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, 1998.
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 (408) 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 20,000,000 shares of common stock outstanding at
April 30, 1998.
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CENTURY ALUMINUM COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
Part I - Financial Information
Item 1 - Financial Statements Page Number
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997..................................... 1
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997............................. 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997............................. 3
Notes to the Consolidated Financial Statements............ 4-9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10-14
Part II - Other Information
Item 1 - Legal Proceedings......................................... 15
Item 6 - Exhibits and Reports on Form 8-K.......................... 15
Signatures......................................................... 16
Exhibit Index...................................................... 17
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CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
ASSETS
CURRENT ASSETS:
Cash ................................................................. $ 1,000 $ 42
Restricted cash equivalents .......................................... 5,807 5,805
Accounts receivable, trade - net ..................................... 102,953 111,146
Due from affiliates .................................................. 12,364 8,362
Inventories .......................................................... 170,481 170,085
Prepaid and other assets ............................................. 6,811 8,082
-------- --------
Total current assets ............................................ 299,416 303,522
PROPERTY, PLANT AND EQUIPMENT - NET ....................................... 200,652 198,341
OTHER ASSETS .............................................................. 7,193 5,285
-------- --------
TOTAL ........................................................... $507,261 $507,148
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade .............................................. $ 39,805 $ 51,411
Due to affiliates .................................................... 8,754 10,560
Accrued and other current liabilities ................................ 35,124 22,364
Accrued employee benefits costs - current portion .................... 37,165 38,663
-------- --------
Total current liabilities ....................................... 120,848 122,998
-------- --------
REVOLVING TERM LOAN ....................................................... 60,287 58,950
ACCRUED PENSION BENEFITS COSTS - Less current portion ..................... 9,107 12,139
ACCRUED POSTRETIREMENT BENEFITS COSTS - Less current portion .............. 121,080 118,532
DUE TO AFFILIATES ......................................................... 2,962 6,673
OTHER LIABILITIES ......................................................... 24,603 24,310
-------- --------
Total noncurrent liabilities .................................... 218,039 220,604
-------- --------
SHAREHOLDERS' EQUITY:
Common Stock (one cent par value, 50,000,000 shares authorized;
20,000,000 shares outstanding at March 31, 1998 and December 31, 1997) 200 200
Additional paid-in capital ........................................... 161,953 161,953
Retained earnings .................................................... 6,221 1,393
-------- --------
Total shareholders' equity ...................................... 168,374 163,546
-------- --------
TOTAL ........................................................... $507,261 $507,148
======== ========
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,
----------------------------
1998 1997
--------- ---------
NET SALES:
Third-party customers ............... $ 153,357 $ 165,704
Related parties ..................... 23,033 25,827
--------- ---------
176,390 191,531
COST OF GOODS SOLD ....................... 162,879 184,585
--------- ---------
GROSS PROFIT ............................. 13,511 6,946
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............. 4,457 4,302
--------- ---------
OPERATING INCOME ......................... 9,054 2,644
INTEREST EXPENSE - Net ................... (688) (741)
NET GAIN ON FORWARD CONTRACTS ............ 1,028 973
OTHER EXPENSE ............................ (288) (179)
--------- ---------
INCOME BEFORE INCOME TAXES ............... 9,106 2,697
INCOME TAX EXPENSE ....................... (3,278) (971)
--------- ---------
NET INCOME ............................... $ 5,828 $ 1,726
========= =========
BASIC AND DILUTED EARNINGS PER SHARE ..... $ 0.29 $ 0.09
========= =========
AVERAGE COMMON SHARES OUTSTANDING ........ 20,000 20,000
AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION .................. 20,259 20,252
CASH DIVIDENDS PAID PER
COMMON SHARE ........................ $ 0.05 $ 0.05
========= =========
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,
------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 5,828 $ 1,726
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................ 4,890 4,842
Pension and other postretirement benefits .................... (1,982) (2,155)
Worker's compensation ........................................ -- 540
Change in operating assets and liabilities:
Accounts receivable, trade - net ........................ 8,193 (31,268)
Due from affiliates ..................................... (4,002) (1,673)
Inventories ............................................. (396) 2,517
Prepaids and other assets ............................... 641 218
Accounts payable, trade ................................. (11,605) 12,572
Due to affiliates ....................................... (5,517) (3,861)
Accrued and other current liabilities ................... 12,760 1,976
Other - net ............................................. 183 118
-------- --------
Net cash provided by (used in) operating activities .......... 8,993 (14,448)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ........................... (8,370) (4,368)
Restricted cash deposits ............................................ (2) --
-------- --------
Net cash used in investing activities ........................ (8,372) (4,368)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings .......................................................... 64,432 68,144
Repayment of borrowings ............................................. (63,095) (46,850)
Dividends ........................................................... (1,000) (1,000)
-------- --------
Net cash provided by financing activities .................... 337 20,294
-------- --------
NET INCREASE IN CASH ....................................................... 958 1,478
CASH, BEGINNING OF PERIOD .................................................. 42 112
-------- --------
CASH, END OF PERIOD ........................................................ $ 1,000 $ 1,590
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1998 AND 1997
(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 Century Aluminum of West Virginia, Inc. ("Century
of West Virginia"), which operates a primary aluminum reduction facility and an
aluminum fabrication facility in Ravenswood, West Virginia. Century of West
Virginia, 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 ("MHAC") and a 26.67%
undivided interest in the property, plant and equipment comprising MHAC.
