber incursion in February 2022 affected global operations but all systems have been restored, and the financial impact is not expected to be material[122] Average Aluminum Prices | Price Component | Q1 2022 ($/tonne) | Q1 2021 ($/tonne) | Q1 2020 ($/tonne) | | :---------------- | :---------------- | :---------------- | :---------------- | | Average LME price | 3,267 | 2,475 | 1,702 | | Average MWP price | 794 | 581 | 267 | | Average EDPP price | 489 | 272 | 126 | Overview Century Aluminum is a global primary aluminum producer, with financial results driven by aluminum prices, cost of goods sold, and production volume - Century Aluminum is a global producer of primary aluminum with smelters in the U.S. and Iceland[121] - Key determinants of financial results are primary aluminum price (LME, regional, and value-added premiums), cost of goods sold (electrical power, alumina, carbon products, labor), and production volume/product mix[121] Recent Developments A cyber incursion on February 16, 2022, affected global operations, but systems are restored with no material financial impact expected - A cyber incursion was detected on February 16, 2022, affecting some global operations servers[122] - All impacted information systems have been fully restored, and the financial impact is not expected to be material[122] Pricing of aluminum Primary aluminum prices, including LME and regional premiums, are volatile and increased significantly in Q1 2022 due to market dynamics - The overall price of primary aluminum consists of the LME base commodity price, regional premiums (MWP, EDPP), and value-added product premiums[123] - Aluminum prices increased significantly in Q1 2022 compared to Q1 2021 and Q1 2020[124] Average Aluminum Prices (Q1 Comparison) | Price Component | Q1 2022 ($/tonne) | Q1 2021 ($/tonne) | Q1 2020 ($/tonne) | | :---------------- | :---------------- | :---------------- | :---------------- | | Average LME price | 3,267 | 2,475 | 1,702 | | Average MWP price | 794 | 581 | 267 | | Average EDPP price | 489 | 272 | 126 | Results of Operations Net sales and gross profit increased significantly year-over-year due to favorable pricing and volume, despite higher raw material and power costs Key Financial Results (Sequential and Year-to-Date) | Metric | Q1 2022 ($ millions) | Q4 2021 ($ millions) | Q1 2021 ($ millions) | | :------------------------------------ | :------------------- | :------------------- | :------------------- | | Total net sales | 753.6 | 659.1 | 444.0 | | Gross profit (loss) | 93.2 | 69.4 | (20.7) | | Net income (loss) | 17.7 | 60.4 | (140.0) | | Basic EPS | $0.18 | $0.62 | $(1.55) | | Diluted EPS | $0.18 | $0.59 | $(1.55) | - Net sales increased by $100.7 million sequentially (QoQ) and $315.9 million year-over-year (YoY), primarily due to favorable volume, sales mix, and LME/regional premium price realizations[133][134] - Gross profit increased by $23.8 million sequentially and $113.9 million year-over-year, driven by favorable LME and regional premium price realizations, partially offset by unfavorable raw material and power price realizations and increased operating costs[134][135] - Selling, general and administrative expenses decreased by $6.9 million sequentially and $4.4 million year-over-year, mainly due to reduced share-based compensation costs[136][137] - Net loss on forward and derivative contracts was $56.7 million in Q1 2022, a decrease of $83.5 million from a gain in Q4 2021, but an improvement of $41.4 million compared to Q1 2021, influenced by LME/MWP forward prices and Nord Pool derivative gains[138] - Income tax expense was $1.7 million in Q1 2022, a decrease of $11.5 million from Q4 2021 expense and a shift from a $2.3 million benefit in Q1 2021, primarily due to improved operational results[140][141] Liquidity and Capital Resources Total liquidity was $154.3 million as of March 31, 2022, with operating activities providing $37.4 million in cash, and debt covenants maintained - Total liquidity as of March 31, 2022, was approximately $154.3 million, comprising $26.6 million in cash and $127.7 million in unused revolving credit facility availability[143] Summary of Cash Flows | Cash Flow Activity | 2022 ($ millions) | 2021 ($ millions) | | :----------------------------------------- | :---------------- | :---------------- | | Net cash provided by (used in) operating activities | 37.4 | (49.8) | | Net cash used in investing activities | (26.0) | (7.4) | | Net cash provided by (used in) financing activities | (3.9) | 0.4 | | Change in cash, cash equivalents and restricted cash | 7.5 | (56.8) | - The U.S. revolving credit facility has $82.7 million net availability, and the Iceland revolving credit facility has $45.0 million net availability as of March 31, 2022[84][86] - The Company was in compliance with all debt covenants as of March 31, 2022[153][155] Other Items Operational updates include Hawesville and Mt. Holly restarts, Grundartangi casthouse construction, and an outstanding stock repurchase authorization - Hawesville's curtailed capacity restart to 80% production was completed in late 2021, with the final potline rebuild planned over several years[168] - The Mt. Holly restart project, aiming for 75% of full capacity, is progressing and expected to be completed in Q2 2022[169] - The