1
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, 1997.
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.)
1200 PIEDMONT AVENUE
P. O. BOX 51130
PACIFIC GROVE, CALIFORNIA 93950
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 657-1280
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 20,000,000 shares of common stock outstanding at April 30,
1997.
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CENTURY ALUMINUM COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
Part I - Financial Information
Item 1 - Financial Statements Page Number
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 .............................................. 1
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 ............................... 2
Consolidated Statement of Shareholders' Equity
for the three months ended March 31, 1997 .......................... 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 ............................... 4
Notes to the Consolidated Financial Statements ..................... 5-12
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 13-17
Part II - Other Information
Item 1 - Legal Proceedings ............................................... 18
Item 6 - Exhibits and Reports on Form 8-K ................................ 18
Signatures ............................................................... 19
Exhibit Index ............................................................ 20
Exhibit 11.1 - Calculation of Earnings per Common Share
and Common Share Equivalent ............................ 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
ASSETS
CURRENT ASSETS:
Cash ........................................................................ $ 1,590 $ 112
Restricted cash equivalents ................................................. 5,801 5,801
Accounts receivable, trade - net ............................................ 120,551 89,283
Due from affiliates ......................................................... 14,354 12,681
Inventories ................................................................. 173,632 176,149
Prepaid and other assets .................................................... 2,954 3,172
-------- --------
Total current assets ................................................... 318,882 287,198
PROPERTY, PLANT AND EQUIPMENT - NET .............................................. 175,816 176,135
OTHER ASSETS ..................................................................... 10,425 10,398
-------- --------
TOTAL .................................................................. $505,123 $473,731
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade ..................................................... $ 43,913 $ 31,341
Due to affiliates ........................................................... 18,805 22,666
Accrued and other current liabilities ....................................... 29,405 27,429
Accrued employee benefits costs - current portion ........................... 39,491 39,491
-------- --------
Total current liabilities .............................................. 131,614 120,927
-------- --------
REVOLVING TERM LOAN .............................................................. 45,650 24,356
ACCRUED PENSION BENEFITS COSTS - Less current portion ............................ 22,765 26,616
ACCRUED POSTRETIREMENT BENEFITS COSTS - Less current portion ..................... 114,274 112,551
OTHER LIABILITIES ................................................................ 23,616 22,803
-------- --------
Total noncurrent liabilities ........................................... 206,305 186,326
-------- --------
CONTINGENCIES AND COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY:
Common Stock (one cent par value, 50,000,000 shares authorized;
20,000,000 shares outstanding at March 31, 1997 and December 31, 1996) ... 200 200
Additional paid-in capital .................................................. 161,953 161,953
Retained earnings ........................................................... 5,051 4,325
-------- --------
Total shareholders' equity ............................................. 167,204 166,478
-------- --------
TOTAL .................................................................. $505,123 $473,731
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
--------- --------
NET SALES:
Third-party customers ....................... $ 165,704 $145,419
Related parties ............................. 25,827 35,985
--------- --------
191,531 181,404
COST OF GOODS SOLD ............................... 183,612 163,983
--------- --------
GROSS PROFIT ..................................... 7,919 17,421
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ..................... 4,302 3,129
--------- --------
OPERATING INCOME ................................. 3,617 14,292
INTEREST INCOME (EXPENSE) - Net .................. (741) 87
OTHER EXPENSE .................................... (179) --
--------- --------
INCOME FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES ......................... 2,697 14,379
INCOME TAX EXPENSE ............................... 971 5,464
--------- --------
INCOME FROM
CONTINUING OPERATIONS ....................... 1,726 8,915
INCOME FROM
DISCONTINUED OPERATIONS -
Net of income taxes ......................... -- 264
--------- --------
NET INCOME ....................................... $ 1,726 $ 9,179
========= ========
EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT:
Income from continuing operations ........... $ 0.09 $ 0.39
