Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003.
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number 0-27918
CENTURY ALUMINUM COMPANY
(Exact name of Registrant as specified in its Charter)
DELAWARE 13-3070826
(State of Incorporation) (IRS Employer Identification No.)
2511 GARDEN ROAD
BUILDING A, SUITE 200
MONTEREY, CALIFORNIA 93940
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (831) 642-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No | |
The registrant had 21,070,210 shares of common stock outstanding at April
30, 2003.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS.
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
2003 2002
--------- ----------
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 56,833 $ 45,092
Accounts receivable - net ................................................. 47,914 46,240
Due from affiliates ....................................................... 58,257 22,732
Inventories ............................................................... 74,486 77,135
Prepaid and other assets .................................................. 10,650 4,777
--------- ---------
Total current assets .................................................. 248,140 195,976
Property, Plant and Equipment - net ............................................ 424,647 417,621
Intangible Asset - net ......................................................... 114,817 119,744
Due from Affiliates - Less current portion ..................................... -- 974
Other Assets ................................................................... 35,026 30,852
--------- ---------
Total ................................................................. $ 822,630 $ 765,167
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ................................................... $ 35,574 $ 37,757
Due to affiliates ......................................................... 16,180 15,811
Industrial revenue bonds .................................................. 7,815 7,815
Accrued and other current liabilities ..................................... 34,951 24,114
Accrued employee benefits costs - current portion ......................... 11,100 10,890
Deferred Taxes - current portion .......................................... 7,880 4,971
--------- ---------
Total current liabilities ............................................. 113,500 101,358
--------- ---------
Long Term Debt - net ........................................................... 321,962 321,852
Accrued Pension Benefits Costs - Less current portion .......................... 11,689 10,751
Accrued Postretirement Benefits Costs - Less current portion ................... 72,738 70,656
Other Liabilities .............................................................. 32,217 8,376
Deferred Taxes ................................................................. 46,165 41,376
--------- ---------
Total noncurrent liabilities .......................................... 484,771 453,011
--------- ---------
Minority Interest .............................................................. 17,680 18,666
Contingencies and Commitments (See Note 5)
Shareholders' Equity:
Convertible preferred stock (8.0% cumulative, 500,000 shares outstanding) . 25,000 25,000
Common stock (one cent par value, 50,000,000 shares authorized;
21,070,210 and 21,054,302 shares outstanding at March 31, 2003 and
December 31, 2002, respectively) ........................................ 211 211
Additional paid-in capital ................................................ 172,403 172,133
Accumulated other comprehensive income (loss) ............................. (2,134) 1,173
Retained earnings (deficit) ............................................... 11,199 (6,385)
--------- ---------
Total shareholders' equity ............................................ 206,679 192,132
--------- ---------
Total ................................................................. $ 822,630 $ 765,167
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
NET SALES:
Third-party customers ......................................... $ 153,455 $ 154,199
Related parties ............................................... 25,554 24,901
--------- ---------
179,009 179,100
Cost of Goods Sold ............................................... 171,303 171,792
--------- ---------
Gross Profit ..................................................... 7,706 7,308
Selling, General and Administrative Expenses ..................... 4,135 4,177
--------- ---------
Operating Income ................................................. 3,571 3,131
Interest Expense ................................................. (10,224) (10,259)
Interest Income .................................................. 151 71
Net Gain on Forward Contracts .................................... 41,693 --
Other Income ..................................................... 270 30
--------- ---------
Income (Loss) Before Income Taxes ................................ 35,461 (7,027)
Income Tax (Expense) Benefit ..................................... (12,974) 2,246
--------- ---------
Income (Loss) Before Minority Interest and Cumulative Effect of
Change in Accounting Principle ................................ 22,487 (4,781)
Minority Interest ................................................ 986 1,313
--------- ---------
Income (Loss) before Cumulative Effect of Change in Accounting
Principle ..................................................... 23,473 (3,468)
Cumulative Effect of Change in Accounting Principle, net of tax
benefit of $3,430 ............................................. (5,878) --
--------- ---------
Net Income (Loss) ................................................ 17,595 (3,468)
Preferred Dividends .............................................. (500) (500)
--------- ---------
Net Income (Loss) Applicable to Common Shareholders .............. $ 17,095 $ (3,968)
========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Income(Loss) before cumulative effect of change in accounting
principle ................................................. $ 1.09 $ (0.19)
Cumulative effect of change in accounting principle ......... (0.28) --
--------- ---------
Net Income (Loss) ........................................... $ 0.81 $ (0.19)
========= =========
Diluted:
Income(Loss) before cumulative effect of change in accounting
principle ................................................. $ 1.04 $ (0.19)
Cumulative effect of change in accounting principle ......... (0.26) --
--------- ---------
Net Income (Loss) ........................................... $ 0.78 $ (0.19)
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic ......................................................... 21,070 20,533
========= =========
Diluted ....................................................... 22,465 20,533
========= =========
DIVIDENDS PER COMMON SHARE ....................................... $ -- $ 0.05
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 17,595 $ (3,468)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Unrealized net gain on forward contracts ..................... (15,564) --
Depreciation and amortization ................................ 12,711 14,075
Deferred income taxes ........................................ 9,543 (2,339)
Pension and other postretirement benefits .................... 3,229 2,202
Inventory market adjustment .................................. (99) (1,473)
Minority interest ............................................ (986) (1,313)
Cumulative effect of change in accounting principle .......... 9,308 --
Change in operating assets and liabilities:
Accounts receivable - net ................................ (1,674) (1,294)
Due from affiliates ...................................... (36,974) (285)
Inventories .............................................. 2,749 (1,627)
Prepaids and other assets ................................ 3,068 (199)
Accounts payable, trade .................................. (2,183) (6,748)
Due to affiliates ........................................ 244 12,908
Accrued and other current liabilities .................... 8,294 9,663
Other - net .............................................. 8,612 (303)
-------- --------
Net cash provided by operating activities .................... 17,873 19,799
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ........................ (6,121) (5,918)
-------- --------
Net cash used in investing activities ........................ (6,121) (5,918)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends ........................................................ (11) (1,026)
-------- --------
Net cash used in financing activities ........................ (11) (1,026)
-------- --------
NET INCREASE IN CASH ................................................ 11,741 12,855
CASH, BEGINNING OF PERIOD ........................................... 45,092 13,388
-------- --------
CASH, END OF PERIOD ................................................. $ 56,833 $ 26,243
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. GENERAL
The accompanying unaudited interim consolidated financial statements of
the Company should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2002. In management's
opinion, the unaudited interim consolidated financial statements reflect all
adjustments, which are of a normal and recurring nature, that are necessary for
a fair presentation of financial results for the interim periods presented.
Operating results for the first three months of 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. Certain reclassifications of 2002 information were made to conform to the
2003 presentation.
2. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
------- --------
Raw materials .................. $28,754 $32,064
Work-in-process ................ 14,273 13,310
Finished goods ................. 10,461 9,853
Operating and other supplies.... 20,998 21,908
------- -------
$74,486 $77,135
======= =======
At March 31, 2003 and December 31, 2002, approximately 76% and 78% of
inventories were valued at the lower of last-in, first-out ("LIFO") cost or
market, respectively. The excess of LIFO cost (or market, if lower) over first
in, first out ("FIFO") cost was approximately $511 and $1,105 at March 31, 2003
and December 31, 2002, respectively.
3. INTANGIBLE ASSET
The intangible asset consists of the power contract acquired in connection
with the Company's acquisition of its aluminum reduction facility located in
Hawesville, Kentucky in April 2001. The contract value is being amortized over
its term (ten years) using a method that results in annual amortization equal to
the expected annual benefits. As of March 31, 2003, the gross carrying amount of
the intangible asset was $165,696 with accumulated amortization of $50,879. For
the three month periods ended March 31, 2003 and March 31, 2002, amortization
expense for the intangible asset totaled $4,929 and $6,565, respectively. For
the year ended December 31, 2003, the estimated aggregate amortization expense
for the intangible asset will be approximately $19,710. The estimated aggregate
amortization expense for the intangible asset for the following five years is as
follows:
4
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Estimated Amortization Expense:
For the year ending December 31,
2004...................... $ 12,448
2005...................... 14,600
2006...................... 12,914
2007...................... 13,686
2008...................... 15,817
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company evaluates the intangible asset for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable.
4. DEBT
The Company has $325.0 million of 11 3/4% senior secured first mortgage
notes due 2008 (the "Notes"). The Company had unamortized bond discounts on the
Notes of $3,038 and $3,148 at March 31, 2003 and December 31, 2002,
respectively. The indenture governing the Notes contains customary covenants
including limitations on the Company's ability to pay dividends, incur debt,
make investments, sell assets or stock of certain subsidiaries, and purchase or
redeem capital stock. The Company suspended its common and preferred stock
dividends in the fourth quarter of 2002. This action was taken because the
Company was near the limits on allowable dividend payments under the covenants
in its bond indenture.
Effective April 1, 2001, the Company entered into a $100,000 senior
secured revolving credit facility (the "Revolving Credit Facility") with a
syndicate of banks. The Revolving Credit Facility will mature on April 2, 2006.
There were no outstanding borrowings under the Revolving Credit Facility as of
March 31, 2003.