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 enter into various transactions
such as the purchase and sale of primary aluminum, scrap aluminum, alumina 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, 1997. 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 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. Certain reclassifications of prior-period information were
made to conform to the current presentation.
2. INVENTORIES
Inventories consist of the following:
March 31, 1998 December 31, 1997
-------------- -----------------
Raw Materials ................................ $ 70,485 $ 62,440
Work-in process .............................. 58,032 62,675
Finished goods ............................... 23,934 23,199
Operating and other supplies ................. 18,030 18,206
Unrealized losses on forward contracts ....... -- 3,565
-------- --------
$170,481 $170,085
======== ========
At March 31, 1998 and December 31, 1997, approximately 89% 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 $16,167 and $16,670 at March 31, 1998
and December 31, 1997, respectively.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1998 AND 1997
3. REVOLVING TERM LOAN
On January 30, 1996, Century of West Virginia and Berkeley entered into a
three-year bank revolving credit facility ("Facility") with BankAmerica Business
Credit, Inc. ("Bank of America"). The Facility provides for a revolving credit
facility that consists of loans and letters of credit up to $150,000 in the
aggregate. On May 11, 1998, the Company and Bank of America agreed to extend the
maturity date of the Facility from January 30, 1999 to January 30, 2001.
Subject to certain limitations, the borrower may select base rate or LIBOR
loans. Under the terms of the agreement, through January 31, 1999, the interest
rate is (i) for base rate loans, 0.5% in excess of the base rate, which is the
rate publicly announced from time to time by Bank of America as its reference
rate, or (ii) for LIBOR loans, 1.75% in excess of the one-, two-, three- or
six-month LIBOR as quoted from time to time by Bank of America. After January
31, 1999, the interest rate margins on base rate loans will range from 0.25% to
0.75% and on LIBOR loans from 1.5% to 2.0% based on the attainment of certain
financial ratios. The interest rate on the borrowings under the Facility was
8.28% on March 31, 1998. Borrowings of $60,287 as of March 31, 1998 are
collateralized by Century of West Virginia's and Berkeley's inventory and
receivables and are guaranteed by the Company.
4. 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"), Century
of West Virginia 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 completed initial sampling
and analysis and submitted its initial findings to the Environmental Protection
Agency ("EPA"). The EPA has requested that the Company perform additional field
work and testing. As a result, the Company anticipates that the RFI will not be
completed before late 1998. 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 Century of West Virginia, 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.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1998 AND 1997
Prior to the Company's acquisition of the Century of West Virginia
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
Century of West Virginia 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 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 of two areas of contamination in the soil and
groundwater at its previously-owned Vialco facility. At the first of these
areas, the Company has removed quantities of contaminated soils and has
transported and disposed of such soils in approved facilities. In addition, it
has begun a bioremediation program which it believes will fulfill the remaining
legal requirements with respect to such soils. In the second area, the Company
believes that a substantial amount of the contamination originated from an
adjacent refinery owned by Hess Oil Virgin Islands, Inc. ("HOVIC"). The Company
further believes that the vast majority of any contamination which did not
originate from HOVIC was caused by releases on the property which predated
Vialco's ownership and will not be the legal responsibility of Vialco. Pursuant
to the Acquisition Agreement by which Vialco sold the premises to St. Croix
Alumina, L.L.C., a subsidiary of Alcoa Alumina and Chemicals L.L.S. ("St.
