UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number 1-34474
Century Aluminum Company
(Exact name of Registrant as specified in its Charter)
Delaware (State or other Jurisdiction of Incorporation or Organization) | 13-3070826 (IRS Employer Identification No.) |
2511 Garden Road Building A, Suite 200 Monterey, California (Address of principal executive offices) | 93940 (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.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | x | Accelerated Filer | o |
Non-Accelerated Filer (Do not check if a smaller reporting company) | o | Smaller Reporting Company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
The registrant had 88,449,656 shares of common stock outstanding at April 30, 2012.
TABLE OF CONTENTS | |
Page | |
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CENTURY ALUMINUM COMPANY | ||||||
CONSOLIDATED BALANCE SHEETS | ||||||
(Dollars in thousands, except share data) | ||||||
(Unaudited) | ||||||
March 31, 2012 | December 31, 2011 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 182,545 | $ | 183,401 | ||
Accounts receivable — net | 50,531 | 47,647 | ||||
Due from affiliates | 39,217 | 44,665 | ||||
Inventories | 170,302 | 171,961 | ||||
Prepaid and other current assets | 43,850 | 40,646 | ||||
Total current assets | 486,445 | 488,320 | ||||
Property, plant and equipment — net | 1,206,106 | 1,218,225 | ||||
Other assets | 104,875 | 104,549 | ||||
TOTAL | $ | 1,797,426 | $ | 1,811,094 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
LIABILITIES: | ||||||
Accounts payable, trade | $ | 74,986 | $ | 86,172 | ||
Due to affiliates | 41,544 | 41,904 | ||||
Accrued and other current liabilities | 48,917 | 40,776 | ||||
Accrued employee benefits costs — current portion | 16,188 | 16,698 | ||||
Industrial revenue bonds | 7,815 | 7,815 | ||||
Total current liabilities | 189,450 | 193,365 | ||||
Senior notes payable | 249,769 | 249,512 | ||||
Accrued pension benefits costs — less current portion | 68,271 | 70,899 | ||||
Accrued postretirement benefits costs — less current portion | 128,919 | 128,078 | ||||
Other liabilities | 39,466 | 40,005 | ||||
Deferred taxes | 90,807 | 90,958 | ||||
Total noncurrent liabilities | 577,232 | 579,452 | ||||
COMMITMENTS AND CONTINGENCIES (NOTE 9) | ||||||
SHAREHOLDERS’ EQUITY: | ||||||
Series A Preferred stock (one cent par value, 5,000,000 shares authorized; 80,696 and 80,718 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively) | 1 | 1 | ||||
Common stock (one cent par value, 195,000,000 shares authorized; 93,236,177 issued and 88,449,656 shares outstanding at March 31, 2012 and 93,230,848 issued and 88,844,327 outstanding at December 31, 2011, respectively) | 932 | 932 | ||||
Additional paid-in capital | 2,506,987 | 2,506,842 | ||||
Treasury stock, at cost | (49,924 | ) | (45,891 | ) | ||
Accumulated other comprehensive loss | (133,832 | ) | (134,588 | ) | ||
Accumulated deficit | (1,293,420 | ) | (1,289,019 | ) | ||
Total shareholders’ equity | 1,030,744 | 1,038,277 | ||||
TOTAL | $ | 1,797,426 | $ | 1,811,094 | ||
See notes to consolidated financial statements
3
CENTURY ALUMINUM COMPANY | ||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||
(Dollars in thousands, except per share amounts) | ||||||
(Unaudited) | ||||||
Three months ended March 31, | ||||||
2012 | 2011 | |||||
NET SALES: | ||||||
Third-party customers | $ | 188,839 | $ | 188,312 | ||
Related parties | 137,351 | 138,025 | ||||
326,190 | 326,337 | |||||
Cost of goods sold | 305,598 | 284,021 | ||||
Gross profit | 20,592 | 42,316 | ||||
Other operating expense (income) – net | 3,721 | (5,884 | ) | |||
Selling, general and administrative expenses | 8,459 | 10,609 | ||||
Operating income | 8,412 | 37,591 | ||||
Interest expense – third party | (5,978 | ) | (6,777 | ) | ||
Interest income – third party | 138 | 155 | ||||
Interest income – related parties | 60 | 113 | ||||
Net loss on forward contracts | (5,159 | ) | (4,809 | ) | ||
Other income - net | 306 | 677 | ||||
Income (loss) before income taxes and equity in earnings of joint ventures | (2,221 | ) | 26,950 | |||
Income tax expense | (2,821 | ) | (3,123 | ) | ||
Income (loss) before equity in earnings of joint ventures | (5,042 | ) | 23,827 | |||
Equity in earnings of joint ventures | 641 | 1,219 | ||||
Net income (loss) | $ | (4,401 | ) | $ | 25,046 | |
Net income (loss) allocated to common shareholders | $ | (4,401 | ) | $ | 23,005 | |
EARNINGS (LOSS) PER COMMON SHARE: | ||||||
Basic and Diluted | $ | (0.05 | ) | $ | 0.25 | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||
Basic | 88,727 | 92,965 | ||||
Diluted | 88,727 | 93,297 | ||||
See notes to consolidated financial statements
4
CENTURY ALUMINUM COMPANY | ||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | ||||||
(Dollars in thousands) | ||||||
(Unaudited) | ||||||
Three months ended March 31, | ||||||
2012 | 2011 | |||||
Comprehensive income (loss) | ||||||
