What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 73 added, 72 removed, 150 unchanged (49% of the section changed)

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Recent Developments

In December 2019, an outbreak of a novel strain of coronavirus, COVID-19, was identified in Wuhan, China.

Since then, COVID-19 has spread across the globe and, in March 2020, was recognized as a pandemic by the World Health Organization.

As of the date of this filing, COVID-19 continues to spread in the United States and within other major economies across the world.

While the ultimate impact of the COVID-19 pandemic is still unknown, the pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restriction on travel and the imposition of stay-at-home or remote-work conditions and has otherwise caused consumers and businesses to reduce their activities and their spending.

These restrictions and reductions in activities associated with the virus have in turn caused a slowdown of the global economy and resulted in lower prices for our products.

For example, the average LME price for primary aluminum has fallen from an average of $1,792 per tonne in 2019 to $1,494 per tonne for the three months ended June 30, 2020 and $1,592 per tonne for the six months ended June 30, 2020.

While we have recently seen some improvement in the LME price for aluminum, averaging $1,639 per tonne for July 2020, because we sell our product on a one- to three-month lag to current prices, the impact of the decline in prices on our fin ancial results will continue to be reflected in future periods.

Decreases in the prices of our products have been partially offset by decreases in the prices of our key cost inputs;

however, decreases in aluminum prices also negatively impact our liquidity by lowering our borrowing availability under our U.S.

revolving credit facility (due to a lower market value of our inventory and accounts receivable).

In response to the pandemic, we have taken a number of actions to protect the health and well-being of our employees and to prevent the spread of COVID-19 within our operations.

Our plants have not experienced any disruption in operations as a result of the pandemic, and we continue to sell all of our metal essentially as it is cast.

We have not experienced material customer cancellations and do not currently expect a build-up of inventory in future periods;

however, changes in product mix have had and will continue to have an impact on the average product premium received for our products as compared to prior periods.

In addition to the efforts noted above, we have also taken actions to mitigate the financial impact of the pandemic.

Such actions include reducing discretionary spending, optimizing working capital and deferring non-essential capital projects.

To preserve liquidity, in March 2020, we drew down a total of $90.0 million under our U.S.

and Iceland revolving credit facilities, the proceeds of which, are available, if needed, for working capital, general corporate or other purposes.

We have also effectively extended the maturities of our principal debt obligations.

On July 1, 2020, we issued $250.0 million in aggregate principal amount of senior secured notes due 2025 (the "2025 Notes"), and used the proceeds, together with cash on hand, to purchase all 2021 Notes tendered in a tender offer and to redeem all 2021 Notes that were not tendered.

In connection with the offering of the 2025 Notes, we also entered into Amendment No.1 to our U.S.

revolving credit facility extending the maturity date to May 16, 2023.

The ultimate extent of the effects of the COVID-19 pandemic on our business, results of operations and financial performance is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time.

Due to the above circumstances and as described generally in this Form 10-Q, our results of operations for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.

Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Pa rt I I, Item 1A.

Risk Fac t ors of our quarterly reports on Form 10-Q for additional information.

On October 20, 2020, we issued a notice to employees at our Mt.

Holly, South Carolina aluminum smelter of our intent to curtail the Mt.

Holly plant operations by no later than December 31, 2020, when our current power contracts at Mt.

Holly expire, if we are unable to secure a competitively priced power arrangement to deliver energy to the plant.

The announcement was made pursuant to the federal Worker Adjustment and Retraining Notification Act.

If a decision is made to curtail the Mt.

Holly facility, we would be subject to various costs and it could cause us to write down the book value of the Mt.

Holly facility .

COVID-19 Update

In response to the COVID-19 pandemic, we have taken a number of actions to protect the health and well-being of our employees and to prevent the spread of COVID-19 within our operations.

As a result, our plants have not experienced any disruption in operations as a result of the pandemic, and we continue to sell all of our metal essentially as it is cast.

The impact of the COVID-19 pandemic on the broader economy, however, resulted in decreased prices for our product.