Income from discontinued operations ......... -- 0.01
--------- --------
Net income .................................. $ 0.09 $ 0.40
========= ========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING .............. 20,224 23,120
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
--------- --------- ---------- -------------
BALANCE, DECEMBER 31, 1996 ... $ 200 $ 161,953 $ 4,325 $ 166,478
Net Income .............. 1,726 1,726
Dividends ............... (1,000) (1,000)
--------- --------- --------- ---------
BALANCE, MARCH 31, 1997 ...... $ 200 $ 161,953 $ 5,051 $ 167,204
========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
-------- --------
CASH FLOWS FROM (USED IN) OPERATIONS:
Net income ....................................................... $ 1,726 $ 9,179
Adjustments to reconcile net income to net cash from (used in)
operating activities:
Depreciation and amortization ................................ 4,842 4,602
Deferred income taxes ........................................ -- (2,308)
Pension and other postretirement benefits .................... (2,155) 1,097
Workers' compensation ........................................ 540 500
Gain on sale of facilities and equipment ..................... 38 (105)
Income from discontinued operations .......................... -- (264)
Change in working capital items:
Accounts receivable, trade - net ........................ (31,268) 2,273
Due from affiliates ..................................... (1,673) 1,784
Inventories ............................................. 2,517 (824)
Prepaids and other assets ............................... 218 1,178
Accounts payable, trade ................................. 12,572 4,130
Due to affiliates ....................................... (3,861) (5,208)
Accrued and other current liabilities ................... 1,976 2,180
Other - net .................................................. 118 744
-------- --------
Net cash from (used in) operating activities ..................... (14,410) 18,958
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of accounts receivables ............................. -- (50,000)
Purchase of property, plant and equipment .................... (4,407) (2,564)
Disposal of fixed assets ..................................... 1 203
Restricted cash deposits ..................................... -- 784
-------- --------
Net cash from (used in) investing activities ..................... (4,406) (51,577)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Borrowings ................................................... 68,144 --
Repayment of borrowings ...................................... (46,850) --
Dividends .................................................... (1,000) --
-------- --------
Net cash from (used in) financing activities ..................... 20,294 --
-------- --------
NET INCREASE (DECREASE) IN CASH ........................................ 1,478 (32,619)
CASH, BEGINNING OF PERIOD .............................................. 112 42,910
-------- --------
CASH, END OF PERIOD .................................................... $ 1,590 $ 10,291
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1997 AND 1996
(Dollars in Thousands Except as Otherwise Noted)
(Unaudited)
1. GENERAL
Century Aluminum Company ("Century" or the "Company") is a holding company whose
principal subsidiary is Ravenswood Aluminum Corporation ("Ravenswood"), which
operates a primary aluminum reduction facility and an aluminum fabrication
facility in Ravenswood, West Virginia. Ravenswood, through its wholly-owned
subsidiary Berkeley Aluminum, Inc. ("Berkeley"), holds a 26.67% interest in a
partnership which operates a primary aluminum reduction facility in Mt. Holly,
South Carolina.
Glencore AG and Vialco Holdings Ltd., which are wholly-owned subsidiaries of
Glencore International AG (together with its subsidiaries, the "Glencore
Group"), own 7,925,000 common shares, or 39.6% of the common shares outstanding
of the Company. Century and the Glencore Group continue to enter into various
transactions related to the purchases and sales of primary and scrap aluminum
and metals risk management.
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, 1996. 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 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. Certain reclassifications of prior-period information were
made to conform to the current presentation.
2. ACCOUNTS RECEIVABLE
On January 30, 1996, Ravenswood purchased $50,000 of accounts receivable from
Monte Rosa Capital Corporation and canceled the related Receivables Purchase
Agreement.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
3. INVENTORIES
Inventories consist of the following: March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials ............................ $ 59,592 $ 56,954
Work-in-process .......................... 48,111 55,040
Finished goods ........................... 29,405 35,711
Operating and other supplies ............. 20,430 20,745
Unrealized losses on forward contracts ... 16,094 7,699
-------- --------
$173,632 $176,149
======== ========
At March 31, 1997 and December 31, 1996 approximately 79% and 84%, respectively,
of inventories were valued at the lower of last-in, first-out ("LIFO") cost or
market. The excess of the LIFO cost (or market, if lower) of inventory over the
first-in, first-out ("FIFO") cost was approximately $19,284 and $20,368 at March
31, 1997 and December 31, 1996, respectively.