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company assumed industrial revenue bonds ("IRBs") in
the aggregate principal amount of $7,815. An affiliate of Glencore International
AG, the Company's largest shareholder (together with its subsidiaries,
"Glencore"), effectively purchased a 20% interest in the Hawesville facility
from the Company on April 1, 2001. Under the terms of the agreement governing
the sale, Glencore agreed to assume a pro rata portion of that debt and will pay
a pro rata portion of service costs of the IRBs through its investment in the
Hawesville facility. The IRBs mature on April 1, 2028, are secured by a Glencore
guaranteed letter of credit and bear interest at a variable rate not to exceed
12% per annum determined weekly based on prevailing rates for similar bonds in
the bond market. The interest rate on the IRBs at March 31, 2003 was 1.50%,
with interest paid quarterly. The IRBs are classified as current
5
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
liabilities because they are remarketed weekly and could be required to be
repaid upon demand if there is a failed remarketing, as provided in the
indenture governing the IRBs.
On April 1, 2003, the Company completed the acquisition of the 20%
interest in its Hawesville, Kentucky primary aluminum reduction facility which
was indirectly owned by Glencore together with Glencore's pro rata interest in
certain related assets (collectively, the "Acquired Assets"). Century paid a
purchase price of approximately $105.0 million for the Acquired Assets, which it
financed with approximately $65.0 million of available cash and a six-year 10%
$40.0 million promissory note payable to Glencore (the "Hawesville Note").
Amounts outstanding under the Hawesville Note are secured by a first priority
security interest in the acquired assets. Until the Hawesville Note matures on
April 1, 2009, the Company will make principal and interest payments
semi-annually, with principal payments based on the average closing prices for
aluminum quoted on the London Metals Exchange for the six month period ending
prior to each payment date. The maximum semi-annual principal payment would be
$3.0 million. The Company's obligations under the Hawesville Note are guaranteed
by each of its consolidated subsidiaries, including Hancock Aluminum LLC
("Hancock"), a wholly-owned subsidiary of the Company which holds the Acquired
Assets. With the completion of the acquisition of the 20% interest in the
Hawesville facility, the Company assumed Glencore's obligations related to the
IRBs. The IRBs will continue to be secured by a Glencore guaranteed letter of
credit and the Company will provide for the servicing costs for the letter of
credit.
5. CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL CONTINGENCIES
The Company believes it does not have environmental liabilities that are
likely to have a material adverse effect on the Company. However, there can be
no assurance that future requirements at currently or formerly owned properties
will not result in liabilities which may have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
Century of West Virginia is performing certain remedial measures at its
Ravenswood Facility pursuant to a RCRA 3008(h) order issued by the Environmental
Protection Agency ("EPA") in 1994 (the "3008(h) Order"). Century of West
Virginia also conducted a RCRA facility investigation ("RFI") under the 3008(h)
Order evaluating other areas at Ravenswood that may have contamination requiring
remediation. The RFI was submitted to the EPA in December 1999. Century of West
Virginia, in consultation with the EPA, has completed interim remediation
measures at two sites identified in the RFI, and the Company expects that
neither the EPA nor the State of West Virginia will require further remediation
under the 3008(h) Order. The Company believes a significant portion of the
contamination on the two identified sites is attributable to the operations of
Kaiser Aluminum and Chemical ("Kaiser"), the prior owner, and will be the
financial responsibility of that owner, as discussed below.
Kaiser owned and operated the Ravenswood facility for approximately 30
years prior to its acquisition by Century of West Virginia. Many of the
conditions that Century of West Virginia is remedying exist because of
activities that occurred during Kaiser's ownership and operation. Under the
terms of the agreement to purchase the Ravenswood Facility ("Kaiser Purchase
Agreement"),
6
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Kaiser retained the responsibility to pay the costs of cleanup of those
conditions. In addition, Kaiser retained title to certain land within the
Ravenswood premises and is responsible for those areas. On February 12, 2002,
Kaiser and certain wholly owned subsidiaries filed voluntary petitions under
Chapter 11 of the Federal Bankruptcy Code ("Kaiser Bankruptcy"). While the
Company believes the Kaiser Bankruptcy will not relieve Kaiser of its
obligations to do remediation work under government orders, the ultimate outcome
of the Kaiser Bankruptcy is uncertain. Nevertheless, the Company does not expect
the Kaiser Bankruptcy to have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Under the terms of the agreement to sell its fabricating businesses to
Pechiney (the "Pechiney Agreement"), the Company and Century of West Virginia
provided Pechiney with certain indemnifications. Those include the assignment of
certain of Century of West Virginia's indemnification rights under the Kaiser
Purchase Agreement (with respect to the real property transferred to Pechiney)
and the Company's indemnification rights under its stock purchase agreement with
Alcoa relating to the Company's purchase of Century Cast Plate, Inc. The
Pechiney Agreement provides further indemnifications, which are limited, in
general, to pre-closing conditions that were not disclosed to Pechiney and to
off-site migration of hazardous substances from pre-closing acts or omissions of
Century of West Virginia. Environmental indemnifications under the Pechiney
Agreement expire September 20, 2005 and are payable only to the extent they
exceed $2,000. The Company does not believe that there are any undisclosed
pre-closing conditions or known off-site migration of hazardous substances, and
does not believe that it will be required to make any potential future payments
under this indemnification. However, the potential future payments under this
indemnification would be limited to $25,000 for on-site liabilities and there is
no limit on potential future payments for any off-site liabilities.
On July 6, 2000, while the Hawesville aluminum reduction facility was
owned by Southwire Company ("Southwire"), a privately-held wire and cable
manufacturing company, the EPA issued a final Record of Decision ("ROD") which
detailed response actions to be implemented at several locations at the
Hawesville site to address actual or threatened releases of hazardous
substances. The ROD was issued under the federal Comprehensive Environmental
Response, Compensation and Liability Act. Those actions include:
- - removal and off-site disposal at approved landfills of certain soils
contaminated by polychlorinated biphenyls ("PCBs");
- - management and containment of soils and sediments with low PCB
contamination in certain areas on-site; and
- - the continued extraction and treatment of cyanide contaminated ground
water using the existing ground water treatment system.
Under the Company's agreement with Southwire to purchase the Hawesville
facility, Southwire indemnified the Company against all on-site environmental
liabilities known to exist prior to the closing of the acquisition, including
all remediation, operation and maintenance obligations under the ROD. The total
costs for the remedial actions to be undertaken and paid for by Southwire
relative to
7
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
these liabilities are estimated under the ROD to be $12,600 and the
forecast of annual operating and maintenance costs is $1,200. Century will
operate and maintain the ground water treatment system required under the ROD on
behalf of Southwire, and Southwire will reimburse Century for any expense that
exceeds $400 annually. Under the terms of the Company's agreements with Glencore
relating to the Company's ownership and operation of the Hawesville Facility,
Glencore will share pro rata in any environmental costs (net of any amounts
available under the indemnity provisions in the Company's stock purchase
agreement with Southwire) associated with the Hawesville Facility.
If on-site environmental liabilities relating to pre-closing activities at
Hawesville that were not known to exist as of the date of the closing of the
acquisition, become known before March 31, 2007, the Company and Glencore, based
on each company's respective percentage interests in the Hawesville Facility,
will share the costs of remedial action with Southwire on a sliding scale
depending on the year the claim is brought. Any on-site environmental
liabilities arising from pre-closing activities which do not become known until
on or after March 31, 2007 will be the responsibility of Glencore and the
Company. In addition, the Company and Glencore will be responsible for a pro
rata portion of any post-closing environmental costs which result from a change
in environmental laws after the closing or from their own activities, including
a change in the use of the facility. Upon completion of the acquisition of the
20% interest in the Hawesville facility on April 1, 2003, the Company assumed
Glencore's responsibilities for the environmental liabilities with respect to
the Hawesville facility.
The Company acquired the Hawesville facility by purchasing all of the
outstanding equity securities of Metalsco Ltd., which was a wholly owned
subsidiary of Southwire. Metalsco previously owned certain assets which are
unrelated to the Hawesville plant's operations, including the stock of Gaston
Copper Recycling Corporation ("Gaston"), a secondary metals reduction facility
in South Carolina. Gaston has numerous liabilities related to environmental
conditions at its reduction facility. Gaston and all other non-Hawesville assets
owned at any time by Metalsco were identified in the Company's agreement with
Southwire as unwanted property and were distributed to Southwire prior to the
closing of the Hawesville acquisition. Southwire indemnified the Company for all
liabilities related to the unwanted property. Southwire also retained ownership
of certain land adjacent to the Hawesville facility containing Hawesville's
former potliner disposal areas, which are the sources of cyanide contamination
in the facility's groundwater. Southwire retained full responsibility for this
land, which was never owned by Metalsco and is located on the north boundary of
the Hawesville site. In addition, Southwire indemnified the Company against all
risks associated with off-site hazardous material disposals by the Hawesville
plant which pre-date the closing of the acquisition.
Southwire has secured its indemnity obligations to the Company for
environmental liabilities until April 1, 2008 by posting a $15,000 letter of
credit issued in the Company's favor, with an additional $15,000 to be posted if
Southwire's net worth drops below a pre-determined level during that period. The
amount of security Southwire provides may increase (but not above $15,000 or
$30,000, as applicable) or decrease (but not below $3,000) if certain specified
conditions are met. The Company cannot be certain that Southwire will be able to
meet its indemnity obligations. In that event, under certain environmental laws
which impose liability regardless of fault, the Company may be liable for any
outstanding remedial measures required under the ROD and for certain liabilities
related to the
8
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
unwanted properties. If Southwire fails to meet its indemnity obligations or if
the Company's shared or assumed liability is significantly greater than
anticipated, the Company's financial condition, results of operations and
liquidity could be materially adversely affected.
