SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002.
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 |_|
The registrant had 20,554,302 shares of common stock outstanding at April
30, 2002.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements.
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
2002 2001
-------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ............................................... $ 26,243 $ 13,388
Accounts receivable, trade - net ........................................ 49,659 48,710
Due from affiliates ..................................................... 22,274 19,767
Inventories ............................................................. 78,318 75,217
Prepaid and other assets ................................................ 4,133 3,573
-------- --------
Total current assets ............................................. 180,627 160,655
Property, Plant and Equipment - net ............................................. 420,565 426,006
Intangible Asset - net .......................................................... 139,438 146,002
Due from Affiliates - Less current portion ...................................... 4,719 8,364
Other Assets .................................................................... 35,710 35,679
-------- --------
Total ............................................................ $781,059 $776,706
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ................................................. $ 35,646 $ 42,394
Due to affiliates ....................................................... 15,909 2,201
Industrial revenue bonds ................................................ 7,815 7,815
Accrued and other current liabilities ................................... 41,915 34,065
Accrued employee benefits costs - current portion ....................... 8,001 7,800
-------- --------
Total current liabilities ........................................ 109,286 94,275
-------- --------
Long Term Debt - net ............................................................ 321,543 321,446
Accrued Pension Benefits Costs - Less current portion ........................... 5,060 4,017
Accrued Postretirement Benefits Costs - Less current portion .................... 66,586 65,627
Other Liabilities ............................................................... 9,176 10,697
Deferred Taxes .................................................................. 36,257 39,542
-------- --------
Total noncurrent liabilities ..................................... 438,622 441,329
-------- --------
Minority Interest ............................................................... 22,605 23,917
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;
20,553,635 and 20,513,287 shares outstanding at
March 31, 2002 and December 31, 2001, respectively) .................. 206 205
Additional paid-in capital .............................................. 168,953 168,414
Accumulated other comprehensive income .................................. 4,576 6,752
Retained earnings ....................................................... 11,811 16,814
-------- --------
Total shareholders' equity ....................................... 210,546 217,185
-------- --------
Total ............................................................ $781,059 $776,706
======== ========
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,
---------------------
2002 2001
--------- ---------
NET SALES:
Third-party customers ............................ $ 154,199 $ 84,090
Related parties .................................. 24,901 26,600
--------- ---------
179,100 110,690
Cost of Goods Sold .................................... 171,792 102,228
--------- ---------
Gross Profit .......................................... 7,308 8,462
Selling, General and Administrative Expenses .......... 4,177 3,591
--------- ---------
Operating Income ...................................... 3,131 4,871
Interest Expense ...................................... (10,259) (83)
Interest Income ....................................... 71 433
Other Income (Expense) ................................ 30 (121)
Net Gain (Loss) on Forward Contracts .................. -- (176)
--------- ---------
Income (Loss) Before Income Taxes and Minority Interest (7,027) 4,924
Income Tax Benefit (Expense) .......................... 2,246 (1,773)
--------- ---------
Net Income (Loss) Before Minority Interest ............ (4,781) 3,151
Minority Interest ..................................... 1,313 --
--------- ---------
Net Income (Loss) ..................................... (3,468) 3,151
Preferred Dividends ................................... (500) --
--------- ---------
Net Income (Loss) Available to Common Shareholders .... $ (3,968) $ 3,151
========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic ............................................ $ (0.19) $ 0.15
Diluted .......................................... $ (0.19) $ 0.15
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic ............................................ 20,533 20,360
========= =========
Diluted .......................................... 20,533 20,401
========= =========
DIVIDENDS PER COMMON SHARE ............................ $ 0.05 $ 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,
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (3,468) $ 3,151
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 14,075 2,986
Deferred income taxes ..................................... (2,339) 1,774
Pension and other postretirement benefits ................. 2,202 1,110
Inventory market adjustment ............................... (1,473) 105
Minority Interest ......................................... (1,313)
Change in operating assets and liabilities:
Accounts receivable, trade - net ................... (1,294) (5,163)