Net income (loss) | $ | (4,401 | ) | $ | 25,046 | |
Other comprehensive income (loss) before income tax effect: | ||||||
Net unrealized loss on financial instruments | (246 | ) | (11 | ) | ||
Net loss (gain) reclassified to income on financial instruments | 272 | (6 | ) | |||
Net gain on foreign currency cash flow hedges reclassified to income | (47 | ) | (46 | ) | ||
Defined benefit plans and other postretirement benefits: | ||||||
Amortization of prior service benefit | (1,025 | ) | (15,119 | ) | ||
Amortization of net loss | 2,184 | 6,285 | ||||
Other comprehensive income (loss) before income tax effect | 1,138 | (8,897 | ) | |||
Income tax effect | (382 | ) | (2,460 | ) | ||
Other comprehensive income (loss) | 756 | (11,357 | ) | |||
Comprehensive income (loss) | $ | (3,645 | ) | $ | 13,689 | |
See notes to consolidated financial statements
5
CENTURY ALUMINUM COMPANY | ||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
(Dollars in thousands) | ||||||
(Unaudited) | ||||||
Three months ended March 31, | ||||||
2012 | 2011 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income (loss) | $ | (4,401 | ) | $ | 25,046 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||
Unrealized net loss on forward contracts | 4,955 | 4,715 | ||||
Accrued and other plant curtailment costs — net | 1,374 | (9,624 | ) | |||
Lower of cost or market inventory adjustment | (17,051 | ) | (139 | ) | ||
Depreciation and amortization | 15,652 | 15,930 | ||||
Debt discount amortization | 256 | 821 | ||||
Pension and other postretirement benefits | (1,138 | ) | (11,064 | ) | ||
Stock-based compensation | 145 | 488 | ||||
Undistributed earnings of joint ventures | (641 | ) | (1,219 | ) | ||
Change in operating assets and liabilities: | ||||||
Accounts receivable — net | (2,884 | ) | 7,520 | |||
Due from affiliates | (249 | ) | 8,766 | |||
Inventories | 18,710 | (7,924 | ) | |||
Prepaid and other current assets | (5,366 | ) | (29,901 | ) | ||
Accounts payable, trade | (11,442 | ) | (4,730 | ) | ||
Due to affiliates | (360 | ) | (2,722 | ) | ||
Accrued and other current liabilities | 7,003 | 3,405 | ||||
Other — net | 335 | (2,998 | ) | |||
Net cash provided by (used in) operating activities | 4,898 | (3,630 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Purchase of property, plant and equipment | (2,899 | ) | (3,128 | ) | ||
Nordural expansion | (1,946 | ) | (4,051 | ) | ||
Investments in and advances to joint ventures | (100 | ) | — | |||
Payments received on advances from joint ventures | 3,166 | — | ||||
Proceeds from the sale of property, plant and equipment | 58 | — | ||||
Net cash used in investing activities | (1,721 | ) | (7,179 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Borrowings under revolving credit facility | 18,076 | — | ||||
Repayments under revolving credit facility | (18,076 | ) | — | |||
Repurchase of common stock | (4,033 | ) | — | |||
Net cash used in financing activities | (4,033 | ) | — | |||
CHANGE IN CASH AND CASH EQUIVALENTS | (856 | ) | (10,809 | ) | ||
Cash and cash equivalents, beginning of the period | 183,401 | 304,296 | ||||
Cash and cash equivalents, end of the period | $ | 182,545 | $ | 293,487 | ||
6
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements for the
Three months ended March 31, 2012 and 2011
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
1. | General |
The accompanying unaudited interim consolidated financial statements of Century Aluminum Company should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2011. In management’s opinion, the unaudited interim consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for the first three months of 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Throughout this Form 10-Q, and unless expressly stated otherwise or as the context otherwise requires, "Century Aluminum," "Century," "we," "us," "our" and "ours" refer to Century Aluminum Company and its consolidated subsidiaries.
2. | Fair value measurements |
ASC 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value, and delineates disclosures about fair value measurements. This guidance applies to a broad range of other existing accounting pronouncements that require or permit fair value measurements. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value is an exit price and that exit price should reflect all the assumptions that market participants would use in pricing the asset or liability.
Our fair value measurements include the consideration of market risks that other market participants might consider in pricing the particular asset or liability, specifically non-performance risk and counterparty credit risk. Consideration of the non-performance risk and counterparty credit risk are used to establish the appropriate risk-adjusted discount rates used in our fair value measurements.
The following section describes the valuation methodology used to measure our financial assets and liabilities that were accounted for at fair value.