Century is a party to an Administrative Order on Consent with the
Environmental Protection Agency (the "Order") pursuant to which all other past
and present owners of an alumina facility at St. Croix, Virgin Islands have
agreed to carry out a Hydrocarbon Recovery Plan to remove and manage
hydrocarbons floating on top of groundwater underlying the facility. Pursuant
to the Hydrocarbon Recovery Plan, recovered hydrocarbons and groundwater will
be delivered to the adjacent petroleum refinery where they will be received and
managed. The owner of the petroleum refinery will pay the parties participating
in the recovery effort the fair market value of the petroleum hydrocarbon
recovered. Lockheed Martin Corporation ("Lockheed"), which sold the facility to
one of the Company's affiliates, Virgin Islands Alumina Corporation ("Vialco"),
in 1989, has tendered indemnity and defense of this matter to Vialco pursuant
to terms of the Lockheed-Vialco Asset Purchase Agreement. Management does not
believe Vialco's liability under the Order or its indemnity to Lockheed will
have a material adverse effect on the Company's financial condition, results of
operations, or liquidity. The Company expects the future potential payments
under this indemnification will be an immaterial amount. However, under the
indemnification, there is no limit to the potential future payments.
It is the Company's policy to accrue for costs associated with
environmental assessments and remedial efforts when it becomes probable that a
liability has been incurred and the costs can be reasonably estimated. The
aggregate environmental related accrued liabilities were $1,649 and $1,370 at
March 31, 2003 and December 31, 2002, respectively. All accrued amounts have
been recorded without giving effect to any possible future recoveries. With
respect to ongoing environmental compliance costs, including maintenance and
monitoring, such costs are expensed as incurred.
Because of the issues and uncertainties described above, and the Company's
inability to predict the requirements of the future environmental laws, there
can be no assurance that future capital expenditures and costs for environmental
compliance will not have a material adverse effect on the Company's future
financial condition, results of operations, or liquidity. Based upon all
available information, management does not believe that the outcome of these
environmental matters, or environmental matters concerning Mt. Holly, will have
a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
LEGAL CONTINGENCIES
Century was a named defendant, along with Kaiser and many other companies,
in civil actions brought by employees of third party contractors prior to the
Kaiser Bankruptcy who allege asbestos-related diseases arising out of exposure
at facilities where they worked, including Ravenswood. All of the actions
relating to the Ravenswood facility have been settled with respect to the
Company and as to Kaiser. Only 14 plaintiffs were able to show they had been on
the Ravenswood premises during the period the Company owned the plant, and the
Company has agreed to settle all of those claims for non-material amounts. The
Company is awaiting receipt of final documentation of those settlements and the
entry of dismissal orders. The Company does not expect the Kaiser Bankruptcy
will have any
9
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
effect on the settlements it has reached on those asbestos claims. Since the
Kaiser Bankruptcy, the Company has been named in an additional 61 civil actions
based on similar allegations with unspecified monetary claims against Century.
The Company does not know if any of the 61 claimants were in the Ravenswood
facility during the Company's ownership, but the Company will investigate such
claims. Management believes that the costs of investigation or settlements, if
any, will be immaterial.
The Company has pending against it or may be subject to various other
lawsuits, claims and proceedings related primarily to employment, commercial,
environmental and safety and health matters. Although it is not presently
possible to determine the outcome of these matters, management believes their
ultimate disposition will not have a material adverse effect on the Company's
financial condition, results of operations, or liquidity.
POWER COMMITMENTS
The Company purchases all of the electricity requirements for the
Ravenswood Facility from Ohio Power Company, a unit of American Electric Power
Company, pursuant to a fixed price power supply agreement. That agreement
expires on July 31, 2003. On May 3, 2002, the Company signed a new contract to
purchase electric power for its Ravenswood facility from Ohio Power. The new
agreement is effective August 1, 2003, when the Company's current power contract
with Ohio Power expires. The new contract will provide power for the Ravenswood
facility at competitive rates under a GS-4 schedule approved by the Public
Utilities Commission of Ohio. The GS-4 schedule is due to expire on December 31,
2005.
The Hawesville facility currently purchases all of its power from Kenergy
Corporation ("Kenergy"), a local retail electric cooperative, under a power
supply contract that expires at the end of 2010. Kenergy acquires the power it
provides to the Hawesville facility under fixed price contracts, mostly with a
subsidiary of LG&E Energy Corporation ("LG&E"), with delivery guaranteed by
LG&E. The Hawesville facility currently purchases all of its power from Kenergy
at fixed prices. Approximately 14% of the Hawesville facility's power
requirements are unpriced in calendar years 2004 through 2005. The unpriced
portion of the contract increases to approximately 26% in 2006.
The Mt. Holly facility purchases all of its power from the South Carolina
Public Service Authority at rates fixed by published schedules. One of those
schedules is a fuel adjustment clause which permits the Authority to pass
through charges or credits to the extent its actual costs vary from those costs
in the formula set in the Fuel Cost Adjustment Clause. The Mt. Holly power
contract expires December 31, 2005.
Equipment failures at the Ravenswood, Mt. Holly or Hawesville facilities
could limit or shut down the Company's production for a significant period of
time. In order to minimize the risk of equipment failure, the Company follows a
comprehensive maintenance and loss prevention program and periodically reviews
its failure exposure.
The Company is subject to losses associated with equipment shutdowns,
caused by the loss or interruption of electrical power, as well as other
events.
10
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Power interruptions may have a material adverse effect on the Company's
business. Any loss of power which causes an equipment shutdown may result in
the hardening or "freezing" of molten aluminum in the pots where it is
produced. If this freezing occurs, significant losses can occur if the pots are
damaged and require repair or replacement, a process that could limit or shut
down the Company's production operations for a significant period of time.
Certain shutdowns not covered by insurance could be a default under the
revolving credit facility. No assurance can be given that a material shutdown
will not occur in the future or that such a shutdown would not have a material
adverse effect on the Company.
Although the Company maintains property damage insurance to provide for
the repair or replacement of damaged equipment or property, as well as business
interruption insurance to mitigate losses resulting from any equipment failure
or production shutdown caused by a catastrophic event, the Company may still be
required to pay significant amounts under the deductible provisions of those
insurance policies. In addition, coverage may not be sufficient to cover all
losses which result from a catastrophic event. Furthermore, Century maintains
insurance to cover losses resulting from damage to the Company's power
suppliers' facilities, or transmission lines that would cause an interruption of
the power supply to the Company's facilities. This insurance contains large
deductibles and self-insured amounts and does not cover losses resulting from a
power loss due solely to lack of sufficient electrical power resulting from
unusually high usage in the regions. Century renewed its property and business
interruption insurance policies in April 2003 at rates that were consistent
with or slightly higher than 2002.
LABOR COMMITMENTS
Century of West Virginia's hourly employees, which comprise 39% of the
Company's workforce, are represented by the USWA and are currently working under
a labor agreement that expires May 31, 2006. The Hawesville LLC's hourly
employees, which comprise 41% of the Company's workforce, are represented by the
USWA and are currently working under a five-year labor agreement effective April
1, 2001.
OTHER COMMITMENTS
The Company may be required to make post-closing payments to Southwire up
to an aggregate maximum of $7,000 if the price of primary aluminum on the London
Metals Exchange ("LME") exceeds specified levels during the seven years
following closing of the Hawesville acquisition.
6. FORWARD DELIVERY CONTRACTS AND FINANCIAL INSTRUMENTS
As a producer of primary aluminum products, the Company is exposed to
fluctuating raw material and primary aluminum prices. The Company routinely
enters into fixed and market priced contracts for the sale of primary aluminum
and the purchase of raw materials in future periods.
In connection with the sale of its aluminum fabricating businesses to
Pechiney in September 1999, the Company entered into a Molten Aluminum Purchase
Agreement (the "Pechiney Metal Agreement") with Pechiney that expires December
31, 2005. This contract will be automatically
11
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
extended through July 31, 2007 provided that the Company's power contract is
extended through that date. Pursuant to the Pechiney Metal Agreement, Pechiney
purchases, on a monthly basis, at least 23.0 million pounds and no more than
27.0 million pounds of molten aluminum at a variable price determined by
reference to the U.S. Midwest Market Price. After July 31, 2003, Pechiney will
have the right, upon 12 months notice, to reduce its purchase obligations under
the contract by 50%.
On April 1, 2000, the Company entered into a ten-year agreement with
Glencore (the "Glencore Metal Agreement") to sell approximately 110.0 million
pounds of primary aluminum products per year. Selling prices under the Glencore
Metal Agreement were at a fixed price for the years 2002 through 2009 as defined
in the agreement. In January 2003, Century terminated the Glencore Metal
Agreement for the years 2005 through 2009. The Company entered into a new 110
million pound per year contract with Glencore which will include delivery of
metal for the years 2005 through 2009 from the Mt. Holly facility at prices
based on the then current market. The price will remain at a fixed price for the
years 2003 and 2004. The Company recorded a gain of $26,129 relating to the
contract termination. Because the contract was terminated, delivery on the
contract under its original fixed price terms is no longer probable.