For example, the LME price for primary aluminum averaged $1,494 per tonne for the three months ended June 30, 2020 and $1,592 per tonne for the six months ended June 30, 2020, as compared to an average of $1,792 for 2019.

We have recently continued to see some improvement in the global economy resulting in an increase in the price for our product.

For example, the LME price for primary aluminum averaged $1,706 for the three months ended September 30, 2020 and $1,803 per tonne for October 2020.

However, because we sell our product on a one- to three-month lag to current prices, our results reflect the LME price on this one to three month lag basis.

Customer demand for value-added aluminum products and, in turn, the product premium we receive for such products, also have generally returned to first quarter levels after having been negatively impacted by the COVID-19 pandemic.

We have taken actions to mitigate the financial impact of the COVID-19 pandemic, including reducing discretionary spending, optimizing working capital and deferring non-essential capital projects.

Decreases in the prices of our products have also been partially offset by decreases in the prices of our key cost inputs.

The potential future impact of the COVID-19 pandemic on our business, results of operations and financial performance is difficult to predict and will depend on future developments, and such effects could exist for an extended period of time.

Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Part II, Item 1A.

Risk Factors of our quarterly reports on Form 10-Q for additional information on the potential risks associated with the COVID-19 pandemic.

Results of Operations

The following discussion for the three and six months ended June 30, 2020 reflects restart activity at Hawesville and no change in production capacities at our other operating facilities.

The following discussion for the three and nine months ended September 30, 2020 reflects restart activity at Hawesville and no change in production capacities at our other operating facilities.

Our net sales are impacted primarily by the LME price for aluminum, regional and value-added premiums, and the volume and product mix of aluminum we ship during the period.

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In general, our results reflect the market cost of alumina on an approximately three-month lag reflecting the terms of our alumina contracts and inventory levels.

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

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Tonnes Net Sales (in millions) Tonnes Net Sales (in millions) Tonnes Net Sales (in millions)

3rd Quarter 118,835 $ 221.8 84,187 $ 138.4 203,022 $ 360.2

2nd Quarter 130,645 $ 246.6 79,664 $ 145.9 210,309 $ 392.5

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Total 378,594 $ 742.2 237,642 $ 425.3 616,236 $ 1,167.5

3rd Quarter 119,916 $ 272.0 78,627 $ 152.1 198,543 $ 424.1

2nd Quarter 125,154 $ 295.0 78,226 $ 157.7 203,380 $ 452.7

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Net sales (in millions) 2020 2019

Three months ended June 30, $ 401.9 $ 473.1

Six months ended June 30, $ 823.1 $ 963.2

Net sales decreased by $71.2 million for the three months ended June 30, 2020 compared to the same period in 2019, primarily driven by unfavorable LME and regional premium price realizations of $66.3 million.

Net sales decreased by $140.1 million for the six months ended June 30, 2020 compared to the same period in 2019, primarily driven by unfavorable LME and regional premium price realizations of $110.3 million.

Three months ended September 30, $ 392.9 $ 438.0

Nine months ended September 30, $ 1,216.0 $ 1,401.2

Net sales (excluding alumina sales) decreased by $63.9 million for the three months ended September 30, 2020, compared to the same period in 2019, primarily driven by unfavorable LME and regional premium price realizations of $65.1 million.

Net sales decreased by $185.2 million for the nine months ended September 30, 2020 compared to the same period in 2019, primarily driven by unfavorable LME and regional premium price realizations of $175.4 million.

Gross profit (loss) (in millions) 2020 2019

Three months ended June 30, $ (13.0) $ (4.1)

Six months ended June 30, $ (8.2) $ (16.9)

Gross loss increased by $8.9 million for the three months ended June 30, 2020 compared to the same period in 2019 primarily due to unfavorable LME and regional premium price realizations of $66.3 million, partially offset by favorable raw material and power price realizations of $44.4 million and $16.8 million, respectively.

Gross loss for the six months ended June 30, 2020 decreased by $8.7 million compared to the same period in 2019 primarily due to favorable raw material and power price realizations of $91.6 million and $31.9 million, respectively.