Grundartangi casthouse project, fully funded by the Casthouse Facility, began in late 2021 and is expected to be completed in H2 2023[170] - The common stock repurchase program has $43.7 million remaining under authorization, with no repurchases made since April 2015[171] Capital Resources Future capital expenditures will be financed by available cash, operating cash flow, and credit facilities, with $40.0 million estimated for 2022 - Future capital expenditures will be financed from available cash, cash flow from operations, and existing revolving credit facilities[176] - Estimated total capital spending in 2022, excluding Mt. Holly restart and Grundartangi casthouse projects, is approximately $40.0 million for ongoing investment and sustainability projects[177] Item 3. Quantitative and Qualitative Disclosures about Market Risk. This section details market risks, including commodity price risk for aluminum and raw materials, power price risk, and foreign currency risk - The Company is exposed to commodity price risk for aluminum (LME, regional, product premiums) and raw materials (alumina), with certain alumina purchases tied to LME prices[179] - Power costs are a major operating expense, with Hawesville and Sebree exposed to MISO pricing, and Grundartangi exposed to LME-based variable rates and Nord Pool power market prices for approximately 30% of its power[180][181][183] Estimated Electrical Power Usage and Cost Impact (at 100% capacity) | Metric | Hawesville | Sebree | Mt. Holly | Grundartangi | Total | | :------------------------------------------------ | :--------- | :------- | :-------- | :----------- | :------ | | Expected average load (MW) | 482 | 385 | 400 | 537 | 1,804 | | Quarterly estimated electrical power usage (MWh) | 1,055,580 | 843,150 | 876,000 | 1,176,030 | 3,950,760 | | Quarterly cost impact of $1/MWh change ($ millions) | 1.1 | 0.8 | 0.9 | 1.2 | 4.0 | | Annual expected electrical power usage (MWh) | 4,222,320 | 3,372,600 | 3,504,000 | 4,704,120 | 15,803,040 | | Annual cost impact of $1/MWh change ($ millions) | 4.2 | 3.4 | 3.5 | 4.7 | 15.8 | - The Company is exposed to foreign currency risk from fluctuations in the U.S. dollar against the Icelandic krona and Euro, affecting labor and maintenance costs at Grundartangi and Vlissingen[187] Fair Value of Derivatives and Sensitivity to 10% Adverse Price Change (March 31, 2022) | Category | Asset Fair Value ($ millions) | Asset Fair Value with 10% Adverse Change ($ millions) | | :----------------------- | :---------------------------- | :---------------------------------------------------- | | Commodity contracts | 84.7 | 72.4 | | Total Assets | 84.7 | 72.4 | | | Liability Fair Value ($ millions) | Liability Fair Value with 10% Adverse Price Change ($ millions) | | Commodity contracts | 220.0 | 273.4 | | Foreign exchange contracts | 3.5 | 8.9 | | Total Liabilities | 223.5 | 282.3 | Item 4. Controls and Procedures. Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control - Disclosure controls and procedures were evaluated and concluded to be effective as of March 31, 2022[196] - There were no material changes in internal control over financial reporting during the three months ended March 31, 2022[197] PART II - OTHER INFORMATION This part addresses legal proceedings, risk factors, equity sales, related party transactions, and required exhibits Item 1. Legal Proceedings Legal proceedings are not expected to materially adversely affect the Company's financial condition, results of operations, or liquidity - Legal proceedings are not expected to result in a material adverse effect on the Company's financial condition, results of operations, or liquidity[199] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[199] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the current period - No unregistered sales of equity securities and use of proceeds to report[200] Item 5. Other Information This section discloses Glencore's non-U.S. affiliates' agricultural sales to Iranian entities, complying with sanctions and not involving the Company - Non-U.S. affiliates of the largest stockholder (Glencore) engaged in sales contracts for agricultural products with Iranian entities controlled by the Government of Iran during Q1 2022[203] - Gross revenue from these transactions did not exceed $178 million for Q1 2022, and the estimated net profit would be a small fraction of this amount[204][205] - These contracts complied with applicable sanctions laws and are not subject to enforcement action. The Company itself was not involved in these transactions[206][207] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, CEO/CFO certifications, and XBRL documents - The report includes exhibits such as the Term Facility Amendment Agreement, CEO and Principal Financial Officer certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), and XBRL instance and taxonomy documents[209] SIGNATURES This section contains the signatures of the Company's authorized financial and accounting officers, certifying the report on May 2, 2022 - The report is signed by Michelle M. Harrison, Senior Vice President, Finance and Treasurer (Principal Financial Officer), and Robert Hoffman, Vice President and Chief Accounting Officer (Principal Accounting Officer), on May 2, 2022[213]