Overview of Century’s valuation methodology | ||
Level | Significant inputs | |
Cash equivalents | 1 | Quoted market prices |
Trust assets (1) | 1 | Quoted market prices |
Surety bonds | 1 | Quoted market prices |
Primary aluminum put option contracts | 2 | Quoted London Metal Exchange (“LME”) forward market prices, historical volatility measurements and risk-adjusted discount rates |
Natural gas forward financial contracts | 2 | Quoted natural gas forward market prices for primary aluminum and risk-adjusted discount rates |
Power contract | 3 | Quoted LME forward market prices, power tariff prices, management’s estimate of future power usage and risk-adjusted discount rates |
E.ON U.S. (“E.ON”) contingent obligation | 3 | Quoted LME forward market prices for primary aluminum, management’s estimates of the LME forward market prices for primary aluminum for periods beyond the quoted periods and management’s estimate of future level of operations at Century Aluminum of Kentucky, our wholly owned subsidiary (“CAKY”) |
Primary aluminum sales premium contracts | 3 | Management’s estimates of future U.S. Midwest premium and risk-adjusted discount rates |
(1) | Trust assets are currently invested in money market funds. The trust has sole authority to invest the funds in secure interest producing investments consisting of short-term securities issued or guaranteed by the United States government or cash and cash equivalents. |
7
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
Fair value measurements
The following table sets forth by level within the ASC 820 fair value hierarchy our financial assets and liabilities that are accounted for at fair value on a recurring basis. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and the placement within the fair value hierarchy levels.
Recurring Fair Value Measurements | As of March 31, 2012 | |||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||
ASSETS: | ||||||||||||
Cash equivalents | $ | 175,321 | $ | — | $ | — | $ | 175,321 | ||||
Trust assets | 15,572 | — | — | 15,572 | ||||||||
Surety bond – workers comp insurance | 2,391 | — | — | 2,391 | ||||||||
Primary aluminum put option contracts | — | 2,981 | — | 2,981 | ||||||||
Power contract | — | — | 53 | 53 | ||||||||
TOTAL | $ | 193,284 | $ | 2,981 | $ | 53 | $ | 196,318 | ||||
LIABILITIES: | ||||||||||||
Natural gas forward financial purchase contracts | $ | — | $ | 236 | $ | — | $ | 236 | ||||
E.ON contingent obligation – net | — | — | 14,310 | 14,310 | ||||||||
Primary aluminum sales contract – premium collar | — | — | 1,169 | 1,169 | ||||||||
TOTAL | $ | — | $ | 236 | $ | 15,479 | $ | 15,715 | ||||
Recurring Fair Value Measurements | As of December 31, 2011 | |||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||
ASSETS: | ||||||||||||
Cash equivalents | $ | 176,284 | $ | — | $ | — | $ | 176,284 | ||||
Trust assets | 15,889 | — | — | 15,889 | ||||||||
Surety bonds – workers comp insurance | 2,391 | — | — | 2,391 | ||||||||
Primary aluminum put option contracts | — | 9,331 | — | 9,331 | ||||||||
Power contract | — | — | 106 | 106 | ||||||||
TOTAL | $ | 194,564 | $ | 9,331 | $ | 106 | $ | 204,001 | ||||
LIABILITIES: | ||||||||||||
Natural gas forward financial purchase contracts | $ | — | $ | 281 | $ | — | $ | 281 | ||||
E.ON contingent obligation – net | — | — | 13,958 | 13,958 | ||||||||
Primary aluminum sales contract – premium collar | — | — | 908 | 908 | ||||||||
TOTAL | $ | — | $ | 281 | $ | 14,866 | $ | 15,147 | ||||
8
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
Change in Level 3 Fair Value Measurements during the three months ended March 31, | ||||||
Derivative liabilities - net | ||||||
2012 | 2011 | |||||
Beginning balance, January 1, | $ | (14,760 | ) | $ | (13,802 | ) |
Total loss (realized/unrealized) included in earnings | (613 | ) | (473 | ) | ||
Settlements | (53 | ) | (36 | ) | ||
Ending balance, March 31, | $ | (15,426 | ) | $ | (14,311 | ) |
Amount of total loss included in earnings attributable to the change in unrealized losses (gains) relating to assets and liabilities held at March 31, | $ | 613 | $ | 473 | ||
The net gain (loss) on our derivative assets and liabilities is recorded in our statement of operations under net loss on forward contracts. See Note 3 Derivative and hedging instruments for the location of our Level 3 derivative assets and liabilities within our consolidated balance sheets.
3. | Derivative and hedging instruments |
The following table provides the fair value and balance sheet classification of our derivatives:
Fair Value of Derivative Assets and Liabilities | |||||||
Balance sheet location | March 31, 2012 | December 31, 2011 | |||||
DERIVATIVE ASSETS: | |||||||
Primary aluminum put option contracts | Due from affiliates | $ | 1,801 | $ | 5,439 | ||
Primary aluminum put option contracts | Prepaid and other current assets | 1,180 | 3,892 | ||||
Power contract | Prepaid and other current assets | 53 | 106 | ||||
TOTAL | $ | 3,034 | $ | 9,437 | |||
DERIVATIVE LIABILITIES: | |||||||
E.ON contingent obligation | Other liabilities | $ | 14,310 | $ | 13,958 | ||
Aluminum sales premium contracts – current portion | Accrued and other current liabilities | 819 | 607 | ||||
Natural gas forward financial contracts | Accrued and other current liabilities | 236 | 281 | ||||
Aluminum sales premium contracts – less current portion | Other liabilities | 350 | 301 | ||||
TOTAL | $ | 15,715 | $ | 15,147 | |||
Natural gas forward financial contracts
To mitigate the volatility of our natural gas cost due to the natural gas markets, we have entered into fixed-price forward financial purchase contracts which settle in cash in the period corresponding to the intended usage of natural gas. These forward contracts are designated as cash flow hedges and qualify for hedge accounting under ASC 815. The critical terms of the contracts essentially match those of the underlying exposure.