4. REVOLVING TERM LOAN
On January 30, 1996 (and as amended through February 7, 1997) Ravenswood and
Berkeley entered into a Bank Revolving Credit Facility ("Facility") with
BankAmerica Business Credit, Inc. ("Bank of America"). The Facility provides for
a three-year $150,000 revolving credit facility which consists of revolving
loans and letters of credit up to $150,000 in the aggregate.
The interest rate is, at the Company's election, (i) the Bank of America base
rate plus .75% or (ii) the one-, two-, three- or six-month LIBOR plus 2.00%. The
interest rate margins of .75% and 2.00% may remain constant, or may be increased
by up to .50%, depending upon the attainment of certain financial ratios.
Under the terms of the Facility, the Company is required to meet certain
financial covenants. At March 31, 1997, the Company was in compliance with these
covenants.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
5. CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL CONTINGENCIES
The Company's operations are subject to various environmental laws and
regulations. The Company has spent, and expects to spend in the future,
significant amounts for compliance with those laws and regulations.
Pursuant to an order issued in September 1994 under Section 3008(h) (the
"3008(h) order") of the Resource Conservation and Recovery Act ("RCRA"),
Ravenswood is performing remediation measures at a former oil pond area and in
connection with cyanide contamination in the groundwater, and is conducting a
RCRA facility investigation ("RFI") and a corrective measures study ("CMS") to
evaluate and develop corrective alternatives for any areas that have
contamination exceeding certain levels. The Company has completed initial
sampling and analysis and has submitted its initial findings to the
Environmental Protection Agency ("EPA"). The Company will conduct further field
work in mid 1997. The Company anticipates that the RFI will not be completed
before late 1997. Once the RFI and CMS are complete, the EPA will assess the
need for clean-up, and if any clean-up is required, a subsequent order will be
issued. At this time, the Company is unable to determine the extent of clean-up
measures, if any, that may be required. However, the Company is aware of some
environmental contamination at Ravenswood, and it is likely that clean-up
activities will be required in at least some areas of the facility. The Company
believes a significant portion of this contamination is attributable to the
operations of a prior owner and will be the financial responsibility of that
owner, as discussed below.
The West Virginia Department of Environmental Protection ("DEP") ordered
Ravenswood to investigate treatment technology to replace the current wastewater
sprayfield and to install such technology by September 1, 1997. Ravenswood
completed the investigation and proposed alternative technology to the DEP. The
DEP has reviewed the proposal and does not object to Ravenswood proceeding with
the design and construction of the proposed treatment technology.
Prior to the Company's acquisition of the Ravenswood facility, Kaiser Aluminum &
Chemical Corporation ("Kaiser") owned and operated the facility for
approximately thirty years. Many of the conditions which the Company is required
to investigate under the 3008(h) order arise out of activities which occurred
during Kaiser's ownership and operation, and with respect to those conditions,
Kaiser will be responsible for the costs of the RFI and required cleanup under
the terms of the purchase agreement ("Kaiser Purchase Agreement"). In addition,
Kaiser retained title to certain land within the Ravenswood premises and retains
full responsibility for those areas. Under current environmental laws and
regulations, the Company may be required to remediate any contamination
discovered during or after completion of the RFI, which contamination was
discharged from areas which Kaiser previously owned or operated, or for which
Kaiser has
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
retained ownership or responsibility. However, if such remediation is required,
the Company believes that Kaiser will be liable for some or all of the costs
thereof pursuant to the Kaiser Purchase Agreement.