Accordingly, the remaining years of the original Glencore agreement (2003-2004)
and the new contract will no longer qualify as normal under Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives
Instruments and Hedging Activities," as amended, and these contracts were
marked-to-market in the first quarter of 2003. The mark-to-market adjustment on
the Glencore Metal Agreement for 2003 and 2004 was $15,564. The total gain for
the quarter was $41,693 ($26,129 on the contract termination and $15,564 on the
mark-to-market of the continuing contracts). On April 1, 2003, the Company
received $35,484 relating to the termination of the contract for the years 2005
through 2009. The new contract for 2005 through 2009 excludes the U.S. delivery
premiums normally included in such sales and previously comprehended in the
original contract. As such, approximately $9,355 of the $35,484 settlement
represents consideration for the unearned delivery premiums on the new contract
for 2005 through 2009.These premiums were classified as deferred revenue and
will be recognized as revenue in years 2005 through 2009.
In connection with the acquisition of the Hawesville facility in April
2001, the Company entered into a 10-year contract with Southwire (the "Southwire
Metal Agreement") to supply 240 million pounds of high-purity molten aluminum
annually to Southwire's wire and cable manufacturing facility located adjacent
to the Hawesville facility. Under this contract, Southwire will also purchase 60
million pounds of standard grade molten aluminum each year for the first five
years of the contract, with an option to purchase an equal amount in each of the
remaining five years. The Company and Glencore were each responsible for
providing a pro rata portion of the aluminum supplied to Southwire under this
contract. On April 1, 2003, in connection with the acquisition of Glencore's
interest in the Hawesville facility, the Company assumed Glencore's delivery
obligations under the Southwire Metal Agreement. The price for the molten
aluminum to be delivered to Southwire from the Hawesville facility is variable
and will be determined by reference to the U.S. Midwest Market Price. This
agreement expires on December 31, 2010, and will automatically renew for
additional five-year terms, unless either party provides 12 months notice that
it has elected not to renew.
12
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and
Southwire Metal Agreement, the Company had forward delivery contracts to sell
291.5 million pounds and 329.0 million pounds of primary aluminum at March 31,
2003 and December 31, 2002, respectively. Of these forward delivery contracts,
the Company had fixed price commitments to sell 45.9 and 42.9 million pounds of
primary aluminum at March 31, 2003 and December 31, 2002, respectively. Of these
forward delivery contracts, 6.5 million pounds and 0.3 million pounds at March
31, 2003 and December 31, 2002, respectively, were with the Glencore Group.
The Company is party to long-term supply agreements with Glencore that
extend through 2006 and provide that Glencore will supply a fixed quantity of
alumina at prices determined by a market-based formula. In addition, as part of
its acquisition of an additional 23% interest in the Mt. Holly facility, the
Company assumed an alumina supply agreement with Glencore for its alumina
requirements relative to the additional interest. This agreement terminates in
2008 and is priced with a market-based formula. As part of its acquisition of
the Hawesville facility, the Company assumed a market based alumina supply
agreement (the "Supply Agreement") with Kaiser Aluminum & Chemical Corporation
("Kaiser") which expires in 2005. In connection with its ongoing Chapter 11
bankruptcy proceedings, Kaiser filed a motion for an Order Authorizing the
Assumption of Certain Critical Customer Supply Contracts (the "Motion"). The
Motion was granted by the Bankruptcy Court on August 27, 2002. As a result,
Kaiser has assumed the Supply Agreement and cured all existing defaults
thereunder. All of Kaiser's continuing obligations under the Supply Agreement
are to be performed in the ordinary course of its business and any claims the
Company has under the Supply Agreement will be afforded administrative expense
claim status pursuant to Section 503 of the Bankruptcy Code.
To mitigate the volatility in its market priced forward delivery
contracts, the Company enters into fixed price financial sales contracts, which
settle in cash in the period corresponding to the intended delivery dates of the
forward delivery contracts. At March 31, 2003 and December 31, 2002, the Company
had financial instruments, primarily with the Glencore Group, for 147.2 million
pounds and 181.0 million pounds, respectively. These financial instruments are
scheduled for settlement at various dates in 2003. The Company had no fixed
price financial purchase contracts to purchase aluminum at March 31, 2003.
Additionally, to mitigate the volatility of the natural gas markets, the Company
enters into fixed price financial purchase contracts, which settle in cash in
the period corresponding to the intended usage of natural gas. At March 31, 2003
and December 31, 2002, the Company had financial instruments for 1.4 million and
1.5 million DTH (one decatherm is equivalent to one million British Thermal
Units), respectively. These financial instruments are scheduled for settlement
at various dates in 2003 through 2005. Based on the fair value of the Company's
financial instruments as of March 31, 2003 accumulated other comprehensive
income of $7,436 is expected to be reclassified to earnings over the next twelve
month period.
The forward financial sales and purchase contracts are subject to the risk
of non-performance by the counterparties. However, the Company only enters into
forward financial contracts with counterparties it determines to be
creditworthy. If any counterparty failed to perform according to the terms of
the contract, the accounting impact would be limited to the difference between
the nominal value of the contract and the market value on the date of
settlement.
13
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
7. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
MARCH 31,
---------------
2003 2002
---- ----
Cash paid for:
Interest ........ $ 21 $ 28
Cash received for:
Interest ......... 151 71
Income tax refunds -- 110
8. ACQUISITIONS
On April 1, 2003, the Company completed the acquisition of the 20%
interest in its Hawesville, Kentucky primary aluminum reduction facility which
was indirectly owned by Glencore together with Glencore's pro rata interest in
certain related assets . Century paid a purchase price of approximately $105.0
million for the Acquired Assets, which it financed with approximately $65.0
million of available cash and a six-year 10% $40.0 million promissory note
payable to Glencore, the Hawesville Note. See Note 4 for a discussion of the
Hawesville Note. In connection with the acquisition, the Company entered into a
ten-year contract with Glencore under which Glencore will purchase 45.0 million
pounds per year of primary aluminum produced at the Ravenswood and Mt. Holly
facilities, at prices based on then-current markets.
Century's purchase of the Acquired Assets was effected pursuant to the
terms of an Asset Purchase Agreement, dated as of April 1, 2003, among Glencore
Ltd., Glencore Acquisition I LLC, Hancock and the Company (the "Asset Purchase
Agreement"). The terms of the Asset Purchase Agreement, including the purchase
price paid for the Acquired Assets, were determined through negotiations between
the parties and approved by an independent committee of the Company's board of
directors.
Glencore originally purchased the Acquired Assets from Century in April
2001 when Century acquired the Hawesville facility and related assets from
Southwire (the "Hawesville Acquisition"). Glencore also assumed direct
responsibility for a pro rata portion of certain liabilities and obligations
related to the Hawesville facility, including: (i) delivery obligations under
the Molten Aluminum Supply Agreement, dated April 1, 2001, between Century and
Southwire, (ii) debt service obligations related to $7.8 million in industrial
revenue bonds ("IRBs") assumed by Century in connection with the Hawesville
Acquisition, (iii) any post-closing payments due Southwire pursuant to the terms
of the Company's agreement with Southwire, and (iv) certain other post-closing
liabilities and obligations (including environmental) related to the Hawesville
facility (collectively, the "Assumed Liabilities").
In connection with the Company's subsequent purchase of the Acquired
Assets from Glencore, the Company assumed all of Glencore's obligations related
to the Assumed Liabilities. In addition, the Company issued a promissory note to
Glencore to secure any payments Glencore makes as guarantor of a letter of
credit the Company posted in April 2001 in support of the IRBs (the
"Reimbursement Note").
14
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
9. CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement
establishes standards for accounting for legal obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company adopted the Standard during the first quarter of 2003. SFAS
143 requires that the Company record the fair value of a legal liability for an
asset retirement obligation ("ARO") in the period in which it is incurred and
capitalize the ARO by increasing the carrying amount of the related asset. The
liability is accreted to its present value each period and the capitalized cost
is depreciated over the useful life of the related asset. The Company's asset
retirement obligations consist primarily of costs associated with the removal
and disposal of reduction plant spent pot liner.
With the adoption of SFAS 143, Century recorded an ARO asset of $8,718,
net of accumulated amortization of $8,989 and a Deferred Tax Asset of $3,430.
The net amount of applying the Statement is reported as a cumulative effect of a
change in accounting principle. The Company recorded a one-time, non-cash charge
of $5,878, for cumulative effect of a change in accounting principle.
The reconciliation of the changes in the asset retirement obligations is
presented below:
FOR THE THREE FOR THE YEAR ENDED
MONTHS ENDED MARCH 31, DECEMBER 31, 2002
2003 (PRO FORMA)
---------------------- -------------------
BEGINNING BALANCE, ARO LIABILITY $ 17,902 $ 17,416
ADDITIONAL ARO LIABILITY INCURRED 874 2,694
ARO LIABILITIES SETTLED ......... (1,119) (3,645)
ACCRETION EXPENSE ............... 369 1,437
-------- --------
ENDING BALANCE, ARO LIABILITY ... $ 18,026 $ 17,902
======== ========
10. NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The Company is currently assessing the impact of this Statement
on its financial position and results of operations.