The natural gas forward financial contracts are derivatives that qualified for cash flow hedge treatment. During the three months ended March 31, 2012 and 2011, the changes in our accumulated other comprehensive loss resulting from realized and unrealized gains and losses on these derivatives were not significant to our financial statements. There were no losses recognized for ineffective portions of these derivatives during the periods.
9
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
Foreign currency forward contracts
As of March 31, 2012 and December 31, 2011, we had no foreign currency forward contracts outstanding. We are exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the euro, the Icelandic krona (“ISK”) and the Chinese yuan. The labor costs, maintenance costs and other local services at our facility in Grundartangi, Iceland (“Grundartangi”) are denominated in ISK and a portion of its anode costs are denominated in euros. As a result, an increase or decrease in the value of those currencies relative to the U.S. dollar would affect Grundartangi’s operating margins.
We manage our foreign currency exposure by entering into foreign currency forward contracts when management deems such transactions appropriate. We had foreign currency forward contracts to manage the currency risk associated with activities at our Icelandic facilities. These contracts were designated as cash flow hedges and qualified for hedge accounting under ASC 815.
The realized gain or loss for our cash flow hedges for the Grundartangi expansion and Helguvik project capital expenditures was recognized in accumulated other comprehensive loss and is reclassified to earnings as part of the depreciation expense of the capital assets (for the Helguvik project this would occur when Helguvik is put into service).
Power contract
We are party to a power supply agreement at our facility in Ravenswood, West Virginia (“Ravenswood”) that contains LME-based pricing provisions that are an embedded derivative. The embedded derivative does not qualify for cash flow hedge treatment and is marked to market quarterly. We estimate the fair value of the embedded derivative based on our expected power usage over the remaining term of the contract, gains and losses associated with the embedded derivative are recorded in net gain (loss) on forward contracts in the consolidated statements of operations.
Primary aluminum put option contracts
We have entered into primary aluminum put option contracts that settle monthly based on LME prices through June 2012. The option contract volumes account for a portion of our domestic production, with a strike price around our domestic facilities’ average cash basis break-even price. These options were purchased to partially mitigate the risk of a future decline in aluminum prices.
Our counterparties include two non-related third parties and Glencore, a related party. We paid cash premiums to enter into the put option contracts and recorded an asset on the consolidated balance sheets. We determined the fair value of the put option contracts using a Black-Scholes model with market data provided by an independent vendor and account for the contracts as derivative financial instruments with gains and losses in the fair value of the contracts recorded on the consolidated statements of operations in net loss on forward contracts.
Aluminum sales premium contracts
The Glencore Metal Agreement is a physical delivery contract for 20,400 metric tons per year (“mtpy”) of primary aluminum through December 31, 2013 with variable, LME-based pricing. Under the Glencore Metal Agreement, pricing is based on market prices, adjusted by a negotiated U.S. Midwest premium with a cap and a floor as applied to the current U.S. Midwest premium. We account for the Glencore Metal Agreement as a derivative instrument under ASC 815. Gains and losses on the derivative are based on the difference between the contracted U.S. Midwest premium and actual and forecasted U.S. Midwest premiums. Settlements are recorded in related party sales. Unrealized gains (losses) based on forecasted U.S. Midwest premiums are recorded in net loss on forward contracts on the consolidated statements of operations.
10
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
Derivatives not designated as hedging instruments: | |||||||
Gain (loss) recognized in income from derivatives | |||||||
Three months ended March 31, | |||||||
2012 | 2011 | ||||||
Primary aluminum put option contracts | Net loss on forward contracts | $ | (4,695 | ) | $ | (4,606 | ) |
E.ON contingent obligation | Interest expense – third party | 353 | 364 | ||||
Aluminum sales premium contracts | Related party sales | 204 | 94 | ||||
Power contract | Net loss on forward contracts | 1 | (5 | ) | |||
Aluminum sales premium contracts | Net loss on forward contracts | (465 | ) | (198 | ) | ||
We had the following outstanding forward contracts that were entered into that were not designated as hedging instruments:
March 31, 2012 | December 31, 2011 | |||
Power contracts (in megawatt hours (“MWH”)) (1) | 1,886 | 3,772 | ||
Primary aluminum sales contract premium (metric tons) (2) | 35,700 | 40,870 | ||
Primary aluminum put option contracts (metric tons) | 7,500 | 15,000 | ||
Primary aluminum put option contracts (metric tons) – related party | 9,000 | 18,000 | ||
(1) | Represents our expected usage during the remaining term of the Ravenswood power contract. In June 2011, the West Virginia PSC extended the term of this contract for an additional year. |
(2) | Represents the remaining physical deliveries under our 2013 Glencore Metal Agreement. |
Counterparty credit risk. The primary aluminum put option contracts are subject to counterparty credit risk. However, we only enter into forward financial contracts with counterparties we determine to be creditworthy at the time of entering into the contract. If any counterparty failed to perform according to the terms of the contract, the impact would be limited to the difference between the contract price and the market price applied to the contract volume on the date of settlement.
As of March 31, 2012, income of $170 is expected to be reclassified out of accumulated other comprehensive loss into earnings over the next 12-month period for derivative instruments that have been designated and have qualified as cash flow hedging instruments and for the related hedged transactions.
11
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
4. | Earnings per share |
Basic earnings per share (“EPS”) amounts are calculated by dividing earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive common shares outstanding. The following table shows the basic and diluted earnings per share for three months ended March 31, 2012 and 2011:
For the three months ended March 31, | |||||||||||||||||
2012 | 2011 | ||||||||||||||||
Income | Shares (000) | Per-Share | Income | Shares (000) | Per-Share | ||||||||||||
Net income (loss) | $ | (4,401 | ) | $ | 25,046 | ||||||||||||
Amount allocated to common shareholders | 100 | % | 91.85 | % | |||||||||||||
Basic EPS: | |||||||||||||||||
Income (loss) allocable to common shareholders | (4,401 | ) | 88,727 | $ | (0.05 | ) | 23,005 | 92,965 | $ | 0.25 | |||||||
Effect of Dilutive Securities: | |||||||||||||||||
Stock compensation plans | — | — | — | 332 | |||||||||||||
Diluted EPS: | |||||||||||||||||
Income (loss) applicable to common shareholders with assumed conversion | $ | (4,401 | ) | 88,727 | $ | (0.05 | ) | $ | 23,005 | 93,297 | $ | 0.25 | |||||
Impact of our outstanding Series A Convertible Preferred Stock on EPS
Our Series A Convertible Preferred Stock has similar characteristics of a “participating security” as described by ASC 260-10-45 “Participating Securities and the Two-Class Method”. In accordance with the guidance in the ASC 260-10-45, we calculate basic EPS using the Two-Class Method, allocating undistributed income to our preferred shareholder consistent with its participation rights, and diluted EPS using the If-Converted Method, when applicable.
The generally accepted accounting principles for reporting EPS do not require the presentation of basic and diluted EPS for securities other than common stock and the EPS amounts, as presented, only pertain to our common stock.
The Two-Class Method is an earnings allocation formula that determines earnings per share for common shares and participating securities according to dividends declared (or accumulated) and the participation rights in undistributed earnings.
The holders of our convertible preferred stock do not have a contractual obligation to share in the losses of Century. Thus, in periods where we report net losses, we will not allocate the net losses to the convertible preferred stock for the computation of basic or diluted EPS.
12
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
Calculation of EPS:
Three months ended March 31, | ||||
2012 | 2011 | |||
Options to purchase common stock outstanding | 632,334 | 650,011 | ||
Weighted average service-based stock awards outstanding | 345,524 | 218,000 | ||
Excluded from the calculation of diluted EPS: | ||||
Stock options (1) | 632,334 | 349,000 | ||
Service-based share award | 345,524 | — | ||
(1) | These stock option awards were excluded from the calculation of diluted EPS because the exercise price of these options was greater than the average market price of the underlying common stock, except in periods when we had a net loss where all option were excluded because of their antidilutive effect on earnings per share. |
During the three months ended March 31, 2012, we repurchased 400,000 shares of our common stock under a stock repurchase program (See Note 5 Shareholders’ Equity for additional information about this program). Shares repurchased under the program are excluded from the calculation of weighted average shares of common stock outstanding.
Service-based stock for which vesting is based upon continued service is not considered issued and outstanding shares of common stock until vested and issued. However, the service-based stock is considered a common stock equivalent and, therefore, the weighted average service-based stock is included, using the treasury stock method, in common shares outstanding for diluted earnings per share computations if they have a dilutive effect on earnings per share.
5. | Shareholders’ equity |
Common Stock
Under our Restated Certificate of Incorporation, as amended, our Board of Directors is authorized to issue up to 195,000,000 shares of our common stock.
The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock which are currently outstanding, including our Series A Convertible Preferred Stock, or any series which we may designate and issue in the future.
Common and Preferred Stock Activity: | Preferred stock | Common stock | ||||
Series A convertible | Treasury | Outstanding | ||||
Beginning balance as of December 31, 2011 | 80,718 | 4,386,521 | 88,844,327 | |||
Repurchase of common stock | — | 400,000 | (400,000 | ) | ||
Conversion of convertible preferred stock | (22 | ) | — | 2,225 | ||
Issuance for stock compensation plans | — | — | 3,104 | |||
Ending balance as of March 31, 2012 | 80,696 | 4,786,521 | 88,449,656 | |||
13
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
Stock Repurchase Program
In August 2011, our Board of Directors approved a $60,000 stock repurchase program. Under the program, we may repurchase up to $60,000 in value of our outstanding shares of common stock from time to time on the open market at prevailing market prices, in block trades or otherwise. The timing and amount of any shares repurchased will be determined by our management based on its evaluation of market conditions, the trading price of the stock and other factors. The repurchase program may be suspended or discontinued at any time.