Due from affiliates ................................ (285) 2,145
Inventories ........................................ (1,627) 75
Prepaids and other assets .......................... (199) (786)
Accounts payable, trade ............................ (6,748) (6,357)
Due to affiliates .................................. 12,908 738
Accrued and other current liabilities .............. 9,663 (1,711)
Other - net ........................................ (303) (207)
-------- --------
Net cash provided by (used in) operating activities ....... 19,799 (2,140)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ........................ (5,918) (2,803)
Proceeds from sale of property, plant and equipment .............. -- 22
-------- --------
Net cash used in investing activities ..................... (5,918) (2,781)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends ........................................................ (1,026) (1,022)
-------- --------
Net cash used in financing activities ..................... (1,026) (1,022)
-------- --------
NET INCREASE (DECREASE) IN CASH ...................................... 12,855 (5,943)
CASH, BEGINNING OF PERIOD ............................................ 13,388 32,962
-------- --------
CASH, END OF PERIOD .................................................. $ 26,243 $ 27,019
======== ========
See notes to consolidated financial statements
3
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(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, 2001. In management's
opinion, the unaudited interim consolidated financial statements reflect all
adjustments, which are of a normal and recurring nature, which are necessary for
a fair presentation, in all material respects, of financial results for the
interim periods presented. Operating results for the first three months of 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
2. Inventories
Inventories consist of the following:
March 31, December 31,
2002 2001
------- -------
Raw materials ......................... $40,716 $36,686
Work-in-process ....................... 12,194 11,911
Finished goods ........................ 9,093 11,219
Operating and other supplies .......... 16,315 15,401
------- -------
$78,318 $75,217
======= =======
At March 31, 2002 and December 31, 2001, approximately 78% and 79% of
inventories were valued at the lower of last-in, first-out ("LIFO") cost or
market, respectively. The excess of first-in, first-out ("FIFO") cost over LIFO
cost (or market, if lower) of inventory was approximately $807 at March 31, 2002
and approximately $3,374 at December 31, 2001.
3. Intangible Asset
The intangible asset consists of the power contract acquired in connection
with the Hawesville acquisition. The contract value is being amortized over its
term (ten years) using a method that results in annual amortization equal to the
percentage of a given year's expected annual benefit to the total as applied to
the total recorded value of the power contract. As of March 31, 2002, the gross
carrying amount of the intangible asset is $165,696 with accumulated
amortization of $26,258. For the three months ended March 31, 2002, amortization
expense for the intangible asset totaled $6,565. For the year ended December 31,
2002, estimated aggregate amortization expense for the intangible asset will be
$26,258.
Estimated Amortization Expense:
For the year ended 12/31/03 ............................. $19,710
For the year ended 12/31/04 ............................. 12,448
For the year ended 12/31/05 ............................. 14,600
For the year ended 12/31/06 ............................. 12,914
For the year ended 12/31/07 ............................. 13,686
4
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
4. Debt
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company issued and sold $325,000 of its 11 3/4% senior
secured first mortgage notes due 2008 (the "Notes") to certain institutional
investors in a private placement under Rule 144A of the Securities Act of 1933.
Payment obligations under the Notes are unconditionally guaranteed by all of the
Company's material wholly owned direct and indirect subsidiaries (the "Guarantor
Subsidiaries") and secured by mortgages and security interests granted by two of
the Company's subsidiaries in all of their respective interests in the real
property, plant and equipment comprising the Hawesville and Ravenswood
facilities. The Company had unamortized bond discounts on the Notes of $3,457
and $3,554 at March 31, 2002 and December 31, 2001, respectively. The indenture
governing the Notes contains customary covenants including limiting the
Company's ability to pay dividends, incur debt, make investments, sell assets or
stock of certain subsidiaries, and purchase or redeem capital stock. If the
Company does not generate sufficient cumulative earnings, as defined in the
Company's loan agreements, it would be required to suspend dividend
distributions on or before 2003. As of March 31, 2002, $6.7 million of retained
earnings was available for payment of dividends. The Note guarantees will rank
equally in right of payment to the other senior indebtedness of the guarantors
and senior in right of payment to all subordinated indebtedness of the
guarantors.
In November 2001, the Company exchanged the Notes for a like principal
amount of 11 3/4% senior secured first mortgage notes due 2008 (the "Exchange
Notes"), which are registered under the Securities Act of 1933. The terms of the
Exchange Notes are substantially similar to the Notes, except the Exchange Notes
do not have the transfer restrictions and registration rights relating to the
Notes. The Exchange Notes will not be listed on any securities exchange or
included in any automated quotation system.