15
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
11. COMPREHENSIVE INCOME
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------- ---------
Net Income (Loss) ............................................ $ 17,595 $ (3,468)
Other Comprehensive Income (Loss):
Net unrealized gain (loss) on financial instruments, net of
tax of ($437) and $539, respectively ...................... 734 (992)
Net amount reclassified as income, net of tax of $1,161 and
$651, respectively ........................................ (2,046) (1,184)
Minimum Pension Liability Adjustment, net of tax of
$1,122 .................................................... (1,995) --
-------- --------
Comprehensive Income (Loss) .................................. $ 14,288 $ (5,644)
======== ========
12. STOCK-BASED COMPENSATION
The Company has elected not to adopt the recognition provisions for
employee stock-based compensation as permitted in SFAS No. 123, "Accounting for
Stock-Based Compensation". As such, the Company accounts for stock based
compensation in accordance with Accounting Principles Board ("APB") Opinion No.
25 "Accounting for Stock Issued to Employees." No compensation cost has been
recognized for the stock option portions of the plan because the exercise price
of the stock options granted were equal to the market value of the Company's
stock on the date of grant. Had compensation cost for the Stock Incentive Plan
been determined using the fair value method provided under SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share would have changed to
the pro forma amounts indicated below:
THREE MONTHS ENDED MARCH 31,
2003 2002
---- ----
Net Income (loss) applicable to common shareholders As Reported $ 17,095 $ (3,968)
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 89 43
Deduct: Total Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (271) (100)
--------- --------
Pro forma Net Income (loss) $ (16,913) $ (4,025)
========= ========
Basic earnings (loss) per share As Reported $ 0.81 $ (0.19)
Pro Forma $ 0.80 $ (0.20)
Diluted earnings (loss) per share As Reported $ 0.78 $ (0.19)
Pro Forma $ 0.77 $ (0.20)
16
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
13. EARNINGS PER SHARE
The following table provides a reconciliation of the computation of the
basic and diluted earnings (loss) per share for income from continuing
operations:
THREE MONTHS ENDED MARCH 31,
2003 2002
------------------------------- --------------------------------
Income Shares Per-Share Income Shares Per-Share
-------- ------ --------- -------- -------- ----------
Income (loss) before cumulative effect
of change in accounting principle $ 23,473 $ (3,468)
Less: Preferred stock dividends (500) (500)
-------- --------
BASIC EPS:
Income (loss) applicable to common shareholders 22,973 21,070 $ 1.09 (3,968) 20,533 $ (0.19)
EFFECT OF DILUTIVE SECURITIES:
Convertible preferred stock 500 1,395 -- --
-------- ------ -------- ------
DILUTED EPS:
Income (loss) applicable to common
shareholders with assumed conversions $ 23,473 22,465 $ 1.04 $ (3,968) 20,533 $ (0.19)
======== ====== ====== ======== ====== =======
Options to purchase 691,200 and 631,117 shares of common stock were
outstanding during the periods ended March 31, 2003 and March 31, 2002,
respectively. In 2003, these shares were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares during the period. In 2002,
these shares and convertible preferred stock shares were not included in the
computation of diluted earnings per share because the assumed conversion would
have had an antidilutive effect on earnings per share.
14. PREFERRED AND COMMON STOCK DIVIDENDS
In the fourth quarter of 2002, the Company suspended its common and
preferred stock dividends. The action was taken because the Company was very
near the limits on allowable dividend payments under the covenants in its bond
indenture and due to current economic conditions. In accordance with current
accounting guidance, no liability for cumulative preferred dividends is recorded
until the dividends are declared. As of March 31, 2003, the Company had total
cumulative preferred dividend arrearages of $1,000 or $2.00 per preferred stock
share.
17
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
15. CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The Company's 11 3/4% Senior Secured First Mortgage Notes due 2008 are
jointly and severally and fully and unconditionally guaranteed by all of the
Company's material wholly owned direct and indirect subsidiaries (the "Guarantor
Subsidiaries"). As of March 31, 2003, the Company indirectly holds an 80% equity
interest in Century Aluminum of Kentucky, LLC ("LLC") and as such consolidates
100% of the assets, liabilities and operations of the LLC into its financial
statements, showing the interest of the 20% owners as "Minority Interest". LLC
(the "Non-Guarantor Subsidiary") has not guaranteed the Notes, and the Company
has not caused its indirect equity interests in the LLC to be pledged as
collateral for the Notes. The Company's interest in the Mt. Holly facility's
property, plant and equipment has not been pledged as collateral. Other
subsidiaries of the Company which are immaterial will not guarantee the Notes
(collectively, the "Non-Guarantor Subsidiaries"). During 2001, the Company
adopted a policy for financial reporting purposes of allocating expenses to
subsidiaries. For the three months ended March 31, 2003 and 2002, the Company
allocated total corporate expenses of $2.2 and $2.2 million to its subsidiaries,
respectively. Additionally, the Company charges interest on certain intercompany
balances.
Because the LLC is not a minor subsidiary, the Company is providing
condensed consolidating financial information for the periods following the
Company's acquisition of the Hawesville facility. The Notes contain customary
covenants limiting the ability of both the Company and the Guarantor
Subsidiaries to pay dividends, incur additional debt, make investments, sell
assets or stock of certain subsidiaries and purchase or redeem capital stock
(see Note 4 to the Consolidated Financial Statements for information about the
terms of the Notes).
The following summarized condensed consolidating balance sheets as of
March 31, 2003, and December 31, 2002, condensed consolidating statements of
operations for the three months ended March 31, 2003 and 2002, and the condensed
consolidating statements of cash flows for the three months ended March 31, 2003
and 2002 present separate results for Century Aluminum Company, the Guarantor
Subsidiaries and the Non-Guarantor Subsidiary.
This summarized condensed consolidating financial information may not
necessarily be indicative of the results of operations or financial position had
the Company, the Guarantor Subsidiaries or the Non-Guarantor Subsidiary operated
as independent entities.
18
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2003
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ -------- ---------------- ------------
Assets:
Cash and cash equivalents .............................. $ 757 $ -- $ 56,076 -- $ 56,833
Accounts receivables, net .............................. 47,732 182 -- -- 47,914
Due from affiliates .................................... 122,783 8,605 353,225 (426,356) 58,257
Inventory .............................................. 52,285 22,201 -- -- 74,486
Other current assets ................................... 12,135 360 1,342 (3,187) 10,650
--------- --------- --------- --------- ---------
Total current assets ................... 235,692 31,348 410,643 (429,543) 248,140
Investment in subsidiaries ............................. 70,720 -- 198,522 (269,242) --
Property, plant and equipment, net ..................... 423,468 900 279 -- 424,647
Intangible asset ....................................... -- 114,817 -- -- 114,817
Other non-current assets ............................... 16,346 -- 18,680 -- 35,026
--------- --------- --------- --------- ---------
Total assets ........................... $ 746,226 $ 147,065 $ 628,124 $(698,785) $ 822,630
========= ========= ========= ========= =========
Liabilities and shareholders' equity:
Accounts payable, trade ................................ $ 15,117 $ 20,457 $ -- $ -- $ 35,574
Due to affiliates ...................................... 29,077 985 64,986 (78,868) 16,180
Industrial revenue bonds ............................... -- 7,815 -- -- 7,815
Accrued and other current liabilities .................. 8,458 5,125 21,368 -- 34,951
Accrued employee benefits costs - current portion ...... 8,886 847 1,367 -- 11,100
Deferred taxes - current portion ...................... 11,068 -- -- (3,188) 7,880
--------- --------- --------- --------- ---------
Total current liabilities .............. 72,606 35,229 87,721 (82,056) 113,500
--------- --------- --------- --------- ---------
Long term debt - net ................................... -- -- 321,962 -- 321,962
Accrued Pension benefits Costs - less current
portion ................................................ 4,156 -- 7,533 -- 11,689
Accrued Postretirement Benefits Costs - less
current portion ........................................ 49,777 22,443 518 -- 72,738
Other liabilities/Intercompany loan .................... 378,642 993 -- (347,418) 32,217
Deferred taxes - less current portion .................. 42,523 -- 3,711 (69) 46,165
--------- --------- --------- --------- ---------
Total non-current liabilities .......... 475,098 23,436 333,724 (347,487) 484,771
--------- --------- --------- --------- ---------
Minority interest ...................................... -- -- -- 17,680 17,680
Shareholders' Equity:
Convertible preferred stock ............................ -- -- 25,000 -- 25,000
Common stock ........................................... 59 -- 211 (59) 211
Additional paid-in capital ............................. 226,998 139,281 172,403 (366,279) 172,403
Accumulated other comprehensive income (loss) .......... (2,134) -- (2,134) 2,134 (2,134)
Retained earnings (deficit) ............................ (26,401) (50,881) 11,199 77,282 11,199
--------- --------- --------- --------- ---------
Total shareholders' equity ............. 198,522 88,400 206,679 (286,922) 206,679
--------- --------- --------- --------- ---------
Total liabilities and equity ........... $ 746,226 $ 147,065 $ 628,124 $(698,785) $ 822,630
========= ========= ========= ========= =========
19
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATION
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ --------- ---------------- ------------
Assets:
Cash and cash equivalents ............. $ 745 $ -- $ 44,347 $ -- $ 45,092
Accounts receivables, net ............. 45,936 304 -- -- 46,240
Due from affiliates ................... 87,071 10,102 353,292 (427,733) 22,732
Inventory ............................. 55,877 21,258 -- -- 77,135
Other current assets .................. 2,887 178 4,434 (2,722) 4,777
--------- --------- --------- --------- ---------
Total current assets ........... 192,516 31,842 402,073 (430,455) 195,976
Investment in subsidiaries ............ 74,663 -- 184,234 (258,897) --
Property, plant and equipment - net ... 416,590 780 251 -- 417,621
Intangible asset - net ................ -- 119,744 -- -- 119,744
Due from affiliates - Less current
portion ............................... 974 -- -- -- 974
Other Assets .......................... 13,041 -- 17,811 -- 30,852
--------- --------- --------- --------- ---------
Total assets ................... $ 697,784 $ 152,366 $ 604,369 $(689,352) $ 765,167
========= ========= ========= ========= =========
Liabilities and shareholders' equity:
Accounts payable, trade ............... $ 14,588 $ 23,169 $ -- $ -- $ 37,757
Due to affiliates ..................... 32,711 -- 64,243 (81,143) 15,811
Industrial revenue bonds .............. -- 7,815 -- -- 7,815
Accrued and other current liabilities . 6,257 5,055 12,802 -- 24,114
Accrued employee benefits costs -
current portion ....................... 8,966 559 1,365 -- 10,890
Deferred Taxes - current portion ...... 7,763 -- -- (2,792) 4,971
--------- --------- --------- --------- ---------
Total current liabilities ...... 70,285 36,598 78,410 (83,935) 101,358
--------- --------- --------- --------- ---------
Long term debt - net .................. -- -- 321,852 -- 321,852
Accrued Pension benefits Costs - less
current portion ....................... 3,771 -- 6,980 -- 10,751
Accrued Postretirement Benefits Costs -
less current portion .................. 48,335 21,840 481 -- 70,656
Other liabilities/Intercompany Loan ... 354,297 599 -- (346,520) 8,376
Deferred taxes - less current portion . 36,862 -- 4,514 -- 41,376
--------- --------- --------- --------- ---------
Total non-current liabilities .. 443,265 22,439 333,827 (346,520) 453,011
--------- --------- --------- --------- ---------
Minority interest ..................... -- -- -- 18,666 18,666
Shareholders' Equity:
Convertible preferred stock ........... -- -- 25,000 -- 25,000
Common stock .......................... 59 -- 211 (59) 211
Additional paid-in capital ............ 226,998 139,281 172,133 (366,279) 172,133
Accumulated other comprehensive income 1,173 -- 1,173 (1,173) 1,173
Retained earnings (deficit) ........... (43,996) (45,952) (6,385) 89,948 (6,385)
--------- --------- --------- --------- ---------
Total shareholders' equity ..... 184,234 93,329 192,132 (277,563) 192,132
--------- --------- --------- --------- ---------
Total liabilities and equity ... $ 697,784 $ 152,366 $ 604,369 $(689,352) $ 765,167
========= ========= ========= ========= =========
20
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ ---------- ---------------- ------------
Net sales:
Third-party customers ...... $ 153,455 $ -- $ -- $ -- $ 153,455
Related parties ............ 25,554 -- -- -- 25,554
--------- --------- --------- --------- ---------
179,009 -- -- -- 179,009
Cost of goods sold ............. 166,388 79,801 -- (74,886) 171,303
Reimbursement from owners ...... -- (74,913) -- 74,913 --
--------- --------- --------- --------- ---------
Gross profit (loss) ............ 12,621 (4,888) -- (27) 7,706
Selling, general and
administrative expenses ...... 4,135 -- -- -- 4,135
--------- --------- --------- --------- ---------
Operating income (loss) ........ 8,486 (4,888) -- (27) 3,571
Interest expense ............... (10,224) (27) -- 27 (10,224)
Interest income ................ 151 -- -- -- 151
Net Gain on Forward Contracts .. 41,693 -- -- -- 41,693
Other income (expense), net .... 284 (14) -- -- 270
--------- --------- --------- --------- ---------
Income (loss) before taxes ..... 40,390 (4,929) -- -- 35,461
Income tax (expense) benefit ... (14,472) -- -- 1,498 (12,974)
--------- --------- --------- --------- ---------
Net income (loss) before
minority interest and
cumulative effect of change in
accounting principle ......... 25,918 (4,929) -- 1,498 22,487
Minority interest .............. -- -- -- 986 986
--------- --------- --------- --------- ---------
Net income (loss) before
cumulative effect of change in
accounting principle ........... 25,918 (4,929) -- 2,484 23,473
Cumulative Effect of Change in
Accounting Principle, net of
$3,430 in tax .................. (5,878) -- -- -- (5,878)
Equity earnings (loss) of
subsidiaries ................. (2,445) -- 17,595 (15,150) --
--------- --------- --------- --------- ---------
Net income (loss) .............. $ 17,595 $ (4,929) $ 17,595 $ (12,666) $ 17,595
========= ========= ========= ========= =========
21
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ --------- ---------------- ------------
Net sales:
Third-party customers ..... $ 154,199 $ -- $ -- $ -- $ 154,199
Related parties ........... 24,901 -- -- -- 24,901
--------- --------- --------- --------- ---------
179,100 -- -- -- 179,100
Cost of goods sold ............ 165,228 62,987 -- (56,423) 171,792
Reimbursement from owners ..... -- (56,466) -- 56,466 --
--------- --------- --------- --------- ---------
Gross profit (loss) ........... 13,872 (6,521) -- (43) 7,308
Selling, general and
administrative expenses ..... 4,177 -- -- -- 4,177
--------- --------- --------- --------- ---------
Operating income (loss) ....... 9,695 (6,521) -- (43) 3,131
Interest expense .............. (10,259) (33) -- 33 (10,259)
Interest income ............... 71 -- -- -- 71
Other income (expense), net ... 30 (11) -- 11 30
--------- --------- --------- --------- ---------
Income (loss) before taxes and
minority interest ........... (463) (6,565) -- 1 (7,027)
Income tax (expense) benefit .. 250 -- -- 1,996 2,246
--------- --------- --------- --------- ---------
Net income (loss) before
minority interest ........... (213) (6,565) -- 1,997 (4,781)
Minority interest ............. -- -- -- 1,313 1,313
Equity earnings (loss) of
subsidiaries ................ (3,255) -- (3,468) 6,723 --
--------- --------- --------- --------- ---------
Net income (loss) ............. $ (3,468) $ (6,565) $ (3,468) $ 10,033 $ (3,468)
========= ========= ========= ========= =========
22
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ -------- ---------------- ------------
Net cash provided by (used in)
operating activities ................ $ 21,431 $ (3,558) $ -- $ -- $ 17,873
-------- -------- -------- ------ --------
Investing activities:
Purchase of property, plant and
equipment, net ..................... (5,915) (120) (86) -- (6,121)
-------- -------- -------- ------ --------
Net cash used in investing activities (5,915) (120) (86) -- (6,121)
-------- -------- -------- ------ --------
Financing activities:
Dividends ........................... -- -- (11) -- (11)
Intercompany transactions ........... (15,504) 3,678 11,826 -- --
-------- -------- -------- ------ --------
Net cash provided by (used in)
financing activities ................. (15,504) 3,678 11,815 -- (11)
-------- -------- -------- ------ --------
Net increase in cash .................. 12 -- 11,729 -- 11,741
Cash, beginning of period ............. 745 -- 44,347 -- 45,092
-------- -------- -------- ------ --------
Cash, end of period ................... $ 757 $ -- 56,076 $ -- $ 56,833
======== ======== ======== ====== ========
23
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ --------- ---------------- ------------
Net cash provided by
operating activities ........... $ 18,000 $ 1,799 $ -- $ -- $ 19,799
-------- -------- -------- -------- --------
Investing activities:
Purchase of property, plant and
equipment, net ............... (5,082) (836) -- -- (5,918)
-------- -------- -------- -------- --------
Net cash used in
investing activities ......... (5,082) (836) -- -- (5,918)
-------- -------- -------- -------- --------
Financing activities:
Dividends ..................... -- -- (1,026) -- (1,026)
Intercompany transactions ..... (10,525) (963) 11,488 -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities ........... (10,525) (963) 10,462 -- (1,026)
-------- -------- -------- -------- --------
Net increase in cash ............ 2,393 -- 10,462 -- 12,855
Cash, beginning of period ....... 1,020 -- 12,368 -- 13,388
-------- -------- -------- -------- --------
Cash, end of period ............. $ 3,413 $ -- $ 22,830 $ -- $ 26,243
======== ======== ======== ======== ========
24
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT
UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995.
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words such as "expects,"
"anticipates," "forecasts," "intends," "plans," "believes," "projects," and
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements include, but are not
limited to, statements regarding new business and customers, contingencies,
environmental matters and liquidity under "Part I, Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk."
These statements are not guarantees of future performance and involve risks and
uncertainties and are based on a number of assumptions that could ultimately
prove to be wrong. Actual results and outcomes may vary materially from what is
expressed or forecast in such statements. Among the factors that could cause
actual results to differ materially are general economic and business
conditions, changes in demand for the Company's products and services or the
products of the Company's customers, fixed asset utilization, competition, the
risk of technological changes and the Company's competitors developing more
competitive technologies, the Company's dependence on certain important
customers, the availability and terms of needed capital, risks of loss from
environmental liabilities, and other risks detailed in this report. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. The
following information should be read in conjunction with the Company's 2002 Form
10-K along with the consolidated financial statements and related footnotes
included within the Form 10-K.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion reflects Century's historical results of
operations.
Century's financial highlights include:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
--------- --------
(dollars in thousands,
except per share data)
Net sales
Third-party customers ............. $ 153,455 $ 154,199
Related party customers ........... 25,554 24,901
--------- ---------
Total ................................ $ 179,009 $ 179,100
========= =========
Net income (loss) .................... $ 17,595 $ (3,468)
Net income (loss) applicable to common
shareholders ......................... $ 17,095 $ (3,968)
Income (loss) before cumulative effect
of change in accounting principle, per
share - Diluted ...................... $ 1.04 $ (0.19)
Net income (loss) - Diluted .......... $ 0.78 $ (0.19)
Net sales. Net sales for the three months ended March 31, 2003 were
essentially unchanged from the same period in 2002. Shipment volume decreased
approximately 6.0 million pounds to 257.0 million pounds from 263.0 million
pounds for the period. The decreased shipment volume accounted for a decrease of
$4.1 million, which was offset by a $4.0 million increase due to higher market
prices for primary aluminum.
Gross profit. Gross profit for the three months ended March 31, 2003
increased $0.4 million from the same period in 2002, despite lower shipment
volume in the current quarter. Higher market prices for primary aluminum, as
discussed above, more than offset higher power and raw material costs in the
2003 quarter.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 2003 were
essentially unchanged from the same period in 2002.
26
Operating income. Operating income for the three months ended March 31,
2003 increased $0.4 million from the same period in 2002. Operating income
increased for the reasons discussed above.
Interest Expense. Interest expense for the three months ended March 31,
2003 was essentially unchanged from the same period in 2002.
Net Gain on Forward Contracts. Net Gain on Forward Contracts for the three
months ended March 31, 2003 was $41.7 million. In January 2003, Century
terminated the Glencore Metal Agreement for the years 2005 through 2009. The
Company entered into a new 110.0 million pound per year contract with Glencore
which will include delivery of metal for the years 2005 through 2009 from the
Mt. Holly facility at prices based on the then current market. The price will
remain at a fixed price for the years 2003 and 2004. The Company recorded a gain
of $26.1 million relating to the contract termination. Because the contract was
terminated, delivery on the contract under its original fixed price terms is no
longer probable. Accordingly, the remaining years of the original Glencore
agreement (2003-2004) and the new contract will no longer qualify as normal
under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivatives Instruments and Hedging Activities," as amended, and these
contracts were marked-to-market in the first quarter of 2003. The mark-to-market
adjustment on the Glencore Metal Agreement for 2003 and 2004 was $15.6 million.
The total gain for the quarter was $41.7 million ($26.1 million on the contract
termination and $15.6 million on the mark-to-market of the continuing
contracts). On April 1, 2003, the Company received $35.5 million relating to the
termination of the contract for the years 2005 through 2009. The new contract
for 2005 through 2009 excludes the U.S. delivery premiums normally included in
such sales and previously included in the original contract. As such,
approximately $9.4 million of the $35.5 million settlement represents
consideration for the unearned delivery premiums on the new contract for 2005
through 2009. These premiums were classified as deferred revenue and will be
recognized as revenue in years 2005 through 2009. No gain or loss on forward
contracts was recognized in the three months ended March 31, 2002 because
delivery on the contract under its original fixed price terms was considered
probable and the contract qualified as a normal sales contract under SFAS 133,
as amended.
Tax Provision/Benefit. Income tax expense for the three months ended March
31, 2003 increased $15.2 million from the same period in 2002. The change in
income taxes was due to the $42.5 million increase in the Income (Loss) Before
Income Taxes in the three months ended March 31, 2003 compared to the same
period in 2002. The increase in Income (Loss) Before Income Taxes was primarily
the result of the Net Gain on Forward Contracts discussed above.
Minority Interest. Minority interest reflects Glencore's interest in the
net operating results of Century Aluminum of Kentucky, LLC, which consists of
amortization of the power contract. The limited liability company holds the
power contract for the Hawesville facility, among other assets.
Cumulative Effect of Change in Accounting Principle. The Company adopted
Financial Accounting Standard No. 143, "Accounting for Asset Retirement
Obligations" during the three
27
months ended March 31, 2003. The cumulative effect of adopting this standard was
a one-time, non-cash charge of $5.9 million, net of tax of $3.4 million.
Net Income or Loss. Net income increased $21.1 million to $17.6 million
for the three ended March 31, 2003 from a net loss of $3.5 million for the same
period in 2002. The reasons for the change in profitability are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
REVOLVING CREDIT FACILITY
On January 14, 2003, Moody's Investor Service ("Moody's") issued an
announcement revising its long-term debt ratings for the Company. Moody's
lowered the rating on the Company's senior secured revolving credit facility
from Ba2 to Ba3.
The availability of funds under the revolving credit facility is subject
to a $30.0 million reserve and limited by a specified borrowing base consisting
of certain eligible accounts receivable and inventory. With the completion of
the acquisition of the 20% interest in its Hawesville facility on April 1, 2003,
the Company expects the borrowing base, less the reserve, will permit the
Company to borrow approximately $55.0 to $65.0 million under the revolving
credit facility.
Working Capital
Working capital was $134.6 million at March 31, 2003. The Company believes
that its working capital will be consistent with past experience and that cash
flow from operations and borrowing availability under the revolving credit
facility should be sufficient to meet working capital needs.
Historical
The Company's statements of cash flows for the three months ended March
31, 2003 and 2002 are summarized below:
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------- ---------
(dollars in thousands)
Net cash provided by operating activities $ 17,873 $ 19,799
Net cash used in investing activities ... (6,121) (5,918)
Net cash used in financing activities . (11) (1,026)
-------- --------
Increase in cash ........................ $ 11,741 $ 12,855
======== ========
Net cash from operating activities of $17.9 million in the first three
months of 2003 was $1.9 million lower than the $19.8 million generated during
the first three months of 2002. The cash flows from operating activities during
the first three months of 2003 did not significantly change from the same period
in 2002.
28
The Company's net cash used for investing activities was $6.1 million and
$5.9 million during the three month periods ended March 31, 2003 and March 31,
2002, respectively. The cash was used for capital expenditures to purchase,
modernize, and/or upgrade production equipment, maintain facilities and comply
with environmental regulations.
Net cash used in financing activities during the first three months of
2003 was used to fund common stock dividend payments for accrued dividends for
restricted stock that vested in 2003. Century suspended its common and
preferred stock dividends in the fourth quarter of 2002. This action was taken
because the Company was near the limits on allowable dividend payments under the
covenants in its bond indenture. The Company's net cash used in financing
activities during the first three months of 2002 was used to fund common stock
dividend payments.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
The Company has incurred and in the future will continue to incur capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. The aggregate environmental
related accrued liabilities were $1.6 million and $1.4 million at March 31, 2003
and December 31, 2002, respectively. The Company believes that compliance with
current environmental laws and regulations is not likely to have a material
adverse effect on the Company's financial condition, results of operations or
liquidity; however, environmental laws and regulations may change, and the
Company may become subject to more stringent environmental laws and regulations
in the future. There can be no assurance that compliance with more stringent
environmental laws and regulations that may be enacted in the future, or future
remediation costs, would not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
The Company is a defendant in several actions relating to various aspects
of its business. While it is impossible to predict the ultimate disposition of
any litigation, the Company does not believe that any of these lawsuits, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Note 5 to
the Consolidated Financial Statements contained herein.
The Company may be required to make post-closing payments to Southwire up
to an aggregate maximum of $7.0 million if the price of primary aluminum on the
London Metals Exchange ("LME") exceeds specified levels during the seven years
following closing of the Hawesville acquisition in 2001. Prior to April 1, 2003,
Glencore was responsible for its pro rata portion of any post-closing payments
made to Southwire. After April 1, 2003, with the completion of the acquisition
of the 20% interest in the Hawesville facility owned by Glencore, the Company
assumed Glencore's obligations for any future post-closing payments to Southwire
that may be required.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement
establishes standards for accounting for legal obligations associated with the
retirement of tangible long-lived assets and
29
the associated asset retirement costs. The Company adopted the Standard during
the first quarter of 2003. For a discussion of the impacts of the adoption of
SFAS 143 see Note 9 to the Consolidated Financial Statements contained herein.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The Company is currently assessing the details of this Statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICES
The Company manages its exposure to fluctuations in the price of primary
aluminum by selling aluminum at fixed prices for future delivery and through
financial instruments as well as by purchasing alumina under supply contracts
with prices tied to the same indices as the Company's aluminum sales contracts.
The Company's risk management activities do not include trading or speculative
transactions. Although the Company has not materially participated in the
purchase of call or put options, in cases where Century sells forward primary
aluminum, it may purchase call options to benefit from price increases which are
significantly above forward sales prices. In addition, it may purchase put
options to protect itself from price decreases.
In connection with the sale of its aluminum fabricating businesses to
Pechiney in September 1999, the Company entered into the Pechiney Metal
Agreement, pursuant to which Pechiney purchases, on a monthly basis, at least
23.0 million pounds and no more than 27.0 million pounds of molten aluminum
produced at the Ravenswood Facility at a price determined by a market-based
formula. Subsequent to the Company's purchase of an additional 23% interest in
the Mt. Holly Facility from Xstrata, and effective April 1, 2000, the Company
entered into the Glencore Metal Agreement pursuant to which it sells to Glencore
110.0 million pounds of primary aluminum products per year. In January 2003,
Century terminated the Glencore Metal Agreement for the years 2005 through 2009.
The Company entered into a new 110.0 million pound per year contract with
Glencore which will include delivery of metal for the years 2005 through 2009
from the Mt. Holly facility at prices based on the then current market. The
price will remain at a fixed price for the years 2003 and 2004. The Company
recorded a gain of $26.1 million relating to the contract termination. Because
the contract was terminated, delivery on the contract under its original fixed
price terms is no longer probable. Accordingly, the remaining years of the
original Glencore agreement (2003-2004) and the new contract will no longer
qualify as normal under Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivatives Instruments and Hedging Activities," as
amended, and these contracts were marked-to-market in the first quarter of 2003.
The mark-to-market adjustment on the Glencore Metal Agreement for 2003 and 2004
was $15.6 million. The total gain for the quarter was $41.7 million ($26.1
million on the contract termination and $15.6 million on the
30
mark-to-market of the continuing contracts). On April 1, 2003, the Company
received $35.5 million relating to the termination of the contract for the years
2005 through 2009. The new contract for 2005 through 2009 excludes the U.S.
delivery premiums normally included in such sales and previously included in
the original contract. As such, approximately $9.4 million of the $35.5 million
settlement represents consideration for the unearned delivery premiums on the
new contract for 2005 through 2009. These premiums were classified as deferred
revenue and will be recognized as revenue in years 2005 through 2009. In
connection with the Hawesville acquisition, the Company entered into the
Southwire Metal Agreement with Southwire to supply 240.0 million pounds of
high-purity molten aluminum per year to Southwire's wire and cable manufacturing
facility located adjacent to the Hawesville facility at a price determined by
reference to the U.S. Midwest Market Price. Under this contract, Southwire will
also purchase 60.0 million pounds of standard-grade molten aluminum each year
for the first five years of the contract, with an option to purchase an equal
amount in each of the remaining five years. The Company and Glencore are each
responsible for providing a pro rata portion of the aluminum supplied to
Southwire under the Southwire Metal Agreement. In connection with the
acquisition of the 20% interest in its Hawesville facility which is owned by
Glencore on April 1, 2003, the Company assumed Glencore's delivery obligations
under the Southwire Metal agreement.
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and
Southwire Metal Agreement the Company had forward delivery contracts to sell
291.5 and 329.0 million pounds of primary aluminum at March 31, 2003 and
December 31, 2002, respectively. Of these forward delivery contracts, the
Company had fixed price commitments to sell 45.9 and 42.9 million pounds of
primary aluminum at March 31, 2003 and December 31, 2002, respectively. Forward
delivery contracts of 6.5 million pounds and 0.3 million pounds at March 31,
2003 and December 31, 2002, respectively, were with the Glencore Group.
The Company is party to long-term supply agreements to purchase alumina
with Glencore that extend through 2006. These agreements provide for a fixed
quantity of alumina at prices determined by a market-based formula. In addition,
as part of its acquisition of an additional 23% interest in the Mt. Holly
Facility, the Company assumed a supply agreement with Glencore for the alumina
raw material requirements relative to the additional interest. The unit cost is
also determined by a market-based formula. This alumina supply agreement
terminates in 2008. As part of its Hawesville acquisition, the Company assumed
an alumina supply agreement with Kaiser. That agreement will terminate in 2005
and is a variable priced market based contract. See the discussion of the Kaiser
Bankruptcy information at Note 5 to the Consolidated Financial Statements.
At March 31, 2003 and December 31, 2002, the Company had entered into
147.2 million pounds and 181.0 million pounds, respectively, of fixed priced
forward primary aluminum financial sales contracts primarily with the Glencore
Group to mitigate the risk of commodity price fluctuations inherent in its
business. These contracts will be settled in cash at various dates in 2003.
Additionally, in order to mitigate the volatility of the natural gas markets,
the Company enters into fixed price forward financial purchase contracts, which
settle in cash in the period corresponding to the intended usage of natural gas.
At March 31, 2003 and December 31, 2002, the Company had financial instruments
for 1.4 million and 1.5 million
31
DTH of natural gas, respectively (one decatherm, or DTH, is equivalent to one
million British Thermal Units). These financial instruments are scheduled for
settlement at various dates in 2003 through 2005.
On a hypothetical basis, a $0.01 per pound increase or decrease in the
market price of primary aluminum is estimated to have an unfavorable or
favorable impact of $0.9 million after tax on accumulated other comprehensive
income for the period ended March 31, 2003 as a result of the forward primary
aluminum financial sale contracts entered into by the Company at March 31, 2003.
On a hypothetical basis, a $0.50 per DTH decrease or increase in the
market price of natural gas is estimated to have an unfavorable or favorable
impact of $0.5 million after tax on accumulated other comprehensive income for
the period ended March 31, 2003 as a result of the forward natural gas financial
purchase contracts entered into by the Company at March 31, 2003.
The Company's metals and natural gas risk management activities are
subject to the management, control and direction of senior management. The
metals related activities are regularly reported to the Board of Directors of
Century.
This quantification of the Company's exposure to the commodity price of
aluminum is necessarily limited, as it does not take into consideration the
Company's inventory or forward delivery contracts, or the offsetting impact upon
the sales price of primary aluminum products. Because all of the Company's
alumina contracts are indexed to the LME price for aluminum, beginning in 2002,
they act as a natural hedge for approximately 25% of the Company's production.
INTEREST RATES
The Company's primary debt obligations are the outstanding Notes,
borrowings under its revolving credit facility and the industrial revenue bonds
the Company assumed in connection with the Hawesville acquisition. Because the
Notes bear a fixed rate of interest, changes in interest rates do not subject
the Company to changes in future interest expense with respect to the
outstanding notes. Borrowings under the Company's revolving credit facility, if
any, are at variable rates at a margin over LIBOR or the Fleet National Bank
base rate, as defined in the revolving credit facility. The industrial revenue
bonds bear interest at variable rates determined by reference to the interest
rate of similar instruments in the industrial revenue bond market. At March 31,
2003 and December 31, 2002, the Company had $7.8 million of variable rate
borrowings. A hypothetical 1% increase in the interest rate would increase the
Company's annual interest expense by $0.1 million, assuming no debt reduction.
The Company's primary financial instruments are cash and short-term
investments, including cash in bank accounts and other highly rated liquid money
market investments and government securities.
32
ITEM 4. CONTROLS AND PROCEDURES
a. Within the 90 days prior to the date of filing of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rule
13a-14(c)) pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Company's Chief Executive Officer and the Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information to be included in the Company's reports required to be filed
under the Exchange Act is recorded, processed, summarized and reported within
the time period specified in the rules and forms of the Securities and Exchange
Commission.
b. There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date the Company carried out this evaluation.
33
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Material Defaults of indebtedness - None
(b) Dividend Arrearages - As of March 31, 2003, the Company had total
preferred dividend arrearages on its 8.0% cumulative convertible preferred stock
of $1.0 million or $2.00 per share of preferred stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits -
99.1 Certificate of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C.1350).
(b) Reports on Form 8-K - During the quarter ended March 31, 2003, the
Company filed the following two reports on Form 8-K with the Securities and
Exchange Commission:
1) Form 8-K filed January 14, 2003, reporting an announcement
by Moody's Investors Service revising the Company's long-term debt
ratings and outlook.
2) Form 8-K filed January 28, 2003, reporting the Company had
signed a letter of intent to purchase the 20 percent interest in its
Hawesville, KY aluminum reduction plant owned by Glencore.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Aluminum Company
Date: May 15, 2003 By: /s/ Gerald A. Meyers
----------------------------------------------
Gerald A. Meyers
Chief Executive Officer and President
Date: May 15, 2003 By: /s/ David W. Beckley
----------------------------------------------
David W. Beckley
Executive Vice-President/Chief Financial Officer
35
CERTIFICATION
I, Gerald A. Meyers, Chief Executive Officer and President of Century Aluminum
Company (Century), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Century as of, and for, the periods presented in this quarterly report;
4. Century's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Century and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Century, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Century's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Century's other certifying officer and I have disclosed, based on our
most recent evaluation, to Century's auditors and the audit committee of
Century's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Century's ability to record,
process, summarize and report financial data and have identified for Century's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Century's internal controls; and
6. Century's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ GERALD A. MEYERS
----------------------------------
Title: Chief Executive Officer and
President
I, David W. Beckley, Executive Vice President and Chief Financial Officer of
Century Aluminum Company (Century), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Century as of, and for, the periods presented in this quarterly report;
4. Century's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Century and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Century, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Century's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Century's other certifying officer and I have disclosed, based on our
most recent evaluation, to Century's auditors and the audit committee of
Century's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Century's ability to record,
process, summarize and report financial data and have identified for Century's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Century's internal controls; and
6. Century's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses
Date: May 15, 2003
/s/ DAVID W. BECKLEY
-------------------------------------
Title: Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
99.1 Certificate of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 (18 U.S.C.1350).