The favorable impacts were partially offset by unfavorable LME and regional premium price realizations of $110.3 million.

Three months ended September 30, $ (27.1) $ (13.7)

Nine months ended September 30, $ (35.3) $ (30.6)

Gross loss increased by $13.4 million for the three months ended September 30, 2020 compared to the same period in 2019 primarily due to unfavorable LME and regional premium price realizations of $65.1 million and unfavorable operating expenses of $8.9 million, partially offset by favorable raw material price realizations of $64.4 million.

Gross loss for the nine months ended September 30, 2020 increased by $4.7 million compared to the same period in 2019 primarily due to unfavorable LME and regional premium price realizations of $175.4 million and unfavorable operating expenses of $20.6 million, partially offset by favorable raw material and power price realizations of $192.7 million.

Selling, general and administrative expenses (in millions) 2020 2019

Three months ended June 30, $ 11.8 $ 11.9

Six months ended June 30, $ 20.7 $ 26.6

Selling, general and administrative expenses were flat for the three months ended June 30, 2020 compared to the same period in 2019.

Selling, general and administrative expenses for the six months ended June 30, 2020 decreased by $5.9 million compared to the same period in 2019 primarily driven by a decrease in compensation costs.

Three months ended September 30, $ 11.0 $ 11.6

Nine months ended September 30, $ 31.7 $ 38.2

Selling, general and administrative expenses decreased by $0.6 million for the three months ended September 30, 2020 compared to the same period in 2019 primarily driven by a decrease in compensation costs.

Selling, general and administrative expenses for the nine months ended September 30, 2020 decreased by $6.5 million compared to the same period in 2019 primarily driven by a decrease in compensation costs.

Net gain (loss) on forward and derivative contracts (in millions) 2020 2019

Three months ended June 30, $ 3.7 $ 6.1

Six months ended June 30, $ 7.5 $ 0.4

For the three months ended June 30, 2020, net gain on forward and derivative contracts decreased by $2.4 million compared to that for the three months ended June 30, 2019.

The period to period change is primarily due to increases in LME and MWP prices from March 31, 2020 to June 30, 2020, as compared to those from March 31, 2019 to June 30, 2019.

For the six months ended June 30, 2020, net gain on our forward and derivative contracts increased by $7.1 million compared to that for the six months ended June 30, 2019.

The increase in gain relates to the impact of decreases in LME, offset by decrease in Nord Pool prices during the first six months of 2020 .

Three months ended September 30, $ (9.4) $ 10.3

Nine months ended September 30, $ (1.9) $ 10.7

For the three months ended September 30, 2020, net gain on forward and derivative contracts decreased by $19.7 million compared to that for the three months ended September 30, 2019.

The period to period change is primarily due to increases in LME and MWP prices from June 30, 2020 to September 30, 2020, as compared to those from June 30, 2019 to September 30, 2019.

For the nine months ended September 30, 2020 , net gain on our forward and derivative contracts decreased by $12.6 million compared to that for the nine months ended September 30, 2019.

The decrease in gain relates to the impact of increases in LME and MWP prices.

Income tax benefit (expense) (in millions) 2020 2019

Three months ended June 30, $ (0.9) $ 1.6

Six months ended June 30, $ 1.9 $ 4.4

Three months ended September 30, $ (0.3) $ 1.3

Nine months ended September 30, $ 1.6 $ 5.7

We have a valuation allowance against all of our U.S.

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We believe that cash provided from operations and financing activities will be adequate to cover our operations and business needs over the next 12 months.

As of June 30, 2020, we had cash and cash equivalents of approximately $174.1 million and unused availability under our revolving credit facilities of $23.3 million, resulting in a total liquidity position of approximately $197.4 million.

As of September 30, 2020, we had cash and cash equivalents of approximately $81.4 million and unused availability under our revolving credit facilities of $88.0 million, resulting in a total liquidity position of approximately $169.4 million.

Adverse changes in the price of aluminum or our principal costs of production could materially impact our ability to generate and raise cash.