Croix"), Vialco retained liability for environmental conditions existing at the
time of the sale only to the extent such conditions arose from operation of the
facility by Vialco. In addition, indemnification arises only if the conditions
require remediation or give rise to claims under the laws in effect at the time
of sale. Finally, St. Croix may not request indemnity from Vialco until St.
Croix has spent $300 on such environmental conditions and Vialco's indemnity is
capped at $18,000. Management of the Company does not believe that 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 $1,246 and $1,052 at
March 31, 1998 and December 31, 1997, respectively. 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.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1998 AND 1997
Because of the issues and uncertainties described above, and the Company's
inability to predict the requirements of 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 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.
Legal Contingencies
Century of West Virginia is a named defendant (along with other companies)
in approximately 4,095 civil actions brought by individuals seeking to recover
significant compensatory and/or punitive damages in connection with various
asbestos-related diseases. However, counsel for the plaintiffs have represented
that Century of West Virginia will be dismissed from 2,412 cases because the
plaintiffs in these cases had no contact with the Century of West Virginia
facility. All of the remaining 1,683 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 Century of West
Virginia 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. If the plaintiffs' work was performed
during the period when Kaiser owned the Century of West Virginia facility,
Kaiser has retained responsibility, pursuant to the terms of the Kaiser Purchase
Agreement, for defense and indemnity. If a plaintiff is shown to have worked at
the Century of West Virginia facility after the time Century of West Virginia
purchased the facility from Kaiser, Kaiser assumes the defense and liability,
subject to a reservation of rights against Century of West Virginia. The Company
believes it is unlikely that existing or potential plaintiffs were exposed to
asbestos at the Century of West Virginia facility after Century of West Virginia
purchased the facility from Kaiser, although nineteen plaintiffs have claimed
they were exposed during this period of time. Claims with nine of these
plaintiffs have been settled for nominal amounts or dismissed. Therefore, while
the impact of the asbestos proceedings is impossible to predict, the Company
believes that the ultimate resolution will not have a material adverse effect on
the Company's financial condition, results of operations or liquidity.
On November 17, 1996, a suit was brought in the United States District
Court for the Southern District of West Virginia against Century of West
Virginia and Kaiser purportedly on behalf of a proposed class believed to
consist of approximately 150 salaried employees and retirees of Century of West
Virginia. Plaintiffs claim that in 1989 defendants misrepresented the terms of
the salaried employee pension plan and/or benefits. Century of West Virginia has
denied liability and asked the court to deny class certification. On March 2,
1998, the court granted Century of West Virginia's motion and denied class
certification. While it is impossible to predict the outcome of this litigation,
Century of West Virginia will continue to defend the
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1998 AND 1997
matter vigorously, and the Company believes the outcome will not have a material
adverse effect on its financial condition, results of operations or liquidity.
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 that 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 ("PBGC") entered into an agreement (the "PBGC Agreement") which
provided that the Company make scheduled cash contributions to its pension plan
for hourly employees in 1996, 1997, 1998 and 1999. The Company made its
scheduled contributions in 1996 and 1997 and estimates that its scheduled
contributions in each of the remaining years will be $7,000 above the minimum
required contributions under Section 412 of the Internal Revenue Code. The
Company has granted the PBGC a first priority security interest in (i) the
property, plant and equipment at its Century of West Virginia facility and (ii)
all of the outstanding shares of Berkeley. In addition, Century must grant the
PBGC a first priority security interest in the first $50,000 of the property,
plant and equipment of any business or businesses that the Company acquires. The
Company, in its discretion, may, however, substitute Berkeley's undivided
interest in the Mt. Holly Facility in lieu of any such after-acquired property,
plant and equipment as well as the shares of Berkeley.
The Company has provided a $27,500 letter of credit to ensure its
performance under the Owners Agreement governing MHAC. The Company's obligation
to maintain the letter of credit will terminate at such time as the Company
achieves certain financial measurements.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1998 AND 1997
5. FIXED-PRICE COMMITMENTS AND FORWARD CONTRACTS
The Company had fixed price commitments to sell 404.2 million pounds and
353.3 million pounds of primary and scrap aluminum and aluminum sheet and plate
products at March 31, 1998 and 1997, respectively. In addition, the Company had
fixed price commitments to purchase 137.1 million pounds and 52.9 million pounds
of aluminum and alloy raw materials at March 31, 1998 and 1997, respectively.
The Company is in a net long metal position and, therefore, is exposed to
the influence of the commodity price of primary aluminum on the selling prices
for its products. In order to reduce this exposure, the Company has entered into
forward sales contracts for primary aluminum that will be settled in cash. At
March 31, 1998, the Company had forward sales contracts with the Glencore Group
for 100 million pounds scheduled for settlement at various dates in 1998 and
1999.
Effective January 1, 1998, all gains and losses from forward contract
activity are being reported separately in the statements of operations.
Unrealized gains or losses on the forward primary aluminum contracts, realized
gains or losses from the cash settlement of the forward primary aluminum
contracts, unrealized losses on purchase and sale commitments and reversals of
prior period unrealized losses are reported as either gains or losses on forward
contracts.
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 annual price increases of approximately 2.5%
through 2001. Pricing for the years 2002 through 2006 will be subject to
agreement between the parties.
6. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS
ENDED
MARCH 31,
-------------------
1998 1997
------ ----
Cash paid for:
Interest ...................................... $1,524 $909
Income taxes .................................. 100 376
Cash received from income tax refunds ......... 5,542 --
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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.
Selling by funds, consumer hesitation in anticipation of lower prices, and
economic uncertainty in Asian markets have influenced the cash price for primary
aluminum on the London Metals Exchange ("LME"). The average cash price per tonne
in the first quarter of 1998 was $1,463. This is a decline of $116 per tonne
from 1997's fourth quarter average of $1,579 and a decline of $133 per tonne
from 1997's first quarter average of $1,596.
Demand for flat rolled products in the United States in the first quarter
of 1998 was about level with demand in the first quarter of 1997, with the
transportation market showing strength and the building and construction market
benefiting from a comparatively mild winter.
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended March 31,1998
and 1997, the percentage relationship to net sales of certain items included in
the Company's condensed consolidated statements of operations.
PERCENTAGE OF NET SALES
-----------------------
1998 1997
----- -----
Net Sales ........................................ 100.0% 100.0%
Cost of goods sold ............................... 92.3 96.4
----- -----
Gross profit .................................. 7.7 3.6
Selling, general and administrative expenses ..... 2.5 2.2
----- -----
Operating income .............................. 5.2 1.4
Net (gain) on forward contracts .................. (0.6) (0.5)
Interest and other expense ....................... 0.6 0.5
----- -----
Income before income taxes ....................... 5.2 1.4
Income tax expense ............................... 1.9 0.5
===== =====
Net income ....................................... 3.3% 0.9%
===== =====
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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
----------- ------- -------- ------ -------- ------ --------
1998 114,618 $ 1.23 7,154 $ 0.31 44,779 $ 0.74
1997 138,916 $ 1.10 12,017 $ 0.32 47,666 $ 0.74
(1) Does not include forward sales contracts without physical delivery.
Net Sales. Net sales decreased $15.1 million (or 7.9%) in the first quarter of
1998 to $176.4 million from $191.5 million in the first quarter of 1997. The
Company shipped 121.8 million pounds of sheet and plate products in the first
quarter of 1998 versus 150.9 million pounds shipped in the first quarter of
1997. Most of the declines were in products that have been de-emphasized as a
result of the rolling operations restructuring that began in mid-1997.
Lower sheet and plate volume had the effect of decreasing revenue by $28.2
million. The volume decline was partially offset by $15.4 million in
improvements in the mix and price of sheet and plate products sold. Lower sales
of primary products reduced revenue by $2.3 million.
Cost of Goods Sold. Cost of goods sold decreased $21.7 million (or 11.8%) to
$162.9 million from $184.6 million in the first quarter of 1997. Most of this
decline in cost is attributable to the reduced volume, but the Company's cost of
goods sold also benefited approximately $3.8 million from the influence of lower
LME prices on its scrap aluminum inputs.
Net Gains on Forward Contracts. Lower LME prices in the first quarter of 1998
improved the market value of the Company's forward contracts. As a result, the
Company recorded a net gain on forward contracts of $1.0 million. In the first
quarter of 1997, the Company recorded a net gain of forward contracts of $1.0
million.
Net Income. As a result of improved price realizations for sheet and plate
products and lower costs for scrap aluminum inputs, net income for the first
quarter of 1998 increased $4.1 million over the net income for the first quarter
of 1997.
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LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1998 and 1997 was $178.6 and $180.6 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 three months ended March 31,
1998 and 1997 are summarized below (dollars in thousands):
1998 1997
------- --------
Net cash provided (used in) operating activities $ 8,993 $(14,448)
Net cash used in investing activities (8,372) (4,368)
Net cash provided by financing activities 337 20,294
------- --------
Increase in cash $ 958 $ 1,478
======= ========
In the first quarter of 1998, operating activities provided $9.0 million in
net cash to the Company. Net income and a reduction in accounts receivable
caused by the change in product/customer mix added to the positive cash flow,
partially offset by payments for metal purchases, maintenance expenditures, and
capital expenditures that were accrued at December 31, 1997. Operating
activities used $14.4 million during the first quarter of 1997, due primarily to
lower earnings and the growth in the Company's accounts receivable as a result
of increased sales to third parties.
Capital expenditures were $8.4 million in the first quarter of 1998
compared to $4.4 million in the first quarter of 1997. The Company used these
expenditures to purchase, modernize or upgrade production equipment, maintain
its facilities and comply with environmental regulations. A significant portion
of the expenditures in the first quarter of 1998 was to double the Company's
heat-treated plate production capacity.
Net cash provided by financing activities in the first quarter of 1998 was
$337,000 compared to $20.3 million in the first quarter of 1997. The Company
paid dividends in the first quarters of 1998 and 1997 of $1.0 million, or $0.05
per common share. The cash provided by operations was sufficient to fund the
Company's working capital needs and investing activities in the first quarter of
1998, so very little additional borrowing was required.
On January 30, 1996, Century of West Virginia and Berkeley entered into a
bank revolving credit facility ("Facility") with BankAmerica Business Credit,
Inc. ("Bank of America"). The Facility provides for a revolving credit facility
that consists of loans and letters of credit up to $150 million in the
aggregate. On May 11, 1998, the Company and Bank of America agreed to extend the
maturity date of the Facility from January 30, 1999 to January 30, 2001. See
Note 3 to the Consolidated Financial Statements.
Pursuant to an agreement with the Pension Benefit Guaranty Corporation
("PBGC Agreement"), the Company is required to make scheduled contributions to
its pension plan for hourly employees with respect to 1998 and 1999. The Company
estimates that each of these
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scheduled contributions will be approximately $7.0 million above the minimum
required contributions under Section 412 of the Internal Revenue Code.
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
Century produces primary aluminum products and manufactures aluminum sheet
and plate products and manages the risks of each accordingly. The Company is in
a net long metal position and, therefore, is exposed to the influence of the
commodity price of primary aluminum on the selling prices for its products. In
order to reduce this exposure, the Company has entered into forward sales
contracts for primary aluminum that will be settled in cash. At March 31, 1998,
the Company had forward sales contracts with the Glencore Group for 100 million
pounds of primary aluminum scheduled for settlement at various dates in 1998 and
1999. Based on market prices at March 31, 1998, these contracts could be settled
by paying $5.3 million. The actual settlement will be based on market prices on
the respective settlement dates.
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 $1.2 million at March
31, 1998 and $1.1 million at December 31, 1997, respectively. 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 West Virginia Department of Environmental Protection. 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 4 to
Consolidated Financial Statements.
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OTHER
The Company has reviewed its business systems to identify areas that could
be impacted by the "Year 2000" issue. The Year 2000 issue results from software
systems that only allow for the last two digits, rather than four digits, for
the applicable year. If left uncorrected, errors could occur in computations
that are dependent upon dates. As a result of its review, the Company has begun
a multi-phase project to significantly enhance its business systems.
The Company will replace its existing financial systems and adopt
electronic tracking for its production processes and inventory. Initial work
will be completed in mid 1999 at a cost of approximately $8.0 million, with a
substantial portion of this amount capitalized. In addition, work is currently
being done to the business systems that will not be replaced to make them Year
2000 compliant.
The Company is in the process of assessing Year 2000 compliance for its
operating systems and for key suppliers and service providers.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 - Statement Re: Calculation of Basic and Diluted 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, 1998.
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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 15, 1998 By: /s/ Craig A. Davis
------------------------------------------------
Craig A. Davis
Chairman/Chief Executive Officer
Date: May 15, 1998 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 Basic and Diluted Earnings per
Common Share 21
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