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 31,1999.
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 20,202,205 shares of common stock outstanding at April
30, 1999.
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CENTURY ALUMINUM COMPANY
Index to Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1999
Part I - Financial Information
Item 1 - Financial Statements Page Number
Consolidated Balance Sheets as
of March 31, 1999
and December 31, 1998......................................... 1
Consolidated Statements of
Operations for the three months
ended March 31, 1999 and 1998................................. 2
Consolidated Statements of Cash
Flows for the three months
ended March 31, 1999 and 1998................................. 3
Notes to the Consolidated Financial Statements................ 4-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 11-18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk. 19-20
Part II - Other Information
Item 1 - Legal Proceedings.......................................... 21
Item 6 - Exhibits and Reports on Form 8-K........................... 21
Signatures.......................................................... 22
Exhibit Index....................................................... 23-24
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CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
1999 1998
-------- ------------
ASSETS
CURRENT ASSETS:
Cash ...................................................................... $ 8 $ 12
Restricted cash equivalents ............................................... 5,815 5,814
Accounts receivable, trade - net .......................................... 85,464 74,948
Due from affiliates ....................................................... 9,186 16,036
Inventories ............................................................... 198,879 197,705
Prepaid and other assets .................................................. 8,031 9,006
-------- ------------
Total current assets ................................................. 307,383 303,521
PROPERTY, PLANT AND EQUIPMENT - NET ............................................ 229,937 227,320
OTHER ASSETS ................................................................... 17,005 14,789
-------- ------------
TOTAL ................................................................ $554,325 $ 545,630
======== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade ................................................... $ 38,192 $ 37,450
Due to affiliates ......................................................... 7,363 15,146
Accrued and other current liabilities ..................................... 33,365 36,733
Accrued employee benefits costs - current portion ......................... 19,628 26,036
-------- ------------
Total current liabilities ............................................ 98,548 115,365
-------- ------------
REVOLVING TERM LOAN ............................................................ 117,237 89,389
ACCRUED PENSION BENEFITS COSTS - Less current portion .......................... 10,067 9,792
ACCRUED POSTRETIREMENT BENEFITS COSTS - Less current portion ................... 130,453 129,318
OTHER LIABILITIES .............................................................. 21,943 24,283
-------- ------------
Total noncurrent liabilities ......................................... 279,700 252,782
-------- ------------
SHAREHOLDERS' EQUITY:
Common Stock (one cent par value, 50,000,000 shares authorized; 20,202,205
shares outstanding at March 31, 1999 and 20,000,000 at December 31, 1998) 202 200
Additional paid-in capital ................................................ 164,406 161,953
Retained earnings ......................................................... 11,469 15,330
-------- ------------
Total shareholders' equity ........................................... 176,077 177,483
-------- ------------
TOTAL ................................................................ $554,325 $ 545,630
======== ============
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,
---------------------------
1999 1998
--------- ---------
NET SALES:
Third-party customers ..................... $ 148,730 $ 153,357
Related parties ........................... 14,629 23,033
--------- ---------
163,359 176,390
COST OF GOODS SOLD ........................... 161,800 162,879
--------- ---------
GROSS PROFIT ................................. 1,559 13,511
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................... 4,272 4,457
--------- ---------
OPERATING INCOME (LOSS) ...................... (2,713) 9,054
INTEREST EXPENSE - Net ....................... (1,530) (688)
NET GAIN (LOSS) ON FORWARD CONTRACTS ......... (50) 1,028
OTHER EXPENSE ................................ (18) (288)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............ (4,311) 9,106
INCOME TAX (EXPENSE) BENEFIT ................. 1,552 (3,278)
--------- ---------
NET INCOME (LOSS) ............................ $ (2,759) $ 5,828
========= =========
EARNINGS (LOSS) PER COMMON SHARE
Basic ..................................... $ (0.14) $ 0.29
========= =========
Diluted ................................... $ (0.14) $ 0.29
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic ..................................... 20,202 20,000
========= =========
Diluted ................................... 20,312 20,259
========= =========
DIVIDENDS 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,
---------------------
1999 1998
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (2,759) $ 5,828
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................... 5,779 4,890
Deferred income taxes ................................... (125) --
Pension and other postretirement benefits ............... (4,909) (1,982)
Workers' compensation ................................... (5) --
Change in operating assets and liabilities:
Accounts receivable, trade - net ................... (10,516) 8,193
Due from affiliates ................................ 6,850 (4,002)
Inventories ........................................ (697) (396)
Prepaids and other assets .......................... 742 641
Accounts payable, trade ............................ 742 (11,605)
Due to affiliates .................................. (7,783) (5,517)
Accrued and other current liabilities .............. (3,456) 12,760
Other - net ........................................ (1,537) 183
--------- --------
Net cash provided by (used in) operating activities ..... (17,674) 8,993
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ........................ (9,371) (8,370)
Purchase price adjustment related to business acquisitions ....... 296 --
Restricted cash deposits ......................................... (1) (2)
--------- --------
Net cash used in investing activities ................... (9,076) (8,372)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ....................................................... 174,981 64,432
Repayment of borrowings .......................................... (147,133) (63,095)
Dividends ........................................................ (1,102) (1,000)
--------- --------
Net cash provided by financing activities ............... 26,746 337
--------- --------
NET INCREASE (DECREASE) IN CASH ...................................... (4) 958
CASH, BEGINNING OF PERIOD ............................................ 12 42
--------- --------
CASH, END OF PERIOD .................................................. $ 8 $ 1,000
========= ========
See notes to consolidated financial statements
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CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Periods Ended March 31, 1999 and 1998
(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 near 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. Century
Aluminum Company's other subsidiary is Century Cast Plate, Inc. ("Century Cast
Plate") which operates a cast aluminum plate business located in Vernon,
California. This business operates as a wholly-owned subsidiary of Century.
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 39.2% 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, 1998. 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 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
2. Inventories
Inventories consist of the following:
March 31, December 31,
1999 1998
-------- ------------
Raw materials ................................ $ 74,560 $ 81,474
Work-in-process .............................. 77,368 71,045
Finished goods ............................... 28,292 25,858
Operating and other supplies ................. 18,659 19,328
-------- --------
$198,879 $197,705
======== ========
At March 31, 1999 and December 31, 1998, approximately 88% and 90%,
respectively, of inventories were valued at the lower of last-in, first-out
("LIFO") cost or market. The excess of
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CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
the LIFO cost (or market, if lower) of inventory over the first-in, first-out
("FIFO") cost was approximately $22,813 and $20,150 at March 31, 1999 and
December 31, 1998, respectively.
3. Bank Revolving Credit Facility
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 provided for a revolving credit facility
that consisted of borrowings and letters of credit up to $150 million in the
aggregate. On March 31, 1999, the Company refinanced the borrowings outstanding
and terminated the Facility.
On February 24, 1999, the Company entered into an agreement with
BankBoston, N.A. and the CIT Group/Business Credit, Inc. ("Bank Agreement") to
provide up to $180,000 of credit facilities to refinance indebtedness, to
finance certain capital expenditures and for other general corporate purposes.
The borrowing base for purposes of determining availability is based upon
certain eligible inventory and receivables. The credit facilities consist of a
revolving loan of up to $160,000 and a term loan of $20,000. On March 31, 1999,
the Company closed on the revolving loan. The revolving loan is secured by
Century of West Virginia's, Berkeley's and Century Cast Plate's inventory and
receivables. To the extent the Company draws on the term loan, the credit
facilities will be secured by a first priority security interest in all of
Century of West Virginia's, Berkeley's and Century Cast Plate's inventory,
receivables, property, plant and equipment and stock of certain subsidiaries.
The credit facilities have a variable interest rate and mature five years from
the closing date. Subject to certain limitations, the borrowers may select base
rate or LIBOR loans. The interest rate margins that the Company will pay are
dependent upon the Company's attainment of a defined coverage ratio. The
interest rate at March 31, 1999 was 8%. The Company expects to complete the
$20,000 term loan financing in the second quarter of 1999.
4. Equity
Changes in the Company's equity for the first three months of 1999 are as
follows:
Additional Total
Common Paid-In Retained Shareholders'
Stock Capital Earnings Equity
------- ---------- -------- -------------
Balance, December 31, 1998 ........ $ 200 $ 161,953 $15,330 $177,483
Net loss .......................... (2,759) (2,759)
Dividends ......................... (1,102) (1,102)
Performance share unit conversion
to common stock ................ 2 2,453 2,455
------- --------- ------- --------
Balance, March 31, 1999 ........... $ 202 $ 164,406 $11,469 $176,077
======= ========= ======= ========
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CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
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 Environmental Protection Agency ("EPA") 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. The Company also 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 anticipates that the RFI will not be completed
before mid 1999. 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.
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, 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 Virgin Islands Alumina Company ("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 that it believes
will fulfill the remaining legal requirements with respect to such soils. In the
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CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
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 that did not originate from HOVIC was caused by releases on the
property that 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 $1,574 and $1,374 at
March 31, 1999 and December 31, 1998, 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.
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, 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 2,029 civil actions brought by individuals seeking to recover
compensatory and/or punitive damages in connection with alleged asbestos-related
diseases. All 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
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CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
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. There are currently 10 actions pending by individuals who claim
exposure after Century of West Virginia's assumption of the premises. Those
matters have been settled for nominal amounts, pending completion of settlement
papers. 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.
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 for 1996, 1997 and 1998 and estimates that its scheduled
contribution in the remaining year will be $7,000 above the minimum required
contribution 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,
at 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.
Other
Century of West Virginia's hourly employees, which comprise 72% of the
Company's workforce, are represented by the United Steelworkers of America and
are currently working under a four and one-half year labor agreement which
expires May 31, 1999. Although the Company anticipates a new labor agreement
will be negotiated by May 31, 1999, failure to reach
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CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
a labor agreement could have a material adverse affect on the Company's
financial condition, results of operations or liquidity.
6. Fixed-Price Commitments and Forward Contracts
The Company produces primary aluminum products and manufactures aluminum
sheet and plate products and manages the risks of each accordingly through the
issuance of fixed-price commitments and financial instruments.
The Company had fixed price commitments to sell 516.1 million pounds and
543.9 million pounds of primary, scrap aluminum and sheet and plate products at
March 31, 1999 and December 31, 1998, respectively. Of the total fixed-price
sales commitments, 25.8 million pounds and 34.6 million pounds at March 31, 1999
and December 31, 1998, respectively, were with the Glencore Group. In addition,
the Company had fixed price commitments to purchase 182.2 million pounds and
190.8 million pounds of aluminum and alloy raw materials at March 31, 1999 and
December 31, 1998, respectively. Of the total fixed-price purchase commitments,
153.1 million pounds and 162.1 million pounds at March 31, 1999 and December 31,
1998, respectively, were with the Glencore Group.
In order to manage the Company's exposure to fluctuating commodity prices,
the Company enters into forward sales and purchase contracts for primary
aluminum that will be settled in cash. At March 31, 1999 and December 31, 1998,
the Company had forward sales contracts, primarily with the Glencore Group, for
65.6 million pounds. At March 31, 1999 and December 31, 1998, the Company had
forward purchase contracts, primarily with the Glencore Group, for 16.3 million
and 18.0 million pounds, respectively. Forward purchase and sales contracts at
March 31, 1999 are scheduled for settlement at various dates in 1999. Based on
market prices at March 31, 1999, these contracts could be settled by the Company
receiving approximately $3,213. The actual settlement will be based on market
prices on the respective settlement dates.
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 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
Three Months Ended
March 31,
------------------
1999 1998
------ ------
Cash paid for:
Interest ................................ $2,241 $1,524
Income taxes ............................ 505 100
Cash received from income tax refunds ........ 356 5,542
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CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
Business Segments
The Company's two reportable business segments are primary aluminum and
sheet and plate products. The primary aluminum segment produces rolling ingot,
t-ingot, extrusion billet and foundry ingot for internal use and sales to
customers. The sheet and plate segment produces a wide range of products such
as: brazing sheet for sale to automobile manufacturers, heat treated and
non-heat treated plate for sale to aerospace and defense manufacturers, heavy
gauge, wide- leveled coil for sale to heavy truck, truck trailer, marine and
rail car manufacturers and sheet and coil for sale to building products
manufacturers.
The accounting policies of the segments are the same as those described in
the Company's December 31, 1998, Form 10-K, except that intersegment revenues
are accounted for based upon a market-based standard established by the Company.
The Company evaluates segment performance based upon gross profit.
Century's business segments are strategic business units that manufacture
and sell different products. The two business segments are managed separately
and require different technology, manufacturing processes and sales and
marketing strategies. Information regarding the Company's business segments for
the three months ended March 31, 1999 and 1998 is summarized below:
Corporate,
Sheet and Unallocated
1999 Primary Plate & Eliminations Total
---- ------- ----- -------------- -----
Net Sales
Third-party customers $ 13,343 $135,387 $ -- $148,730
Related party customers 14,629 -- -- 14,629
Intersegment 48,832 -- (48,832) --
Segment gross profit (loss) (4,157) 5,716 -- 1,559
Corporate,
Sheet and Unallocated
1998 Primary Plate & Eliminations Total
---- ------- ----- -------------- -----
Net Sales
Third-party customers $ 10,004 $143,353 $ -- $153,357
Related party customers 23,033 -- -- 23,033
Intersegment 59,430 -- (59,430) --
Segment gross profit (loss) 10,803 2,750 (42) 13,511
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FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT UNDER
THE PRIVATE SECURITIES REFORM ACT OF 1995.
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words such as "expects,"
"anticipates," "forecasts," "intends," "plans," "believes," "projects," and
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements include, but are not
limited to, statements regarding new business and customers, contingencies, Year
2000 readiness, environmental matters and liquidity under "Part I, Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Part I, Item 3 - Quantitative and Qualitative Disclosures About
Market Risk" and "Part II, Item 1 Legal Proceedings." These statements are not
guarantees of future performance and involve risks and uncertainties and are
based on a number of assumptions that could ultimately prove to be wrong. Actual
results and outcomes may vary materially from what is expressed or forecast in
such statements. Among the factors that could cause actual results to differ
materially are: general economic and business conditions; changes in demand for
the Company's products and services or the products of the Company's customers;
fixed asset utilization; competition; the risk of technological changes and the
Company's competitors developing more competitive technologies; the Company's
dependence on certain important customers; the availability and terms of needed
capital; risks of loss from environmental liabilities; and other risks detailed
in this report. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The following information should be read in conjunction with the Company's 1998
Form 10-K along with the consolidated financial statements and related footnotes
included within the Form 10-K.
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
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are alumina, aluminum scrap, coal tar, pitch, petroleum coke, aluminum fluoride
and electricity.
The cash price for primary aluminum on the London Metal Exchange ("LME")
continued its decline in the first quarter of 1999, falling to a five year low
on March 5. The average cash price per tonne in the first quarter of 1999 was
$1,195. This is a decline of $88 per tonne from 1998's fourth quarter average of
$1,283 per tonne and a decline of $268 per tonne from 1998's first quarter
average of $1,463 per tonne.
Demand for flat rolled products in the first quarter of 1999 has been firm in
both the building construction and transportation areas, but demand and orders
have been declining for aerospace sheet and plate.
Results of Operations
Century's financial highlights include:
Three months ended March 31,
---------------------------------------
1999 1998
------------- ----------
(in thousands, except per share data)
Net sales
Third-party customers $ 148,730 $ 153,357
Related-party customers 14,629 23,033
Net income (loss) $ (2,759) $ 5,828
Earnings (loss) per share - basic $ (0.14) $ 0.29
In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." Century's operations consist of two
segments: primary aluminum and sheet and plate aluminum products. The Company
evaluates segment performance based upon gross profit. The Company uses a
market-based transfer price to record intersegment sales.
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Primary Aluminum
Three months ended March 31,
-----------------------------------------
1999 1998
----------- -----------
(in thousands)
Net sales
Third-party customers $ 13,343 $ 10,004
Related-party customers 14,629 23,033
Intersegment 48,832 59,430
Gross profit (loss) $ (4,157) $ 10,803
Third-party shipments 19,145 12,654
Related-party shipments 25,852 32,125
Intersegment shipments 77,759 78,805
The primary aluminum segment produces t-ingot, rolling ingot, extrusion billet
and foundry ingot for internal use and sales to customers. A significant portion
of this segment's sales is to a related party: Glencore.
Net sales for the segment decreased $15.7 million (or 16.9%) in the first
quarter of 1999 to $76.8 million from $92.5 million in the first quarter of
1998. Shipments decreased 828 thousand pounds (or 0.7%) in the first quarter of
1999 to 122.8 million pounds from 123.6 million pounds in the first quarter of
1998. Substantially all of the reduction in revenue is attributable to the
decline in the LME price for primary aluminum and its influence upon the
realized prices for Century's primary aluminum.
The decreased revenue experienced in the first quarter of 1999 was only
partially offset by cost improvements at the Company's primary operations.
Therefore, gross profit declined by $15.0 million.
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Sheet and Plate Aluminum Products
Three months ended March 31,
-----------------------------------------
1999 1998
----------- -----------
(in thousands)
Net sales
Direct customers $ 134,299 $ 141,161
Toll customers 1,088 2,192
Gross profit $ 5,716 $ 2,750
Direct shipments 113,751 114,618
Toll shipments 4,405 7,154
The sheet and plate aluminum segment produces a wide range of products such as:
brazing sheet for sale to automobile manufacturers: heat treated and non-heat
treated plate for sale to aerospace and defense manufacturers; heavy gauge,
wide-leveled coil for sale to heavy truck, truck trailer, marine and rail car
manufacturers and sheet and coil for sale to building products manufacturers.
Net sales for the segment decreased $8.0 million (or 5.6%) in the first quarter
of 1999 to $135.4 million from $143.4 million in the first quarter of 1998.
Shipments decreased 3.6 million pounds (or 3.0%) in the first quarter of 1999 to
118.2 million pounds from 121.8 million pounds in the first quarter of 1998.
This lower volume caused net sales to drop $5.7 million. The average realized
price in the first quarter of 1999 was $0.05 per pound lower than the average
realized price in the first quarter of 1998. Most of the reduction in the
average realized price is attributable to the decline in the LME price for
primary aluminum and its influence upon the realized prices for Century's sheet
and plate products.
Gross profit for the segment increased by $3.0 million in the first quarter of
1999 to $5.7 million from $2.7 million in the first quarter of 1998. The
increase in gross profit was the result of the shift in product mix from lower
margin to higher margin products and the positive impact of lower LME prices on
aluminum raw material costs.
Interest Expense. Interest expense increased $842 thousand in the first quarter
of 1999 (or 122.4%) over interest expense in the first quarter of 1998. Interest
expense increased due to an increase in the amount of debt outstanding in the
first quarter of 1999.
Net Gains on Forward Contracts. The Company recorded a loss of $50 thousand from
its forward contract activity in the first quarter of 1999 versus a gain of $1.0
million in the first quarter of 1998. Rising LME prices in the first quarter of
1999 reduced the market value of the Company's forward contracts relative to
their December 31, 1998 value, resulting in a loss. Declining LME prices in the
first quarter of 1998 increased the
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market value of the Company's forward contracts relative to their December 31,
1997 market value, resulting in a gain.
Net Income. The Company lost $2.8 million in the first quarter of 1999 versus
net income of $5.8 million in the first quarter of 1998. The lower LME price for
primary aluminum and its influence upon realized prices were the principal
reason for the reduction in its earnings.
Liquidity and Capital Resources
Working capital amounted to $208.8 million and $188.2 million at March 31,
1999 and December 31, 1998, respectively. The Company's liquidity requirements
arise primarily from working capital needs, capital investments and debt
service.
The Company's statements of cash flows for the three months ended March
31, 1999 and 1998 are summarized below (dollars in thousands):
1999 1998
--------- ---------
Net cash from (used in) operating activities......... $ (17,674) $ 8,993
Net cash used in investing activities................ (9,076) (8,372)
Net cash from financing activities................... 26,746 337
--------- ---------
Increase (decrease) in cash.......................... $ (4) $ 958
========= =========
Operating activities used $17.7 million in net cash during the first
quarter of 1999. Contributing to the reduction in cash was the Company's net
loss of $2.8 million, growth in accounts receivable due to an increase in sales
over the prior quarter's sales, a pension contribution of $5.0 million, and
payments to Glencore for metal activity that occurred during the fourth quarter
of 1998. 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 a 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.
The Company's net cash used in investing activities was $9.1 million and
$8.4 million during the quarters ended March 31, 1999 and 1998, respectively.
Capital expenditures were $9.4 million and $8.4 million for the quarters ended
March 31, 1999 and 1998, respectively. The Company used these expenditures to
purchase, modernize or upgrade production equipment, maintain facilities and
comply with environmental regulations.
Net cash flows from financing activities were $26.7 million and $337
thousand during the first quarters of 1999 and 1998, respectively.
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
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America"). The Facility provided for a revolving credit facility that consisted
of borrowings and letters of credit up to $150.0 million in the aggregate. On
March 31, 1999, the Company refinanced the borrowings outstanding and terminated
the Facility.
On February 24, 1999, the Company entered into an agreement with
BankBoston, N.A. and the CIT Group/Business Credit, Inc. ("Bank Agreement") to
provide up to $180.0 million of credit facilities to refinance indebtedness, to
finance certain capital expenditures and for other general corporate purposes.
The borrowing base for purposes of determining availability is based upon
certain eligible inventory and receivables. The credit facilities consist of a
revolving loan of up to $160.0 million and a term loan of $20.0 million. On
March 31, 1999, the Company closed on the revolving loan. The revolving loan is
secured by Century of West Virginia's, Berkeley's and Century Cast Plate's
inventory and receivables. See Note 3 to Consolidated Financial Statements
appearing in Part I, Item 1.
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 in 1999. The Company estimates that its
scheduled contribution will be approximately $7.0 million above the minimum
required contribution under Section 412 of the Internal Revenue Code.
The Company believes that cash flows from operations and funds available
under its bank agreements will be sufficient to fund its working capital
requirements, capital expenditures, pension funding and debt service
requirements in the near term and for the foreseeable future.
Environmental Expenditures and Other Contingencies
The Company has incurred and, in the future, will continue to incur
capital expenditures and operating expenses for matters relating to
environmental control, remediation, monitoring and compliance. The aggregate
environmental related accrued liabilities were $1.6 million at March 31, 1999,
and $1.4 million at December 31, 1998. 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
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aggregate, will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
See Note 5 to Consolidated Financial Statements appearing in Part I, Item
1.
Year 2000 Compliance Program
The Company began its Year 2000 program in September 1996, using funds
from its annual information services budget. In August 1997, the Board of
Directors approved $8.7 million of funding for this program and for installation
of new systems. At the same time, the Company allocated approximately 30 people
(from both inside and outside resources) to the effort. To date, the Company has
incurred $5.6 million in total costs relating to Year 2000 compliance, which is
approximately 50% of the Company's total information technology budget for the
period (including the August 1997 authorization). The Company estimates total
Year 2000 compliance costs will be about $6.0 million. Century has not had to
defer any of its information technology projects due to its Year 2000 compliance
efforts.
The Company's inventory of potentially affected systems (both information
technology and non-information technology) is 99% complete. Major systems have
been determined to be Year 2000 compliant. Each of the Company's business units
has a Year 2000 compliance plan in place, establishing timetables, staff and
responsibilities. Each of the Company's business units conducted its own
inventory, identified its mission-critical systems and is upgrading or replacing
those systems that were not Year 2000 compliant.
Each business unit reports the results of its Year 2000 program quarterly
to a corporate steering committee. This central coordination allows the Company
to evaluate and, if necessary, remedy common applications or software only once,
reducing costs. The Company expects to complete all software and hardware
testing and implementation by the end of the second quarter of 1999.
The Company expects to formulate its Year 2000 contingency plan at the end
of the second quarter of 1999, once the Company has completed its final
remediation testing and implementation. The primary goal is to ensure that the
Company can continue to produce and invoice for production. The Company's plan
will emphasize uninterrupted production, accounting, staffing and delivery, as
well as address potential banking, raw material supply and utility failures.
While the Company has not detailed its contingency plans, it is developing an
emergency response team for each business unit to be on hand for the turn of the
millennium. Each team will be made up of senior staff and an information systems
representative. Each unit site will be equipped with satellite telephones to
insure communications in the event of a telephone outage. All locations will
thus be able to report problems.
The Company has sent questionnaires to 349 selected vendors and suppliers,
inquiring as to their Year 2000 readiness. To date, the Company has received
responses to 99% of the questionnaires from those vendors and suppliers. If
vendors and suppliers
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do not respond, or there is evidence of noncompliance, the Company contacts
those vendors and suppliers directly for more detailed information. The Company
intends to have its key vendor and supplier review complete in the second
quarter of 1999. In addition to the foregoing, the Company has visited critical
vendors in order to conduct in person reviews of their Year 2000 readiness
preparations. A six page audit form questionnaire is sent to these vendors in
advance of the meetings and is used as a form for discussions with these
critical vendors. If the Company concludes that any of its material vendors or
suppliers are not Year 2000 compliant, the Company will identify alternative
sources for their products and services as part of its contingency plan, to the
extent possible. The Company has, for example, conducted such an interview with
its electrical supplier, since a disruption in electricity could result in a
shut down of the facilities. That visit involved a review of the preparations
being made by the Company's electrical supplier.
To date, the Company has received no indication that any third party
supplier or vendor may not have accurately assessed their state of readiness or
that they may have a Year 2000 problem which may have a material adverse affect
on the Company's results of operations. However, the risk remains that those
vendors and suppliers may not have accurately assessed their state of readiness.
The contingency plan which will be developed at the end of the second quarter
will address, where feasible, solutions to those identifiable risks.
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 potential impact SFAS No. 133 will have on its results of
operations and financial position.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Prices
Century produces primary aluminum products and manufactures aluminum sheet
and plate products. The Company's earnings are exposed to aluminum price
fluctuations. The Company manages this risk through the issuance of fixed price
commitments and financial instruments. The Company does not engage in trading or
speculative transactions. Although the Company has not materially participated
in the purchase of call options, in cases where Century sells forward primary
aluminum, it may purchase call options to preserve the benefit from price
increases significantly above forward sales prices. In addition, it may purchase
put options to protect itself from price decreases.
The Company had fixed price commitments to sell 516.1 million pounds of
primary, scrap aluminum and sheet and plate products at March 31, 1999. The
Company had fixed price commitments to purchase 182.2 million pounds of aluminum
and alloy raw materials at March 31, 1999. In addition, the Company has a
long-term supply agreement for 936.0 million pounds of alumina annually;
whereby, the Company will pay a fixed price for alumina with annual price
increases of approximately 2.5% through 2001.
At March 31, 1999, the Company had entered into 16.3 million pounds of
forward primary aluminum purchase contracts, primarily with the Glencore Group,
to mitigate the risk of commodity price fluctuations inherent in a portion of
its anticipated future sales of aluminum sheet and plate products. At March 31,
1999, the Company had also entered into 65.6 million pounds of forward primary
aluminum sales contracts with the Glencore Group to mitigate the risk of
commodity price fluctuations inherent in a portion of its inventory and fixed
price purchase commitments. These contracts will be settled in cash at various
dates in 1999. Based on market prices at March 31, 1999, these financial
instruments could be settled by the Company receiving approximately $3.2
million. The actual settlement will be based on market prices at the respective
settlement dates.
A hypothetical $0.10 per pound increase in the market price of primary
aluminum is estimated to have an unfavorable impact of $4.9 million on net
income for the three months ended March 31, 1999 as a result of the forward
primary aluminum purchase and sale contracts entered into by the Company at
March 31, 1999. The effect of the hypothetical change of $0.10 per pound was
calculated using a parallel shift in the March 31, 1999 forward price curve for
primary aluminum. The price curve takes into account the time value of money, as
well as future expectations regarding the price of primary aluminum. Actual
changes in commodity prices may differ from hypothetical changes. This
quantification of the Company's exposure to the commodity price of aluminum is
necessarily limited, as it does not take into consideration the Company's
inventory or fixed price commitments, or the offsetting impact upon the purchase
price of raw materials and sales price of aluminum products.
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All gains and losses from forward contract activity are 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, and reversals of prior
period unrealized losses are reported as either gains or losses on forward
contracts.
Century monitors its overall position, and its metals risk management
activities are subject to the management, control and direction of senior
management. These activities are regularly reported to the Board of Directors of
Century.
Interest Rates
The Company is exposed to interest rate volatility with regard to its
variable rate revolving term debt of $117.2 million at March 31, 1999. The
primary exposure is movement in the U.S. Treasury rates and LIBOR. A
hypothetical 1% increase in these interest rates would increase annual interest
expense by approximately $1.2 million. Actual changes in interest rates may
differ from hypothetical changes. This analysis does not take into effect other
changes that might occur in the economic environment due to such changes in
short term interest rates.
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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 3.2 - Amended and Restated Bylaws of Century Aluminum Company,
dated March 5, 1999.
Exhibit 10.1 - Revolving Credit and Term Loan Agreement among Century
Aluminum Company, Century Aluminum of West Virginia, Inc., Berkeley
Aluminum, Inc., and Century Cast Plate, Inc., as Borrowers, various
lending institutions, as lenders, BankBoston, N.A., as Agent, The CIT
Group/Business Credit, Inc., as Co-Agent, and BancBoston Robertson
Stephens Inc., as Arranger, dated as of March 31, 1999.
Exhibit 10.2 - Employment Agreement between Century Aluminum Company and
Craig A. Davis.
Exhibit 10.3 - Employment Agreement between Century Aluminum Company and
Gerald A. Meyers.
Exhibit 10.4 - Employment Agreement between Century Aluminum Company and
Gerald J. Kitchen.
Exhibit 10.5- Employment Agreement between Century Aluminum Company and
David W. Beckley.
Exhibit 10.6 - Amendment to Severance Protection Agreement between Century
Aluminum Company and Craig A. Davis.
Exhibit 10.7 - Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald A. Meyers.
Exhibit 10.8 - Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald J. Kitchen.
Exhibit 10.9 - Amendment to Severance Protection Agreement between Century
Aluminum Company and David W. Beckley.
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended March
31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Aluminum Company
Date: May 14, 1999 By: /s/ Craig A. Davis
------------------- ------------------------------------------------
Craig A. Davis
Chairman/Chief Executive Officer
Date: May 14, 1999 By: /s/ David W. Beckley
------------------- ------------------------------------------------
David W. Beckley
Executive Vice-President/Chief Financial Officer
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Exhibit Index
Exhibit
Number Description
- ------------ ---------------------------------------------------------------
3.2 Amended and Restated Bylaws of Century Aluminum Company, dated
March 5, 1999.
10.1 Revolving Credit and Term Loan Agreement among Century
Aluminum Company, Century Aluminum of West Virginia, Inc.,
Berkeley Aluminum, Inc., and Century Cast Plate, Inc., as
Borrowers, various lending institutions, as lenders,
BankBoston, N.A., as Agent, The CIT Group/Business Credit,
Inc., as Co-Agent, and BancBoston Robertson Stephens Inc., as
Arranger, dated as of March 31, 1999.
10.2 Employment Agreement between Century Aluminum Company and
Craig A. Davis.
10.3 Employment Agreement between Century Aluminum Company and
Gerald A. Meyers.
10.4 Employment Agreement between Century Aluminum Company and
Gerald J. Kitchen.
10.5 Employment Agreement between Century Aluminum Company and
David W. Beckley.
10.6 Amendment to Severance Protection Agreement between Century
Aluminum Company and Craig A. Davis.
10.7 Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald A. Meyers.
10.8 Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald J. Kitchen.
10.9 Amendment to Severance Protection Agreement between Century
Aluminum Company and David W. Beckley.
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27.0 Financial Data Schedule
24