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Such actions include reducing discretionary spending, optimizing working capital and deferring non-essential capital projects.

To preserve liquidity, in March 2020, we drew down a total of $90.0 million under our U.S.

and Iceland revolving credit facilities, the proceeds of which, are available, if needed, for working capital, general corporate or other purposes.

We have also effectively extended the maturities of our principal debt obligations.

To preserve liquidity in light of the uncertainty in the global markets due to COVID-19, in March 2020, we drew down a total of $90.0 million under our U.S.

and Iceland revolving credit facilities.

In the third quarter, we repaid $40.0 million on our U.S.

revolving credit facility.

As of September 30, 2020, the remaining outstanding borrowings on the U.S.

and Iceland revolving credit facilities were $50.0 million.

We also effectively extended the maturities of our principal debt obligations.

On July 1, 2020, we issued $250.0 million in aggregate principal amount of our 2025 Notes and used the proceeds, together with cash on hand, to purchase all 2021 Notes tendered in a tender offer and to redeem all 2021 Notes that were not tendered.

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Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Part II, Item 1A.

Risk Factor s of our quarterly report on Form 10-Q for the three months ended March 31, 2020 for additional information.

Risk Factors of our quarterly report on Form 10-Q for the three months ended March 31, 2020 for additional information.

Available Cash

Our available cash and cash equivalents balance at June 30, 2020 was $174.1 million compared to $38.9 million at December 31, 2019.

Our available cash and cash equivalents balance at September 30, 2020 was $81.4 million compared to $38.9 million at December 31, 2019.

Sources and Uses of Cash

Our statements of cash flows are summarized below:

Six months ended June 30,

Nine months ended September 30,

(in millions)

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Change in cash, cash equivalents and restricted cash $ 45.4 $ (16.4)

The increase in net cash provided by operating activities was primarily driven by a decrease in net loss and improvements in working capital.

The increase in net cash provided by operating activities was primarily driven by improvements in working capital.

The improvements in working capital were primarily attributable to lower raw material prices, timing of raw material receipts and the timing of trade receivable collection.

The decrease in net cash used in investing activities was primarily due to higher spending on capital projects during the six months ended June 30, 2019, driven by the Vlissingen furnace rebuild project, as compared to the six months ended June 30, 2020.

The decrease in net cash used in investing activities was primarily due to higher spending on capital projects during the nine months ended September 30, 2019, driven by a higher level of capital investments in the Hawesville restart project during that period, as compared to the nine months ended September 30, 2020.

The increase in net cash provided by financing activities was primarily due to outstanding borrowings on our U.S.

revolving credit facility and Iceland revolving credit facility at June 30, 2020 compared to June 30, 2019, partially offset by payments on our Hawesville Term Loan.

revolving credit facility and Iceland revolving credit facility at September 30, 2020 compared to September 30, 2019, partially offset by payments on our Hawesville Term Loan.

Borrowings on our revolving credit facilities are available, if needed, for working capital requirements, general corporate or other purposes.

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decreases in the price of aluminum and/or curtailment of production capacity would decrease our borrowing base by reducing our accounts receivable and inventory balances.

As of June 30, 2020, our U.S.

As of September 30, 2020, our U.S.

revolving credit facility had a borrowing base of $124.6 million, $5.0 million in borrowings and $36.6 million in letters of credit outstanding.

Of the outstanding letters of credit, $15.7 million related to our domestic power commitments and the remainder secured certain debt and workers’ compensation commitments.

As of June 30, 2020, our Iceland revolving credit facility had a borrowing base of $50.0 million an d $45.0 million in borrowing s.

As of June 30, 2020, our credit facilities had $23.3 million of net availability after consideration of our outstanding borrowings and letters of credit.

As of September 30, 2020, our Iceland revolving credit facility had a borrowing base of $50.0 million an d $45.0 million in borrowing s.

As of September 30, 2020, our credit facilities had $88.0 million of net availability after consideration of our outstanding borrowings and letters of credit.

We may 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.

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Our Iceland revolving credit facility also contains a covenant that requires Grundartangi to maintain a minimum equity ratio.