The Company is aware there has been contamination in the soil and groundwater at
the previously owned Vialco facility. The Company believes that a substantial
amount of the contamination migrated from an adjacent facility. The adjacent
facility is currently investigating and has installed monitoring wells at the
Vialco facility. The Company has removed quantities of contaminated soils from
Vialco and transported and disposed of such soils in approved facilities. In
addition, it has instituted a bioremediation program which it believes will
address the remaining legal requirements with respect to such soils. Pursuant to
the contract for sale of the Vialco facility to St. Croix Alumina, L.L.C. ("St.
Croix Alumina") a subsidiary of Alcoa Alumina and Chemicals L.L.C., the Company
has retained liability for environmental conditions existing at the time of sale
only to the extent such conditions require remedial action, or give rise to
claims, under laws in effect at the time of sale. The Company will not have
liability if remediation is required or claims are made due to changes in law
after the time of sale. The Company has agreed to indemnify St. Croix Alumina
against claims arising from environmental conditions for which the Company has
retained liability. The indemnity is capped at $18,000, and any claims under the
indemnity must be brought by July 24, 2001. Management of the Company does not
believe that the ultimate amount of the retained liability, 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 $800 at March 31, 1997 and
December 31, 1996. All accruals have been recorded without giving effect to any
possible future insurance or Kaiser indemnity proceeds. With respect to ongoing
environmental compliance costs, including maintenance and monitoring, such costs
are expensed as incurred.
Because of the issues and uncertainties concerning the extent of required
cleanup, the complexity of applicable government laws and regulations and their
interpretation, the varying costs and effectiveness of alternative cleanup
technologies and methods, and the uncertain level of recoveries from insurance,
the Kaiser indemnity or other types of recovery, 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 and after
consultation with counsel, management does not believe that the outcome of these
environmental matters will have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
LEGAL CONTINGENCIES
On February 14, 1995, a suit was brought in the Territorial Court in St. Croix,
U.S. Virgin Islands against Vialco, Bechtel Corporation and Mitsubishi Heavy
Industries, Ltd., by three plantiffs, purportedly on behalf of a class
consisting of more than 1,000 persons. The proposed class is comprised of
residents of Harvey Project, Bethlehem Village, and Estate Profit (residential
areas in the vicinity of the Vialco facility) who claim personal injury,
property damage and nuisance from pollutants, toxins, dusts and deleterious
fumes, mists, vapors, particulates and/or gases allegedly discharged into the
atmosphere since Vialco restarted operations at the Vialco facility in 1989.
Plantiffs also sought a monetary award in an unspecified amount which would
create a fund to cover the costs of permanent medical monitoring for members of
the proposed plaintiff class. Without admitting to any liability, and in order
to put an end to growing defense costs and protracted litigation, Vialco and the
plaintiffs have agreed to settle this case, subject to Court approval. The
Company accrued the expense of settlement in 1996.
Ravenswood is a named defendant (along with other companies) in approximately
2,300 civil actions brought by individuals seeking to recover significant
compensatory and/or punitive damages in connection with various asbestos-related
diseases. All of the plaintiffs have been employees of independent contractors
who claim to have been exposed to asbestos in the course of performing services
at various facilities, including the Ravenswood facility. The cases are
typically resolved based upon factual determinations as to the facilities at
which the plaintiffs worked, the periods of time during which work was
performed, the type of work performed and the conditions in which work was
performed. In Ravenswood's case, if the plaintiffs' work was performed during
the period when Kaiser owned the Ravenswood facility, Kaiser has retained
responsibility, pursuant to the terms of the Kaiser Purchase Agreement. In a
typical case or consolidated group of cases, Ravenswood turns the complaint over
to Kaiser with a demand for defense and indemnity. Kaiser assumes the defense
and liability, subject to a reservation of rights against Ravenswood in the
event that a plaintiff is shown to have worked at the Ravenswood facility after
the time Ravenswood purchased the facility from Kaiser. The Company believes it
is unlikely that existing or potential plaintiffs were exposed to asbestos at
the Ravenswood facility after Ravenswood purchased the facility from Kaiser,
although eight plaintiffs have claimed they were exposed during this period of
time. Therefore, while the impact of the asbestos proceedings is impossible to
predict, the Company believes it has meritorious defenses to the actions and
that the ultimate resolution will not have a material adverse effect on the
Company's financial condition, results of operation or liquidity.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
On November 17, 1996, a suit was brought in the United States District Court for
the Southern District of West Virginia against Ravenswood and Kaiser purportedly
on behalf of a proposed class believed to consist of approximately 150 salaried
employees and retirees of Ravenswood. Plaintiffs claim that in 1989 defendants
misrepresented the terms of the salaried employee pension plan and/or benefits.
The proposed class has not yet been certified and damages have not been
specified. Ravenswood has denied liability and will defend the matter
vigorously. While it is impossible to predict the outcome of this litigation,
Ravenswood believes the outcome will not have a material adverse effect on its
financial condition or liquidity, although it is possible that an adverse
outcome could materially affect its results of operations in a given period.
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.
COMMITMENTS
The Company and a public utility have signed a power supply agreement, covering
the period from July 1, 1996 through July 31, 2003. This agreement replaces a
power supply agreement with the same utility that was due to expire in 1998.
Billings, under the old agreement, were computed using a formula based
principally upon the utility's operating costs. Such billings were decreased if
the London Metals Exchange ("LME") primary ingot price was less than certain
specified levels, and increased, limited to the extent of cumulative net
decreases, if the LME primary ingot price was greater than certain specified
levels. Under the new agreement, the Company will pay a fixed price for
electricity used. However, for the period from July 1, 1996 through July 31,
1998, if the LME primary ingot price were to exceed certain specified levels,
the price for electricity used would increase, to the extent of cumulative net
price decreases under the previous contract with the same utility. The Public
Utilities Commission of Ohio has approved the agreement.
On January 23, 1996 the Company and the Pension Benefit Guaranty Corporation
entered into an agreement (the "PBGC Agreement") which provided that the Company
make additional cash contributions to its pension plan for hourly employees. The
Company has made all required contributions. The PBGC Agreement also provides
for scheduled contributions to be made to the Company's pension plan for hourly
employees with respect to 1997, 1998 and 1999. The Company estimates that these
contributions will be approximately $6,000, $7,000 and $7,000,
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
respectively, above the minimum required contributions under Section 412 of the
Code for such years.
During 1992, Ravenswood established a progress sharing plan for eligible union
employees. Accrued and other current liabilities as of March 31, 1997 and
December 31, 1996 include an accrual for the 1996 progress sharing pool.
The Company has provided a $27,500 letter of credit to ensure its performance
under the Owners Agreement governing the Mt. Holly facility. The Company's
obligation to maintain the letter of credit will terminate at such time as the
Company achieves certain financial measurements.
6. FIXED-PRICE COMMITMENTS AND FORWARD CONTRACTS
The Company had fixed price commitments to sell 353.3 million pounds and 278.6
million pounds of primary and scrap aluminum and aluminum sheet and plate
products at March 31, 1997 and March 31, 1996, respectively. Forward purchase
contracts for approximately 16.4 million pounds and 26.5 million pounds of
primary aluminum at March 31, 1997 and March 31, 1996, respectively, did not
qualify for hedge accounting treatment because the Company's aggregate metals
position exceeded its fixed-price sales commitments at such dates. Cost of goods
sold includes either a net credit or a net charge relating to the unrealized
gains or losses on these contracts that did not satisfy the technical
requirements for hedge accounting, realized gains or losses from the cash
settlement of forward contracts, unrealized losses on purchase and sales
commitments, and reversals of prior period unrealized losses; net credits so
included were $973 and $546 for the periods ended March 31, 1997 and March 31,
1996, respectively.
During 1996, the Company entered into forward sales contracts with the Glencore
Group for 116 million pounds of primary aluminum to hedge 1997 and 1998
production. Accounting standards require such contracts be marked to market. As
of December 31, 1996, the Company deferred unrealized losses of $7,699 on such
contracts. At March 31, 1997, the Company had forward sales contracts with the
Glencore Group for 144 million pounds of primary aluminum to hedge 1997 and 1998
production. As of March 31, 1997, the Company deferred unrealized losses of
$16,094 on such contracts.
As of March 31, 1997, the Glencore Group had forward option contracts to
purchase 30 million pounds of primary aluminum from the Company during the
second half of 1997.
The Company entered into a long-term supply agreement for 936 million pounds of
alumina annually, beginning January 1, 1996. The Company will pay a fixed price
for alumina with fixed
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
annual price increases of approximately 2.5% through 2001. Pricing for the years
2002 through 2006 will be subject to agreement between the parties.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for: Three Months Ended
March 31,
---------
1997 1996
---- ----
Interest .................................. $909 $ 93
Income taxes .............................. 376 2,515
Non-Cash Investing Activities
Effective March 28, 1996 the Company made a non-cash special distribution of
certain holdings of the Company in the form of a pro rata redemption of shares.
The distribution consisted of businesses unrelated to the continuing operations
of the Company. The Company redeemed and retired 3,120,000 shares of stock and
distributed assets with a book value of $72,534.
8. NEW ACCOUNTING STANDARDS
SFAS No. 128, "Accounting for Earnings per Share" is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
This standard, among other things, specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock or potential common stock. Based upon current facts and
circumstances, adoption of this standard will not have a material effect upon
the Company's resultant earnings per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an integrated manufacturer of primary aluminum and a broad range
of value-added and specialized flat-rolled sheet and plate aluminum products.
The aluminum industry is highly cyclical and the market price of aluminum (which
trades as a commodity) has been volatile from time to time. In turn, prices of
flat-rolled sheet and plate aluminum products have reflected this volatility as
well as fluctuations attributable to general and industry-specific economic
conditions. However, there is less price volatility in the higher value-added
products such as plate. The principal elements comprising the Company's cost of
goods sold are raw materials, energy and labor. The major raw materials and
energy sources used by the Company in its production process are alumina,
aluminum scrap, coal tar, pitch, petroleum coke, aluminum fluoride and
electricity.
During the first quarter of 1997, consumer demand for sheet and plate products
appeared to be greater than first quarter 1996. Increased consumption of
aluminum and the reemergence of commodity fund investors into the primary
aluminum market caused the cash price for primary aluminum on the London Metals
Exchange to average $1,596 per tonne during the first quarter of 1997, an
increase of $174 per tonne over the fourth quarter 1996 average of $1,422 per
tonne.
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended March 31, 1997 and
1996, the percentage relationship to net sales of certain items included in the
Company's condensed consolidated statements of operations.
Percentage of Net Sales
1997 1996
---- ----
Net sales ............................................... 100.0% 100.0%
Cost of goods sold ...................................... 95.9 90.4
------ ------
Gross profit ........................................ 4.1 9.6
Selling, general and administrative expenses ............ 2.2 1.7
------ ------
Operating income ................................... 1.9 7.9
Interest and other expense .............................. 0.5 0.0
------ ------
Income from continuing operations before income taxes ... 1.4 7.9
Income tax expense ...................................... 0.5 3.0
------ ------
Income from continuing operations ....................... 0.9% 4.9%
====== ======
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The following table sets forth, for the periods indicated, the pounds and the
average sales price per pound for certain of the Company's products (pounds in
thousands):
Flat-Rolled Sheet and Plate Products Primary Aluminum
Direct (1) Toll Direct (1)
---------- ---- ----------
1st Quarter Pounds $/Pound Pounds $/Pound Pounds $/Pound
------ ------- ------ ------- ------ -------
1997 138,916 $ 1.10 12,017 $ 0.32 47,666 $ 0.74
1996 115,708 $ 1.17 20,936 $ 0.32 46,774 $ 0.79
(1) Does not include forward sales contracts without physical delivery.
Net Sales. Net sales increased $10.1 million (or 5.6%) in the first quarter of
1997 to $191.5 million from $181.4 million in the first quarter of 1996. The
higher sales revenue is principally attributable to increased shipments of sheet
and plate products. During the first quarter of 1997, shipments of sheet and
plate products increased 14.3 million pounds to 150.9 million pounds from 136.6
million pounds shipped during the first quarter of 1996. Shipments of direct
sheet and plate products increased 23.2 million pounds, while shipments of toll
sheet and plate products decreased 8.9 million pounds. The improvement in sheet
and plate product shipments had the effect of increasing net revenue by $24.3
million over first quarter 1996 levels. Realized prices for the direct sheet and
plate products were an average of $1.10 per pound in the first quarter of 1997
compared to an average of $1.17 per pound in the first quarter of 1996. This
decline is the result of a continuing squeeze on profit margins for many rolled
products. Lower realized sheet and plate prices had the effect of reducing net
revenues by $10.4 million below first quarter 1996 levels.
During the first quarter of 1997, shipments of primary aluminum products were
47.7 million pounds, an increase of 0.9 million pounds over first quarter 1996
shipments. However, average realized prices were $0.05 per pound lower in the
first quarter of 1997. The net effect of the increased volume and decreased
prices was a reduction in net revenue of $1.4 million.
Gross Profit. With more volume in the first quarter of 1997, the cost of goods
sold rose accordingly, but because of lower realized prices, gross profit
decreased $9.5 million from first quarter 1996 levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses during the first quarter of 1997 increased to $4.3
million from $3.1 million during the first quarter of 1996 primarily due to the
increased costs Century experienced as a public company.
Interest Expense. Interest expense increased $0.8 million in the first quarter
of 1997 due to the amount borrowed under the Facility. During the first quarter
of 1996, none of the amounts available under the Facility were outstanding.
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LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1997 and 1996 was $187.3 million and $155.1
million, respectively. The Company's liquidity requirements arise from working
capital needs, capital investments, and debt service.
The Company's statements of cash flows for the periods indicated are summarized
below (dollars in thousands):
Three Months Ended
March 31,
---------
1997 1996
---- ----
Net cash from (used in) operating activities .... $(14,410) $ 18,958
Net cash used in investing activities ........... (4,406) (51,577)
Net cash from financing activities .............. 20,294 0
-------- --------
Increase (decrease) in cash ..................... $ 1,478 $(32,619)
======== ========
Net cash used in operating activities was $14.4 million during the first quarter
of 1997 compared to net cash of $19.0 million provided by operations during the
first quarter of 1996. The difference was primarily due to lower earnings and
the growth in the Company's accounts receivable as a result of increased sales
to third parties in the first quarter of 1997.
Capital expenditures were $4.4 million and $2.6 million for the three months
ended March 31, 1997 and 1996, respectively. The Company used these expenditures
to purchase, modernize or upgrade production equipment, maintain facilities and
comply with environmental regulations. In the first quarter of 1996, the Company
purchased $50.0 million of its accounts receivable concurrent with the
refinancing of the Company's credit facilities as discussed below.
On January 30, 1996, Ravenswood, Berkeley and BankAmerica Business Credit, Inc.
("Bank of America") entered into an agreement, as amended through February 7,
1997, pursuant to which Bank of America is providing Ravenswood and Berkeley a
three-year, $150 million Bank Revolving Credit Facility ("Facility"). The
interest rate is, at the Company's election, (i) the Bank of America base rate
plus .75% or (ii) the one-, two-, three- or six-month LIBOR plus 2.00%. The
interest rate margins of .75% and 2.00% may remain constant, or may be increased
by up to .50%, depending upon the attainment of certain financial ratios.
Borrowings of $45.7 million as of March 31, 1997 under the Facility are
collateralized by all of Ravenswood's and Berkeley's inventory and receivables
and are guaranteed by the Company.
Under the terms of the Facility, as amended, the Company is required to meet
certain financial covenants. Based on its current financial condition and
internal forecasts through the end of 1997, the Company believes that it will be
in compliance with all covenants.
Pursuant to an agreement with the Pension Benefit Guaranty Corporation ("the
PBGC Agreement") the Company made additional cash contributions of $20.0 million
to its pension
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plans for hourly employees in 1996. The PBGC Agreement also provides for
scheduled contributions to be made to the Company's pension plan for hourly
employees with respect to 1996, 1997, 1998 and 1999. The Company estimates that
these contributions will be approximately $6.0 million, $7.0 million and $7.0
million, respectively, above the minimum required contributions under Section
412 of the Code for such years.
The Company believes that cash flow from operations and funds available under
the Facility will be sufficient to fund its working capital requirements,
capital expenditures and debt service requirements in the near term and for the
foreseeable future.
METALS RISK MANAGEMENT
The Company produces primary aluminum products and manufactures aluminum sheet
and plate products and manages the risks of each accordingly. With respect to
its primary aluminum products, the Company attempts to assure itself a fixed
margin over its primary aluminum production costs through the use of forward
sales contracts. With respect to its aluminum sheet and plate sales, the Company
attempts to assure itself a fixed margin over its aluminum raw material costs
through the use of forward purchase contracts.
The Company had fixed-price commitments to sell 353.3 million pounds and 278.6
million pounds of primary and scrap aluminum and aluminum sheet and plate
products at March 31, 1997 and March 31, 1996, respectively. Forward purchase
contracts for approximately 16.4 million pounds and 26.5 million pounds of
primary aluminum at March 31, 1997 and March 31, 1996, respectively, did not
qualify for hedge accounting treatment because the Company's aggregate metals
position exceeded it fixed-price sales commitments at such dates. Cost of goods
sold includes either a net credit or a net charge relating to the unrealized
gains on these contacts that did not satisfy the technical requirements for
hedge accounting, realized gains or losses from the cash settlement of certain
other forward contracts, unrealized losses on purchase and sales commitments,
and reversals of prior period unrealized losses; net credits so included were
$1.0 million and $0.5 million for the periods ended March 31, 1997 and March 31,
1996, respectively.
During 1996, the Company entered into forward sales contracts with the Glencore
Group for 116 million pounds of primary aluminum to hedge 1997 and 1998
production. Accounting standards require such contracts be marked to market. As
of December 31, 1996, the Company deferred unrealized losses of $7.7 million on
such contracts. At March 31, 1997, the Company had forward sales contracts with
the Glencore Group for 144 million pounds of primary aluminum to hedge 1997 and
1998 production. As of March 31, 1997, the Company deferred unrealized losses of
$16.1 million on such contracts.
As of March 31, 1997, the Glencore Group had forward option contracts to
purchase 30 million pounds of primary aluminum from the Company during the
second half of 1997.
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ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
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 cost can be reasonably estimated. The aggregate
environmental related accrued liabilities were $800 at March 31, 1997 and
December 31, 1996. 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 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
have changed rapidly in recent years and the Company may become subject to more
stringent environmental laws and regulations in the future. In addition, the
Company may be required to conduct remediation activities in the future pursuant
to various orders issued by the EPA and DEP. 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 or liquidity, although it is possible that an
adverse outcome in the lawsuit by a proposed class of salaried employees and
retirees of Ravenswood could materially affect the results of operations in a
given period. See Note 5 to Consolidated Financial Statements: Contingencies and
Commitments.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1994, Ravenswood received a Civil Investigative Demand ("CID") from
the Antitrust Division of the U.S. Department of Justice (the "Antitrust
Division") in connection with an investigation by the Antitrust Division to
determine whether there had been or was an unlawful agreement to restrict the
production of primary aluminum. The CID has been dismissed by the Antitrust
Division.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 - Statement Re: Calculation of Earnings per Common Share
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1997.
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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 13, 1997 By: /s/ Craig A. Davis
----------- ---------------------------------
Craig A. Davis
Chairman/Chief Executive Officer
Date: May 13, 1997 By: /s/ David W. Beckley
------------ ---------------------------------
David W. Beckley
Executive Vice-President/Chief Financial Officer
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EXHIBIT INDEX
Exhibit Page
Number Description Number
- ------ ----------- ------
11.1 Calculation of Earnings per Common Share and
Common Share Equivalent ............................ 21
20