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company assumed IRBs in the aggregate principal amount
of $7,815. Glencore has assumed 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
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, 2002 was 1.80%. Interest is
paid quarterly. The IRBs are classified as current 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.
5. Contingencies and Commitments
Environmental Contingencies
The Company spends significant amounts to comply with environmental laws
and to assure compliance with known and anticipated requirements. 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
5
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
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") 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, is carrying out interim remediation measures at two
sites identified in the RFI. The Company expects that it will complete work on
these two sites by the end of 2002 and that the EPA will not require further
work as a result of the RFI. 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 before the Company purchased it. 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 Company's agreement to
purchase the Ravenswood Facility ("Kaiser Purchase Agreement"), 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 Company's 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 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 Hawesville Facility has been listed on the National Priorities List
under the federal Comprehensive Environmental Response, Compensation and
Liability Act. On July 6, 2000, the EPA issued a final Record of Decision
("ROD") which details response actions to be implemented at
6
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
several locations at the Hawesville site to address actual or threatened
releases of hazardous substances. Those actions include:
o removal and off-site disposal at approved landfills of certain soils
contaminated by polychlorinated biphenyls ("PCBs");
o management and containment of soils and sediments with low PCB
contamination in certain areas on-site; and
o the continued extraction and treatment of cyanide contaminated
ground water using the existing ground water treatment system.
The total costs for the remedial actions to be undertaken and paid for by
Southwire relative to this site are estimated under the ROD to be $12,600 and
the forecast of annual operating and maintenance costs is $1,200. Under the
Company's agreement with Southwire to purchase NSA, 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. On behalf of Southwire, Century will
operate and maintain the ground water treatment system required under the ROD.
Southwire will reimburse Century for any such 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 NSA's pre-closing
activities that were not known to exist as of the date of the closing of the
acquisition become known within six years after the closing, 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 the sixth anniversary of the closing of the
Hawesville acquisition 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.
The Company acquired NSA by purchasing all of the outstanding equity
securities of its parent company, Metalsco, which was a wholly owned subsidiary
of Southwire. Metalsco previously owned certain assets which are unrelated to
NSA, 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-NSA 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 NSA's former potliner disposal
areas, which are the sources of cyanide
7
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
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 NSA which pre-date the closing of the acquisition.
Under the terms of the Company's agreement to purchase NSA, Southwire
secured its indemnity obligations for environmental liabilities for seven years
after the closing 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 Company's indemnity rights
under the agreement are shared pro rata with Glencore. 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 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.
The Company, together with all other past and present owners of an alumina
facility at St. Croix, Virgin Islands, has entered into an Administrative Order
on Consent with the Environmental Protection Agency (the "Order") pursuant to
which the signatories have agreed to carry out a Hydrocarbon Recovery Plan to
remove and manage oil floating on top of groundwater underlying the facility.
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 compensate the other signatories by paying them the fair
market value for the petroleum 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. The Company also gave certain environmental indemnity rights
to St. Croix Alumina, LLC ("St. Croix"), an indirect affiliate of Alcoa, Inc.,
when it sold the facility to St. Croix. Those rights extend only to
environmental conditions arising from Vialco's operation of the facility and
then only after St. Croix has spent $300 on such conditions. Vialco's
indemnification obligation to St. Croix expired on July 24, 2001. Management
does not believe Vialco's liability under this Order or its indemnification
obligation to St. Croix, if any, will have a material adverse effect on the
Company's financial condition, results of operations, or liquidity.
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 $1,800 at March 31,
2002 and December 31, 2001, respectively. All accruals have been recorded
without giving effect to any possible recoveries. With respect to ongoing
environmental compliance costs, including maintenance and monitoring, such costs
are expensed as incurred.
8
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
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
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 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 Company, a unit of American Electric Power Company. The
new agreement is effective August 1, 2003, when the Company's current power
contract with Ohio Power expires. The new contract provides for purchase of
power 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 Company is subject to losses associated with equipment shutdowns,
caused by the loss or interruption of electrical power, as well as by labor
shortages and catastrophic events. Power interruptions may have a material
adverse effect on the Company's business because it uses large amounts of
electricity in the primary aluminum production process. Any loss of power which
causes an equipment shutdown can result in the hardening or "freezing" of molten
aluminum in the pots where it is produced. If this 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
9
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 2002 for one year. As expected,
premiums increased significantly and the policies contain much higher
deductibles and self-insured amounts.