As of June 30, 2020, we were in compliance with all such covenants or maintained availability above such covenant triggers.

As of September 30, 2020, we were in compliance with all such covenants or maintained availability above such covenant triggers.

Senior Secured Notes

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and (ix) effect a consolidation or merger.

In connection with the issuance of the 2025 Notes, we commenced a cash tender offer for any and all of our previously outstanding 2021 Notes, notified the holders of all outstanding 2021 Notes that were not purchased in the tender offer of our election to redeem all such remaining 2021 Notes on July 31, 2020, and deposited with the trustee under the indenture governing the 2021 Notes an amount sufficient to fund the full redemption of the remaining 2021 Notes.

As a result, the Company’s and the guarantors’ obligations under the indenture governing the 2021 Notes have been fully discharged.

We applied the net proceeds from the offering of the 2025 Notes described above, together with cash on hand, toward payment of the total consideration amount to holders whose 2021 Notes were accepted and purchased in the tender offer and to fund the redemption of any remaining 2021 Notes.

As a result, the Company's and the guarantors' obligations under the indenture governing the 2021 Notes have been fully discharged.

Hawesville Term Loan

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This contingent obligation consists of the aggregate payments made to Big Rivers by the third party on CAKY’s behalf in excess of the agreed upon base amount under the long-term cost-based power contract with Kenergy.

As of June 30, 2020, the principal and accrued interest for the contingent obligation was $26.0 million, which was fully offset by a derivative asset.

As of September 30, 2020, the principal and accrued interest for the contingent obligation was $26.3 million, which was fully offset by a derivative asset.

We may be required to make installment payments for the 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, 2020 and management’s estimate of the LME forward market beyond the quoted market period, we believe that we will not be required to make payments on the contingent obligation during the term of the agreement, which expires in 2028.

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 September 30, 2020 and management’s estimate of the LME forward market beyond the quoted market period, we believe that we will not be required to make payments on the contingent obligation during the term of the agreement, which expires in 2028.

There can be no assurance that circumstances will not change, thus accelerating the timing of such payments.

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Under certain circumstances, in periods of lower primary aluminum prices relative to our cost of operations, we are able to defer one or more of these payments, but would then be required to provide the PBGC with acceptable security for deferred payments.

We did not make any contributions in the three month periods ended June 30, 2020 and 2019.

We did not make any contributions in the three month periods ended September 30, 2020 and 2019.

We have elected to defer certain payments under the PBGC agreement and have provided the PBGC with the appropriate security.

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We expect that all losses arising from the Sebree equipment failure will be covered under our insurance policies, less $7.0 million in deductibles.

As of June 30, 2020, we have received $19.1 million in insurance proceeds to offset against such losses.

As of September 30, 2020, we have received $19.1 million in insurance proceeds to offset against such losses.

In November 2009, Century Aluminum of West Virginia ("CAWV") filed a class action complaint for declaratory judgment against the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union ("USW"), the USW’s local and certain CAWV retirees, individually and as class representatives ("CAWV Retirees"), seeking a declaration of CAWV’s rights to modify/terminate retiree medical benefits.

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Upon approval of the settlement, we paid $5.0 million to the aforementioned trust in September 2017 and agreed to pay the remaining amounts under the settlement agreement in annual increments of $2.0 million for nine years.

At June 30, 2020, we had $2.0 million in other current liabilities and $9.1 million in other liabilities related to this agreement.

At September 30, 2020, we had $2.0 million in other current liabilities and $7.3 million in other liabilities related to this agreement.

We are a defendant in several actions relating to various aspects of our business.

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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 incurred for the six months ended June 30, 2020 were $5.4 million, excluding expenditures of $4.7 million associated with the restart project at Hawesville.

Capital expenditures incurred for the nine months ended September 30, 2020 were $7.2 million, excluding expenditures of $4.7 million associated with the restart project at Hawesville.

We estimate our total capital spending in 2020, excluding the Hawesville restart project, will be approximately $10.0 million related to ongoing investment projects at our plants.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis