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 September 30, 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 (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 20,000,000 shares of common stock outstanding at
October 31, 1998.
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CENTURY ALUMINUM COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Part I - Financial Information
Item 1 - Financial Statements Page Number
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 ....................................... 1
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1998 and 1997 ........... 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 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)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash ...................................................................... $ 43 $ 42
Restricted cash equivalents ............................................... 5,811 5,805
Accounts receivable, trade - net .......................................... 86,693 111,146
Due from affiliates ....................................................... 9,502 8,362
Inventories ............................................................... 170,890 170,085
Prepaid and other assets .................................................. 8,962 8,082
-------- --------
Total current assets ................................................. 281,901 303,522
PROPERTY, PLANT AND EQUIPMENT - NET ............................................ 212,861 198,341
OTHER ASSETS ................................................................... 10,203 5,285
-------- --------
TOTAL ................................................................ $504,965 $507,148
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade ................................................... $ 38,847 $ 51,411
Due to affiliates ......................................................... 4,110 10,560
Accrued and other current liabilities ..................................... 34,278 22,364
Accrued employee benefits costs - current portion ......................... 30,208 38,663
-------- --------
Total current liabilities ............................................ 107,443 122,998
-------- --------
REVOLVING TERM LOAN ............................................................ 65,737 58,950
ACCRUED PENSION BENEFITS COSTS - Less current portion .......................... 9,362 12,139
ACCRUED POSTRETIREMENT BENEFITS COSTS - Less current portion ................... 120,805 118,532
DUE TO AFFILIATES .............................................................. -- 6,673
OTHER LIABILITIES .............................................................. 25,192 24,310
-------- --------
Total noncurrent liabilities ......................................... 221,096 220,604
-------- --------
CONTINGENCIES AND COMMITMENTS (Note 4)
SHAREHOLDERS' EQUITY:
Common Stock (one cent par value, 50,000,000 shares authorized;
20,000,000 shares outstanding at September 30, 1998 and
December 31, 1997)........................................................ 200 200
Additional paid-in capital ................................................ 161,953 161,953
Retained earnings ......................................................... 14,273 1,393
-------- --------
Total shareholders' equity ........................................... 176,426 163,546
-------- --------
TOTAL ................................................................ $504,965 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
NET SALES:
Third-party customers ......... $ 143,558 $ 141,237 $ 435,985 $ 471,965
Related parties ............... 19,169 28,472 59,894 80,752
--------- --------- --------- ---------
162,727 169,709 495,879 552,717
COST OF GOODS SOLD ................. 156,204 169,864 464,018 534,345
--------- --------- --------- ---------
GROSS PROFIT (LOSS) ................ 6,523 (155) 31,861 18,372
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ....... 4,376 3,748 13,171 13,655
--------- --------- --------- ---------
OPERATING INCOME (LOSS) ............ 2,147 (3,903) 18,690 4,717
INTEREST EXPENSE - Net ............. (437) (569) (1,579) (2,263)
NET GAIN (LOSS) ON FORWARD
CONTRACTS...................... 1,068 (1,473) 7,592 (966)
OTHER INCOME ....................... 256 888 109 552
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES .. 3,034 (5,057) 24,812 2,040
INCOME TAX (EXPENSE) BENEFIT ....... (1,092) 1,854 (8,932) (734)
--------- --------- --------- ---------
NET INCOME (LOSS) .................. $ 1,942 $ (3,203) $ 15,880 $ 1,306
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Basic ......................... $ 0.10 $ (0.16) $ 0.79 $ 0.07
========= ========= ========= =========
Diluted ....................... $ 0.10 $ (0.16) $ 0.78 $ 0.06
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic ........................... 20,000 20,000 20,000 20,000
========= ========= ========= =========
Diluted ......................... 20,227 20,244 20,254 20,243
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE ......... $ 0.05 $ 0.05 $ 0.15 $ 0.15
========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 15,880 $ 1,306
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ...................... 14,668 13,933
Deferred income taxes .............................. (3,767) (6,363)
Pension and other postretirement benefits .......... (8,959) (3,471)
Change in operating assets and liabilities:
Accounts receivable, trade - net .............. 24,453 (13,129)
Due from affiliates ........................... (1,140) (4,191)
Inventories ................................... (805) 5,961
Prepaids and other assets ..................... (936) (4,992)
Accounts payable, trade ....................... (12,564) 3,424
Due to affiliates ............................. (13,123) 7,809
Accrued and other current liabilities ......... 11,914 (2,565)
Other - net ................................... 670 820
--------- ---------
Net cash provided by (used in) operating
activities ........................................ 26,291 (1,458)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ................. (30,071) (18,685)
Restricted cash deposits .................................. (6) --
--------- ---------
Net cash used in investing activities .............. (30,077) (18,685)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ................................................ 166,533 179,671
Repayment of borrowings ................................... (159,746) (154,622)
Dividends ................................................. (3,000) (3,000)
--------- ---------
Net cash provided by financing activities .......... 3,787 22,049
--------- ---------
NET INCREASE IN CASH ............................................. 1 1,906
CASH, BEGINNING OF PERIOD ........................................ 42 112
--------- ---------
CASH, END OF PERIOD .............................................. $ 43 $ 2,018
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
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 nine 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:
September 30, December 31,
1998 1997
-------- --------
Raw Materials .................................. $ 75,142 $ 62,440
Work-in-process ................................ 54,988 62,675
Finished goods ................................. 23,316 23,199
Operating and other supplies ................... 17,444 18,206
Unrealized losses on forward contracts ......... -- 3,565
-------- --------
$170,890 $170,085
======== ========
At September 30, 1998 and December 31, 1997, approximately 90% and 89%,
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 $19,102
and $16,670 at September 30, 1998 and December 31, 1997, respectively.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
3. BANK REVOLVING CREDIT FACILITY
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 borrowings and letters of credit up to $150,000 in the
aggregate. On May 11, 1998, the Company and Bank of America agreed to amend and
extend the Facility to January 30, 2001.
Subject to certain limitations, the Company 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
7.125% on September 30, 1998. Borrowings of $65,737 as of September 30, 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 SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
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 $1,374 and $1,052 at
September 30, 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 SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
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 4,489 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 2,077 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.
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.
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
Commitments
The Company and a public utility have a fixed price power supply agreement,
covering the period from July 1, 1996 through July 31, 2003.
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.
5. FIXED-PRICE COMMITMENTS AND FORWARD CONTRACTS
The Company had fixed price commitments to sell 213.1 million pounds and
298.3 million pounds of primary and scrap aluminum and aluminum sheet and plate
products at September 30, 1998 and 1997, respectively. In addition, the Company
had fixed price commitments to purchase 209.7 million pounds and 79.0 million
pounds of aluminum and alloy raw materials at September 30, 1998 and 1997,
respectively.
The Company is in a net long metal position. The Company is exposed to the
influence of the commodity price of primary aluminum. In order to manage this
exposure, the Company has entered into forward sales and purchase contracts for
primary aluminum that will be settled in cash. At September 30, 1998, the
Company had forward sales and purchase contracts for 87.5 and 19.4 million
pounds, respectively. The contracts are scheduled for settlement at various
dates in 1998 and 1999.
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 fixed
price 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
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CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
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
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
------ ------
Cash paid for:
Interest ...................................... $4,323 $3,303
Income taxes .................................. 8,499 9,228
Cash received from income tax refunds .............. 5,560 --
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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 third quarter of 1998 was $1,321. This is a decline of $42 per tonne from
1998's second quarter average of $1,363 and a decline of $317 per tonne from
1997's third quarter average of $1,638.
Demand for flat rolled products in the United States in the third quarter
of 1998 was about level with demand in the third quarter of 1997, with the
transportation market and the building and construction market showing continued
strength.
The following discussion contains forward-looking statements that involve
risk and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein.
RESULTS OF OPERATIONS
The following table sets forth, for the three and nine months ended
September 30, 1998 and 1997, the percentage relationship to net sales of certain
items included in the Company's condensed consolidated statements of operations.
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PERCENTAGE OF NET SALES
--------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
Net Sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......................... 96.0 100.1 93.6 96.7
----- ----- ----- -----
Gross profit (loss) ..................... 4.0 (0.1) 6.4 3.3
Selling, general and administrative
expenses.................................. 2.7 2.2 2.6 2.5
----- ----- ----- -----
Operating income (loss) ................. 1.3 (2.3) 3.8 0.8
Net gain (loss) on forward contracts ...... 0.7 (0.9) 1.5 (0.2)
Interest and other (expense) income ........ (0.1) 0.2 (0.3) (0.3)
----- ----- ----- -----
Income (loss) before income taxes .......... 1.9 (3.0) 5.0 0.3
Income tax (expense) benefit ............... (0.7) 1.1 (1.8) (0.1)
===== ===== ===== =====
Net income (loss) .......................... 1.2% (1.9)% 3.2% 0.2%
===== ===== ===== =====
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)
---------------- ---------------- ----------------
POUNDS $/POUND POUNDS $/POUND POUNDS $/POUND
------- ----- ------- ----- ------- -----
1st Qtr 1998 114,618 $1.23 7,154 $0.31 44,779 $0.74
2nd Qtr 1998 103,355 $1.23 9,592 $0.26 38,022 $0.71
3rd Qtr 1998 109,205 $1.20 6,718 $0.29 43,146 $0.69
------- ----- ------- ----- ------- -----
Total 327,179 $1.22 23,464 $0.28 125,947 $0.71
======= ===== ======= ===== ======= =====
1st Qtr 1997 138,916 $1.10 12,017 $0.32 47,666 $0.74
2nd Qtr 1997 134,411 $1.14 13,130 $0.29 46,059 $0.76
3rd Qtr 1997 112,232 $1.17 9,217 $0.32 46,780 $0.76
------- ----- ------- ----- ------- -----
Total 385,559 $1.13 34,364 $0.31 140,505 $0.75
======= ===== ======= ===== ======= =====
(1) Does not include forward sales contracts without physical delivery.
Net Sales. Net sales during the three and nine months ended September 30, 1998
were $162.7 million and $495.9 million, a decrease of $7.0 million (or 4.1%) and
$56.8 million (or 10.3%) from comparable 1997 periods. The Company shipped 115.9
million and 350.6 million pounds of sheet and plate products in the three and
nine months ended September 30, 1998 versus 121.4 million and 419.9 million
pounds shipped in the comparable 1997 periods. Most of the declines were in
products that have been de-emphasized as a result of the rolling operations
restructuring completed in 1997.
Lower sheet and plate volume had the effect of decreasing revenue by $4.3
million and $68.9 million during the comparable three and nine months ended
September 30, 1998 and 1997. The volume decline was partially offset by $3.1
million and $28.1 million improvements in the mix and price of sheet and plate
products sold during the comparable 1998 and 1997 periods. Lower
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sales of primary products reduced revenue by $5.8 million and $16.0 million
during the comparable 1998 and 1997 periods.
Cost of Goods Sold. Cost of goods sold during the comparable three and nine
months ended September 30, 1998 and 1997 decreased $13.7 million (or 8.0%) and
$70.3 million (or 13.2%). The declines in costs are attributable to the reduced
volumes and the benefits of lower LME prices on its scrap aluminum inputs. The
third quarter of 1997 includes a charge of $3.0 million for restructuring of
operations at the Company's Century of West Virginia facility.
Net Gains on Forward Contracts. Lower LME prices during the first nine months of
1998 improved the market value of the Company's forward contracts. As a result,
the Company recorded net gains on forward contracts of $1.1 million and $7.6
million during the three and nine months ended September 30, 1998. During
comparable periods of 1997, the Company recorded a net loss on forward contracts
of $1.5 million and $1.0 million.
Net Income. As a result of improved price realizations for sheet and plate
products, lower costs for scrap aluminum inputs and forward contract gains, net
income for the three and nine months ended September 30, 1998 and 1997 increased
$5.1 million and $14.6 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1998 and 1997 was $174.5 and $184.4
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 nine months ended September
30, 1998 and 1997 are summarized below (dollars in thousands):
1998 1997
-------- --------
Net cash provided by (used in) operating activities $ 26,291 $ (1,458)
Net cash used in investing activities (30,077) (18,685)
Net cash provided by financing activities 3,787 22,049
-------- --------
Increase in cash $ 1 $ 1,096
======== ========
In the nine months ended September 30, 1998, operating activities provided
$26.3 million in net cash to the Company. Net income and a reduction in accounts
receivable, caused by changes in product/customer mix and trade accounts
receivable terms, added to the positive cash flow. This was partially offset by
payments for metal purchases, maintenance expenditures, and capital expenditures
that were accrued at December 31, 1997. Operating activities used $1.5 million
during the nine months ended September 30, 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 $30.1 million in the first nine months of 1998
compared to $18.7 million in the first nine months of 1997. The Company used
these expenditures to purchase, modernize or upgrade production equipment,
maintain its facilities and comply with
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environmental regulations. A significant portion of the expenditures in the
first nine months of 1998 were for the expansion of the Company's heat-treated
plate production capacity.
Net cash provided by financing activities in the first nine months of 1998
was $3.8 compared to net cash provided of $22.0 million in the first nine months
of 1997. The Company paid dividends in the first nine months of 1998 and 1997 of
$3.0 million, or $0.15 per common share. The cash provided by operations funded
the Company's working capital needs and a significant portion of its investing
activities during the first nine months of 1998.
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 borrowings and letters of credit up to $150 million in the
aggregate. On May 11, 1998, the Company and Bank of America agreed to amend and
extend the Facility 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 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. The Company is exposed to the influence of the
commodity price of primary aluminum. In order to manage this exposure, the
Company has entered into forward sales and purchase contracts for primary
aluminum that will be settled in cash. At September 30, 1998, the Company had
forward sales and purchase contracts for 87.5 and 19.4 million pounds,
respectively. The contracts are scheduled for settlement at various dates in
1998 and 1999. Based on market prices at September 30, 1998, these contracts
could be settled by the Company receiving less than $1.0 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 $1.4 million at
September 30, 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
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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.
YEAR 2000 READINESS DISCLOSURE
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.
The Company is addressing the Year 2000 impact by establishing processes for
evaluating and managing the risks associated with this issue. The Company is
currently replacing or upgrading its computer systems to make them Year 2000
compliant, and it expects to have remediation completed by the mid 1999 for all
significant computer systems, with testing to occur during 1998 and 1999.
Microchips embedded in systems such as manufacturing equipment are also being
replaced or upgraded, if necessary.
The total cost of this effort is estimated to be $8.0 million, with a
substantial portion of this amount capitalized. While the Company believes all
necessary work will be completed in a timely fashion, there can be no guarantee
that all systems will be compliant by the Year 2000 within the estimated cost or
that the systems of other companies on which the Company relies will be
converted in a timely fashion. The Company is communicating with outside vendors
and customers to determine their state of readiness with regard to Year 2000
issues, and based on the assessments to date, the Company has no indication that
any third party could cause a material impact on the Company. However, the risk
remains that outside vendors and customers may not have accurately assessed
their state of readiness, and therefore may have a material adverse effect on
the Company's result of operations. The Company is developing a contingency plan
which will allow the operations of the Company to continue if significant
systems are not Year 2000 compliant by December 31, 1999.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133,
modifies the accounting for derivative and hedging activities and is effective
for fiscal years beginning after June 1999. The Company is currently evaluating
the effect that implementation of SFAS No. 133 will have on its results of
operations and financial position.
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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 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 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: November 12, 1998 By: /s/ Craig A. Davis
--------------------- ------------------------------------
Craig A. Davis
Chairman/Chief Executive Officer
Date: November 12, 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
- ------ ----------- ------
27.0 Financial Data Schedule 18 - 19
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