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 four-year labor agreement that would have expired May 31, 2003. On March, 8,
2002, the labor agreement was extended through May 31, 2006.
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 July 31,
2003 with provisions for extension. 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 price determined by a
market-based formula.
Concurrent with the Company's purchase of an additional 23% interest in
the Mt. Holly facility from Xstrata, effective 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 of the Glencore Metal Agreement through December 31, 2001
were determined by a market-based formula while the remaining eight years are at
a fixed price as defined in the agreement.
In connection with the Hawesville acquisition 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. Assuming the option is exercised, this represents
approximately 57% of the production capacity of the Hawesville facility through
the duration of the contract. The Company and Glencore will each be responsible
for
10
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
providing a pro rata portion of the aluminum supplied to Southwire under this
contract. 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.
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and
Southwire Metal Agreement, the Company had forward delivery contracts to sell
371.1 million pounds and 377.1 million pounds of primary aluminum at March 31,
2002 and December 31, 2001, respectively. Of these forward delivery contracts,
23.0 million pounds and 25.5 million pounds at March 31, 2002 and December 31,
2001, respectively, were with the Glencore Group.
The Company was party to a long-term supply agreement to purchase alumina
through the end of 2001. Beginning on January 1, 2002, that agreement was
replaced by new long-term alumina supply agreements with Glencore which
terminate on December 31, 2006. These new agreements 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 NSA, the Company assumed an alumina supply agreement with
Kaiser. That agreement expires in 2005 and is a variable-priced market-based
contract. The Company has received assurances from Kaiser management that Kaiser
will continue to perform under this alumina supply agreement, and the Company is
seeking to have the contract assumed through the bankruptcy process, but there
can be no assurance the Company will be successful.
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, 2002 and December 31, 2001, the Company
had financial instruments, primarily with the Glencore Group, for 220.7 million
pounds and 248.8 million pounds, respectively. These financial instruments are
scheduled for settlement at various dates in 2002 through 2003. The Company had
no fixed price financial purchase contracts to purchase aluminum at March 31,
2002. 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, 2002 and December 31, 2001, the Company had financial instruments for 2.7
million and 3.1 million DTH (one decatherm is equivalent to one million British
Thermal Units). These financial instruments are scheduled for settlement at
various dates in 2002 through 2005. Based on the fair value of the Company's
financial instruments as of March 31, 2002, accumulated other comprehensive
income of $1,924 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
11
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
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.
7. Supplemental Cash Flow Information
Three Months Ended
March 31,
------------------
2002 2001
------ ------
Cash paid for:
Interest .............................. $ 28 $ 1
Income taxes .......................... -- 282
Cash received for:
Interest ............................ 71 433
Income tax refunds .................. $110 $ 30
8. Acquisitions
Effective April 1, 2001, the Company completed the acquisition of
Hawesville facility. The following table represents the unaudited pro forma
results of operations for the three months ended March 31, 2001 assuming the
acquisition occurred on January 1, 2001. The unaudited pro forma amounts may not
be indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the periods
indicated or the results that may be obtained in the future.
Three months ended
March 31,
2001
------------------
(unaudited)
Net sales ............................................ $196,614
Net income ........................................... 2,426
Net income available to common shareholders .......... 1,926
Earnings per share ................................... $ 0.09
12
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
9. New Accounting Standards
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
Effective January 1, 2002, the Company adopted SFAS No. 141. There have been no
business acquisitions since the effective date of SFAS No. 141.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which became effective January 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, SFAS No.
142 includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional goodwill impairment test six months from the date of
adoption. There was no impact on the Company's Balance Sheet or Statement of
Operations from the adoption of SFAS No. 142.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long Lived Assets." Effective January 1, 2002, the Company
adopted SFAS No. 144. This statement addresses financial accounting and
reporting for the impairment and disposal of long-lived assets. The provisions
of this standard are generally to be applied prospectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is required to be adopted by the
Company beginning January 1, 2003. The Company is currently assessing the
details of this standard and is developing a plan for implementation.
10. Comprehensive Income
Three months ended
March 31,
2002 2001
------------------
Net Income (Loss) ......................................... $(3,468) $3,151
Other Comprehensive Income (Loss):
Net unrealized gain (loss) on financial instruments,
net of tax of $539 and $(2,114), respectively ....... (992) 3,757
Net amount reclassified to income, net of tax of $651
and $0, respectively ................................ (1,184) --
------- ------
Comprehensive income (loss) ............................... $(5,644) $6,908
======= ======
13
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
11. 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"). Condensed consolidating financial information was not provided
for the periods prior to the acquisition because: (i) Century Aluminum Company
has no independent assets or operations, (ii) the guarantees are full and
unconditional and joint and several, and (iii) for those periods, any
subsidiaries of the Company other than the subsidiary guarantors were minor. As
of March 31, 2002, as a result of the acquisition of the Hawesville facility,
Century 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 Exchange Notes, and the Company has not caused its indirect
equity interests in the LLC to be pledged as collateral for the Exchange 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 Exchange 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, 2002, the Company allocated total corporate
expenses of $2.2 million to its subsidiaries. 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 Exchange 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.
The following summarized condensed consolidating financial information as
of and for the three months ended March 31, 2002 and condensed consolidating
balance sheet as of December 31, 2001 presents 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 Subsidiaries
operated as independent entities.
14
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2001
Combined Combined Reclassification
Guarantor Non-Guarantor The and
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------ ------- ------------ ------------
Assets:
Cash and cash equivalents ............. $ 1,020 $ -- $ 12,368 $ -- $ 13,388
Accounts receivables, net ............. 48,365 -- 345 -- 48,710
Due from affiliates ................... 50,722 838 366,855 (398,648) 19,767
Inventory ............................. 46,649 28,568 -- -- 75,217
Other current assets .................. 7,395 98 1,329 (5,249) 3,573
--------- --------- -------- --------- --------
Total current assets ........... 154,151 29,504 380,897 (403,897) 160,655
Investment in subsidiaries ............ 95,670 -- 208,419 (304,089) --
Property, plant and equipment, net .... 424,653 878 475 -- 426,006
Intangible asset ...................... -- 146,002 -- -- 146,002
Due from affiliates - Less current
portion ............................... 8,364 -- -- -- 8,364
Other non-current assets .............. 20,467 1,674 16,784 (3,246) 35,679
--------- --------- -------- --------- --------
Total assets .................. $ 703,305 $ 178,058 $606,575 $(711,232) $776,706
========= ========= ======== ========= ========
Liabilities and shareholders' equity:
Accounts payable, trade ............... $ 19,922 $ 22,472 $ -- $ -- $ 42,394
Due to affiliates ..................... 351,690 1,998 47,089 (398,576) 2,201
Industrial revenue bonds .............. -- 7,815 -- -- 7,815
Accrued and other current liabilities . 16,437 5,269 17,680 (5,321) 34,065
Accrued employee benefits costs -
current portion ....................... 7,653 147 -- -- 7,800
--------- --------- -------- --------- --------
Total current liabilities ...... 395,702 37,701 64,769 (403,897) 94,275
Long term debt - net .................. -- -- 321,446 -- 321,446
Accrued Pension benefits Costs - less
current portion ....................... 1,555 -- 2,462 -- 4,017
Accrued Postretirement Benefits Costs -
less current portion .................. 45,008 20,619 -- -- 65,627
Other liabilities ..................... 9,833 151 713 -- 10,697
Deferred taxes ........................ 42,788 -- -- (3,246) 39,542
--------- --------- -------- --------- --------
Total non-current liabilities .. 99,184 20,770 324,621 (3,246) 441,329
Minority interest ..................... -- -- -- 23,917 23,917
Shareholders' Equity:
Convertible preferred stock ........... -- -- 25,000 -- 25,000
Common stock .......................... 59 -- 205 (59) 205
Additional paid-in capital ............ 226,996 139,281 168,414 (366,277) 168,414
Accumulated other comprehensive income 6,752 -- 6,752 (6,752) 6,752
Retained earnings ..................... (25,388) (19,694) 16,814 45,082 16,814
--------- --------- -------- --------- --------
Total shareholders' equity ..... 208,419 119,587 217,185 (328,006) 217,185
--------- --------- -------- --------- --------
Total liabilities and equity ... $ 703,305 $ 178,058 $606,575 $(711,232) $776,706
========= ========= ======== ========= ========
15
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2002
Combined Combined
Guarantor Non-Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ ------- ---------------- ------------
Assets:
Cash and cash equivalents .......................... $ 3,413 $ -- $ 22,830 $ -- $ 26,243
Accounts receivables, net .......................... 49,633 26 -- -- 49,659
Due from affiliates ................................ 65,395 9,185 361,839 (414,145) 22,274
Inventory .......................................... 58,171 20,147 -- -- 78,318
Other current assets ............................... 7,203 674 1,505 (5,249) 4,133
--------- ------- -------- --------- --------
Total current assets ..................... 183,815 30,032 386,174 (419,394) 180,627
Investment in subsidiaries ......................... 90,419 -- 203,111 (293,530) --
Property, plant and equipment, net ................. 418,435 1,712 418 -- 420,565
Intangible asset ................................... -- 139,438 -- -- 139,438
Due from affiliates - Less current portion ......... 4,719 -- -- -- 4,719
Other non-current assets ........................... 20,192 1,674 17,090 (3,246) 35,710
--------- --------- -------- --------- --------
Total assets ............................. $ 717,580 $ 172,856 $606,793 $(716,170) $781,059
========= ========= ======== ========= ========
Liabilities and shareholders' equity:
Accounts payable, trade ............................ $ 12,530 $ 24,708 $ -- $ (1,592) $ 35,646
Due to affiliates .................................. 383,144 -- 45,254 (412,489) 15,909
Industrial revenue bonds ........................... -- 7,815 -- -- 7,815
Accrued and other current liabilities .............. 15,121 5,546 26,563 (5,315) 41,915
Accrued employee benefits costs - current portion .. 7,653 348 -- -- 8,001
--------- --------- -------- --------- --------
Total current liabilities ................ 418,448 38,417 71,817 (419,396) 109,286
Long term debt - net ............................... -- -- 321,543 -- 321,543
Accrued Pension benefits Costs
- less current portion ....... .................. 1,539 634 2,887 -- 5,060
Accrued Postretirement Benefits Costs
- less current portion .......................... 46,100 20,486 -- -- 66,586
Other liabilities .................................. 8,879 297 -- -- 9,176
Deferred taxes ..................................... 39,503 -- -- (3,246) 36,257
--------- --------- -------- --------- --------
Total non-current liabilities ............ 96,021 21,417 324,430 (3,246) 438,622
Minority interest .................................. -- -- -- 22,605 22,605
Shareholders' Equity:
Convertible preferred stock ........................ -- -- 25,000 -- 25,000
Common stock ....................................... 59 -- 206 (59) 206
Additional paid-in capital ......................... 226,998 139,281 168,953 (366,279) 168,953
Accumulated other comprehensive income ............. 4,576 -- 4,576 (4,576) 4,576
Retained earnings .................................. (28,522) (26,259) 11,811 54,781 11,811
--------- --------- -------- --------- --------
Total shareholders' equity ............... 203,111 113,022 210,546 (316,133) 210,546
--------- --------- -------- --------- --------
Total liabilities and equity ............. $ 717,580 $ 172,856 $606,793 $(716,170) $781,059
========= ========= ======== ========= ========
16
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2002
Combined Combined Reclassifications
Guarantor Non-Guarantor The and
Subsidiaries Subsidiaries Company 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 income (expense), net ..................... (10,188) (33) -- 33 (10,188)
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)
========= ======= ======= ========= =========
17
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Three Month Periods Ended March 31, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2002
Combined Combined Reclassifications
Guarantor Non-guarantor The and
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------ -------- ----------------- ------------
Net cash provided by (used in) operating activities .... $ 18,000 $ 1,799 $ -- $ -- $ 19,799
-------- ------- -------- -------- --------
Investing activities:
Purchase of property, plant and equipment, net ...... (5,082) (836) -- -- (5,918)
-------- ------- -------- -------- --------
Net cash provided by (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 (decrease) 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
======== ======= ======== ======== ========
18
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," "Part
I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk" and
"Part II, Item 1 Legal Proceedings." 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 2001 Form 10-K along with the consolidated financial
statements and related footnotes included within the Form 10-K.
19
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, which do not include results for the Company's 80% interest in the
Hawesville facility until it was acquired in April 2001.
Century's financial highlights include (in thousands, except per share
data):
Three months ended
March 31,
-------------------------
2002 2001
--------- --------
Net sales
Third-party customers ................. $ 154,199 $ 84,090
Related party customers ............... 24,901 26,600
--------- --------
Total .................................... $ 179,100 $110,690
========= ========
Net income (loss) ........................ $ (3,468) $ 3,151
Net income (loss) available
to common shareholders ................. $ (3,968) $ 3,151
Earnings (loss) per share - basic ........ $ (0.19) $ 0.15
Net sales. Net sales for the three months ended March 31, 2002 increased
$68.4 million or 61.8% to $179.1 million from $110.7 million for the same period
in 2001. This increase was primarily the result of increased volumes, primarily
from the Hawesville facility, of $76.2 million, which was partially offset by
$7.8 million due to declining market prices for primary aluminum.
Gross profit. Gross profit for the three months ended March 31, 2002
decreased $1.2 million to $7.3 million from $8.5 million for the three months
ended March 31, 2001. The decrease was primarily the result of lower market
prices for primary aluminum, of $7.8 million, and was partially offset by a $1.5
million lower of cost or market inventory reversal and by additional gross
margins on increased sales volume and reduced raw material costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 2002 increased $0.6
million to $4.2 million from $3.6 million for the three months ended March 31,
2001. Selling, general and administrative expenses as a percentage of revenue
decreased to 2.3% for the three months ended March 31, 2002 from 3.2% for the
three months ended March 31, 2001.
20
Operating income or loss. Operating income for the three months ended
March 31, 2002 decreased $1.8 million to $3.1 million from $4.9 million for the
three months ended March 31, 2001. Changes in operating income are primarily a
result of changes in gross profit and increases in selling, general and
administrative expenses, as discussed above.
Interest Expense. Interest expense during the three months ended March 31,
2002 increased $10.2 million to $10.3 million from $0.1 million for the three
months ended March 31, 2001. The change in interest expense was a result of the
borrowings required to fund the Hawesville acquisition in April 2001.
Interest Income. Interest income during the three months ended March 31,
2002 decreased $362 thousand to $71 thousand from $433 thousand. The change in
interest was a result of using available cash to fund the Hawesville acquisition
in April 2001.
Net Gains/Losses on Forward Contracts. For the three months ended March
31, 2002 the Company recorded no gain or loss on forward contracts. For the
three months ended March 31, 2001 the Company recorded a loss of $0.2 million.
Tax Provision/Benefit. Income tax benefit for the three months ended March
31, 2002 increased $4.0 million to $2.2 million from an expense of $1.8 million
for the three months ended March 31, 2001. The change in income taxes was a
result of a pre-tax loss in the three months ended March 31, 2002 compared to
pre-tax income in the three months ended March 31, 2001.
Net Income or loss before Minority Interest. The Company had a net loss
before minority interest of $4.8 million during the three months ended March 31,
2002 compared to net income of $3.2 million for the three months ended March 31,
2001. Net income or loss before minority interest decreased for the reasons
discussed above.
Minority Interest. Minority Interest reflects Glencore's interest in the
net operating results of Century Aluminum of Kentucky, LLC, the limited
liability company which holds the power contract for the Hawesville facility,
which consists of amortization of the power contract.
Net Income or loss. The Company had a net loss of $3.5 million during the
three months ended March 31, 2002 compared to net income of $3.2 million for the
three months ended March 31, 2001. Net income or loss decreased for the reasons
discussed above.
Liquidity and Capital Resources
The Company's statements of cash flows for the three months ended March
31, 2002 and 2001 are summarized below (dollars in thousands):
21
Three months ended
March 31,
2002 2001
-------- -------
Net cash from (used in) operating activities ... $ 19,799 $(2,140)
Net cash used in investing activities .......... (5,918) (2,781)
Net cash used in financing activities .......... (1,026) (1,022)
---------------------
Increase (decrease) in cash .................... $ 12,855 $(5,943)
=====================
Operating activities generated $19.8 million during the first three months
of 2002 primarily as a result of operating cash flow from the Hawesville
operations. Operating activities used $2.1 million in net cash during the first
three months of 2001 due to increases in the accounts receivable and reductions
in trade payables.
The Company's net cash used for investing activities was $5.9 million
during the first three months of 2002. The cash was used for capital
expenditures to purchase, modernize, and/or upgrade production equipment,
maintain facilities and comply with environmental regulations. The Company's net
cash used in investing activities, for capital expenditures was $2.8 million
during the first three months of 2001.
Net cash used in financing activities 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 $1.8 million at March 31, 2002 and December 31,
2001. 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 of
the financial statements contained herein.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement establishes standards for accounting for
obligations associated
22
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The standard is required to be adopted by the Company
beginning January 1, 2003. The Company is currently assessing the details of
this standard and is developing a plan for implementation.
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.
The Company was party to a long-term supply agreement to purchase alumina
through the end of 2001. Beginning January 2, 2002, that agreement was replaced
by new long-term supply agreements 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.
At March 31, 2002, the Company had entered into 220.7 million pounds 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 during
2002 and 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, 2002, the Company had financial instruments
for 2.7 million DTH (one decatherm, or DTH, is equivalent to one million British
Thermal Units). These financial instruments are scheduled for settlement at
various dates in 2002 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 $1.4 million after tax, respectively, on accumulated other
comprehensive income for the three months ended
23
March 31, 2002 as a result of the forward primary aluminum financial sale
contracts entered into by the Company at March 31, 2002.
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 $0.9 million after tax, respectively, on accumulated other
comprehensive income for the three months ended March 31, 2002 as a result of
the forward natural gas financial purchase contracts entered into by the Company
at March 31, 2002.
Century monitors its overall position, and its metals and natural gas risk
management activities are subject to the management, control and direction of
senior management. These 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.
Entering the year 2002, approximately 48% and 55% of the Company's production
for the years 2002 and 2003, respectively, was either hedged by the alumina
contracts or by fixed price forward delivery and financial sales contracts.
Interest Rates
Interest Rate Risk. The Company's primary debt obligations are the
outstanding Exchange Notes, borrowings under its revolving credit facility and
the industrial revenue bonds the Company assumed in connection with the
Hawesville acquisition. Because the Exchange 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, 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.
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report on Form 10-Q:
Exhibit
Number Description
- ------------- --------------------------------------------------------------
10.1 Employment Agreement between Century Aluminum Company and
Craig A. Davis
10.2 Employment Agreement between Century Aluminum Company and
Gerald A. Meyers
10.3 Employment Agreement between Century Aluminum Company and
Gerald J. Kitchen
10.4 Employment Agreement between Century Aluminum Company and
David W. Beckley
10.5 Century Aluminum Company Supplement Retirement Income Benefit
Plan
10.6* Alumina Supply Agreement, dated as of January 1, 2001, between
Century Aluminum of West Virginia, Inc. and Glencore Ltd.
10.7* Alumina Supply Agreement, dated as of January 1, 2001, between
Berkeley Aluminum, Inc. and Glencore Ltd.
10.8 Extension of Labor Agreement, dated February 21, 2002,
between Century Aluminum of West Virginia, Inc. and the United
Steelworkers of America AFL-CIO-CLC.
*Confidential information has been omitted from this exhibit pursuant to a
request for confidential treatment and filed separately with the Securities and
Exchange Commission.
(b) Reports on Form 8-K -- None.
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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 14, 2002 By: /s/ Craig A. Davis
------------ --------------------------------
Craig A. Davis
Chairman/Chief Executive Officer
Date: May 14, 2002 By: /s/ David W. Beckley
------------ --------------------------------
David W. Beckley
Executive Vice-President/
Chief Financial Officer
Exhibit Index
Exhibit
Number Description
- ------------- --------------------------------------------------------------
10.1 Employment Agreement between Century Aluminum Company and
Craig A. Davis
10.2 Employment Agreement between Century Aluminum Company and
Gerald A. Meyers
10.3 Employment Agreement between Century Aluminum Company and
Gerald J. Kitchen
10.4 Employment Agreement between Century Aluminum Company and
David W. Beckley
10.5 Century Aluminum Company Supplement Retirement Income Benefit
Plan
10.6* Alumina Supply Agreement, dated as of January 1, 2001, between
Century Aluminum of West Virginia, Inc. and Glencore Ltd.
10.7* Alumina Supply Agreement, dated as of January 1, 2001, between
Berkeley Aluminum, Inc. and Glencore Ltd.
10.8 Extension of Labor Agreement, dated February 21, 2002,
between Century Aluminum of West Virginia, Inc. and the United
Steelworkers of America AFL-CIO-CLC.
*Confidential information has been omitted from this exhibit pursuant to a
request for confidential treatment and filed separately with the Securities and
Exchange Commission.
26