Shares of common stock repurchased are recorded at cost as treasury stock and result in a reduction of shareholders’ equity in the consolidated balance sheets. From time to time, treasury shares may be reissued as contributions to our employee benefit plans and for the conversion of convertible preferred stock. When shares are reissued, we use an average cost method for determining cost. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital.
From August 11, 2011 through March 31, 2012, we repurchased 4,786,521 shares of common stock at an aggregate purchase price of $49,924. We had approximately $10,076 remaining under the repurchase program authorization as of March 31, 2012.
Series A Convertible Preferred Stock conversions
All shares of Series A Convertible Preferred Stock are held by Glencore. The issuance of common stock under our stock incentive programs, debt exchange transactions and any stock offering that excludes Glencore participation triggers anti-dilution provisions of the preferred stock agreement and results in the automatic conversion of Series A Convertible Preferred Stock shares into shares of common stock. See Common and Preferred Stock Activity table above for additional information about preferred stock conversions during the period.
6. | Income taxes |
The components of our unrecognized tax positions are as follows:
March 31, 2012 | December 31, 2011 | |||||
Highly certain tax positions | $ | 15,700 | $ | 15,100 | ||
Other unrecognized tax benefits | 800 | 800 | ||||
Gross unrecognized tax benefits | $ | 16,500 | $ | 15,900 | ||
Accrued interest and penalties related to unrecognized tax benefits | 100 | 100 | ||||
We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.
We do not expect a significant change in the balance of unrecognized tax benefits within the next twelve months.
Our federal income tax returns beginning in 2008 are subject to examination. Our 2008 tax year is currently under audit by the Internal Revenue Service (“IRS”). Additionally, a 2005 amended return is also under audit with respect to carry back items. Our state returns beginning in 2005 are subject to examination. Our Icelandic tax returns are subject to examination beginning with the 2005 tax year.
For the years 2011, 2010 and 2009, we did not elect to permanently reinvest foreign earnings . In March 2012, we are releasing the previously reinvested earnings under APB23 to the extent of foreign cash available for distribution.
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
7. | Inventories |
Inventories consist of the following:
March 31, 2012 | December 31, 2011 | |||||
Raw materials | $ | 42,557 | $ | 41,142 | ||
Work-in-process | 15,932 | 15,548 | ||||
Finished goods | 10,886 | 10,535 | ||||
Operating and other supplies | 100,927 | 104,736 | ||||
Inventories | $ | 170,302 | $ | 171,961 | ||
Inventories are stated at the lower of cost or market, using the first-in, first-out method (“FIFO”).
8. | Debt |
March 31, 2012 | December 31, 2011 | |||||
Debt classified as current liabilities: | ||||||
Hancock County industrial revenue bonds due 2028, interest payable quarterly (variable interest rates (not to exceed 12%))(1) | $ | 7,815 | $ | 7,815 | ||
Debt classified as non-current liabilities: | ||||||
8.0% senior secured notes payable due May 15, 2014, net of debt discount of $2,438 and $2,695, respectively, interest payable semiannually | 247,166 | 246,909 | ||||
7.5% senior unsecured notes payable due August 15, 2014, interest payable semiannually | 2,603 | 2,603 | ||||
E.ON contingent obligation, principal and accrued interest, contingently payable monthly, annual interest rate of 10.94% (2) | 14,310 | 13,958 | ||||
TOTAL | $ | 271,894 | $ | 271,285 | ||
(1) | The IRBs are classified as current liabilities because they are remarketed weekly and could be required to be repaid upon demand if there is a failed remarketing. The IRB interest rate at March 31, 2012 was 0.44%. |
(2) | E.ON contingent obligation principal and interest payments are payable based on CAKY’s operating level and the LME price for primary aluminum. See E.ON contingent obligation below. |
Revolving credit facility
On July 1, 2010, we and certain of our direct and indirect domestic subsidiaries (together with Century, the "Borrowers") entered into a four-year $100,000 senior secured revolving credit facility pursuant to a Loan and Security Agreement, dated as of July 1, 2010, among the Borrowers and Wells Fargo Capital Finance, LLC, as lender and agent (the "Credit Facility"), a portion of which was later syndicated to Credit Suisse AG.
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
Status of our revolving credit facility:
March 31, 2012 | |||
Senior secured revolving credit facility amount | $ | 100,000 | |
Borrowing availability, net of outstanding letters of credit | 52,932 | ||
Outstanding borrowings on revolving credit facility | — | ||
Letter of credit sub-facility amount | 50,000 | ||
Outstanding letters of credit issued under the revolving credit facility | 41,451 | ||
The availability of funds under the revolving credit facility is limited by a specified borrowing base consisting of accounts receivable and inventory which meet the eligibility criteria.
Our obligations under the Credit Facility are guaranteed by certain of our domestic subsidiaries and secured by a first priority security interest in all of the domestic accounts receivable, inventory and certain bank accounts. The guarantees for any and all obligations under the Credit Facility are on a joint and several basis.
Any amounts outstanding under the Credit Facility will bear interest, at our option, at LIBOR or a base rate, plus, in each case, an applicable interest margin. In addition, we pay a commitment fee on undrawn amounts, less the amount of our letters of credit exposure. For standby letters of credit, we are required to pay a fee on the face amount of such letters of credit.
The Credit Facility will expire on July 1, 2014.
E.ON contingent obligation
The E.ON contingent obligation consists of the aggregate E.ON payments made on CAKY’s behalf under a power purchase agreement with Big Rivers and E.ON (the “Big Rivers Agreement”) in excess of the agreed upon base amount. Interest accrues at an annual rate equal to 10.94%. The term of the agreement is through December 31, 2028. Our obligation to make repayments is contingent upon certain operating criteria for Hawesville and the LME price of primary aluminum. Based on the LME forward market and our expectation of Hawesville’s future operations, we classified the E.ON contingent obligation within noncurrent liabilities, which includes accrued interest on the obligation. When the conditions for repayment are met, and for so long as those conditions continue to be met, we will be obligated to make principal and interest payments.
9. | Commitments and contingencies |
Environmental Contingencies
Based upon all available information, we believe our current environmental liabilities do not have, and are not likely to have, a material adverse effect on our financial condition, results of operations or liquidity. Because of the issues and uncertainties described below and the inability to predict the requirements of future environmental laws, there can be no assurance that future capital expenditures and costs for environmental compliance at currently or formerly owned or operated properties will not result in liabilities which may have a material adverse effect.
It is our 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 $933 and $852 at March 31, 2012 and December 31, 2011, respectively. All accrued amounts have been recorded without giving effect to any possible future recoveries. With respect to costs for ongoing environmental compliance, including maintenance and monitoring, such costs are expensed as incurred.
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
Century Aluminum of West Virginia, Inc. (“CAWV”) continues to perform remedial measures at Ravenswood pursuant to an order issued by the EPA in 1994 (the “3008(h) Order”). CAWV also conducted a RCRA facility investigation (“RFI”) under the 3008(h) Order evaluating other areas at Ravenswood that may have contamination requiring remediation. The RFI has been approved by appropriate agencies. CAWV has completed interim remediation measures at two sites identified in the RFI, and we believe no further remediation will be required. A Corrective Measures Study, which formally documents the conclusion of these activities, has been submitted by the EPS for a final order.
Prior to our purchase of Hawesville, the EPA issued a final Record of Decision (“ROD”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”). By agreement, Southwire Company (“Southwire”), the former owner and operator is to perform all obligations under the ROD. CAKY has agreed to operate and maintain the ground water treatment system required under the ROD on behalf of Southwire, and Southwire will reimburse CAKY for any expense that exceeds $400 annually.
In July 2006, we were named as a defendant, together with certain affiliates of Alcan Inc., in a lawsuit brought by Alcoa Inc. seeking to determine responsibility for certain environmental indemnity obligations related to the sale of a cast aluminum plate manufacturing facility located in Vernon, California, which we purchased from Alcoa Inc. in December 1998, and sold to Alcan Rolled Products-Ravenswood LLC in July 1999. The complaint also seeks costs and attorney fees. At this time, it is not practicable to predict the ultimate outcome of these actions or to estimate a range of possible damage awards.
Matters relating to the St. Croix Alumina Refining Facility
We are a party to an EPA Administrative Order on Consent (the “Order”) pursuant to which other past and present owners of an alumina refining facility at St. Croix, Virgin Islands (the “St. Croix Alumina Refinery”) have agreed to carry out a Hydrocarbon Recovery Plan to remove and manage hydrocarbons floating on groundwater underlying the facility. Pursuant to the Hydrocarbon Recovery Plan, recovered hydrocarbons and groundwater are delivered to the adjacent petroleum refinery where they are received and managed. In connection with the sale of the facility by Lockheed Martin Corporation (“Lockheed”), to one of our affiliates, Virgin Islands Alumina Corporation (“Vialco”), in 1989, Lockheed, Vialco and Century entered into the Lockheed-Vialco Asset Purchase Agreement. The indemnity provisions contained in the Lockheed-Vialco Asset Purchase Agreement allocate responsibility for certain environmental matters. Lockheed has tendered indemnity and defense of the above matter to Vialco. We have likewise tendered indemnity to Lockheed. Through March 31, 2012, we have expended approximately $940 on the Hydrocarbon Recovery Plan. We expect the future potential payments under this indemnification to comply with the Order will be approximately $500, which may be offset in part by sales of recoverable hydrocarbons.
In May 2005, we and Vialco were among several defendants listed in a lawsuit filed by the Commissioner of the Department of Planning and Natural Resources (“DPNR”), in his capacity as Trustee for Natural Resources of the United States Virgin Islands. The complaint alleges damages to natural resources caused by alleged releases from the St. Croix Alumina Refinery and the adjacent petroleum refinery. The primary cause of action is pursuant to the natural resource damage provisions of CERCLA, but various ancillary Territorial law causes of action were included as well. We and Lockheed have each tendered indemnity and defense of the case to the other pursuant to the terms of the Lockheed-Vialco Asset Purchase Agreement. The complaint seeks unspecified monetary damages, costs and attorney fees. In November 2011, the court granted a motion by Century, dismissing Century from the case. Vialco, however, remains a defendant in this case. The parties are currently engaged in the discovery process. Vialco has asserted factual and affirmative defenses, and in January 2012, filed a motion from summary judgment that is pending before the court. As of March 31, 2012, no trial date has been set for the remaining claims.
In December 2006, Vialco and the two succeeding owners of the St. Croix Alumina Refinery were named as defendants in a lawsuit filed by the Commissioner of the DPNR. The complaint alleges the defendants failed to take certain actions specified in a Coastal Zone management permit issued to Vialco in October 1994, and alleges violations of territorial water pollution control laws during the various defendants’ periods of ownership. The complaint seeks statutory and other unspecified monetary penalties for the alleged violations. The parties are currently engaged in the discovery process.
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
In May 2009, St. Croix Renaissance Group, L.L.L.P. (“SCRG”) filed a third-party complaint for contribution and other relief against several third-party defendants, including Vialco, relating to a lawsuit filed against SCRG seeking recovery of response costs relating to the aforementioned DPNR CERCLA matter. In February 2011, the court granted a motion by Century, dismissing Century from the case. Vialco, however, remains a defendant in this case. In March 2011, the court granted the remaining defendants’, including Vialco’s, motion for summary judgment, dismissing the case. The plaintiff filed a notice of appeal with the Third Circuit Court of Appeals in May 2011. The appeal is set for hearing in May 2012.
In December 2010, Century was among several defendants listed in a lawsuit filed by approximately 2,300 plaintiffs who either worked, resided or owned property in the area downwind from the St. Croix Alumina Refinery. In March 2011, Century was also named a defendant in a nearly identical suit brought by approximately 200 plaintiffs previously named in the aforementioned suit. The plaintiffs in both suits allege damages caused by the presence of red mud and other particulates coming from the alumina facility. The plaintiffs in both suits seek unspecified monetary damages, costs and attorney fees as well as certain injunctive relief. We have tendered indemnity and defense to St. Croix Alumina LLC and Alcoa Alumina & Chemical LLC under the terms of an acquisition agreement relating to the facility and have filed a motion to dismiss plaintiffs’ claims, but the court has not yet ruled on the motion.
Pursuant to the terms of the asset purchase agreement between Vialco and the purchaser of the St. Croix Alumina Refinery in 1995, the purchaser assumed responsibility for all costs and other liabilities associated with the bauxite waste disposal facilities, including pre-closure and post-closure liabilities. At this time, it is not practicable to predict the ultimate outcome of or to estimate a range of possible losses relating to any of the foregoing actions.
Legal Contingencies
We have pending against us or may be subject to various lawsuits, claims and proceedings related primarily to employment, commercial, environmental, shareholder, 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 our financial condition, results of operations, or liquidity.
In evaluating whether to accrue for costs associated with legal contingencies, it is our policy to take into consideration factors such as the facts and circumstances asserted, our historical experience with contingencies of a similar nature, the likelihood of our prevailing and the severity of any potential loss. For some matters, no accrual is established because we have assessed our risk of loss to be remote. Where the risk of loss is probable and the costs can be reasonably estimated, we record an accrual, either on an individual basis or with respect to a group of matters involving similar claims, based on the factors set forth above.
We also determine estimates of reasonably possible losses or ranges of reasonably possible losses in excess of related accrued liabilities, if any, when we have assessed that a loss is reasonably possible. Based on current knowledge, management has ascertained estimates for losses that are reasonably possible and management does not believe that any reasonably possible outcomes in excess of our accruals, if any, would be material to our financial condition, results of operations, or liquidity. We reevaluate and update our assessments and accruals as matters progress over time.
In November 2011, we were named as a defendant in a lawsuit filed by our former Chief Executive Officer, Logan Kruger, alleging breach of contract and wrongful termination in violation of public policy. The lawsuit alleges that Century anticipatorily breached the employment and severance protection agreements between Century and Mr. Kruger and that Century is obligated to make various severance payments in excess of $20,000 to Mr. Kruger under such agreements. In addition, the complaint seeks unspecified damages, including exemplary and punitive damages, for wrongful termination, as well as costs and attorneys’ fees. The trial court has transferred the matter to an arbitration panel for resolution. We believe these claims are without merit and intend to vigorously defend our self against them. The matter is in a preliminary stage, and we cannot predict the ultimate outcome of this action or estimate a range of possible losses related to this matter at this time. We do not expect that the ultimate costs to resolve this action will have a material adverse effect on our financial condition, results of operations or liquidity, regardless of the ultimate outcome.
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
In March 2011, the purported stockholder class actions pending against us consolidated as In re: Century Aluminum Company Securities Litigation were dismissed with prejudice by the United States District Court for the Northern District of California. The plaintiffs in the class actions allege that we improperly accounted for cash flows associated with the termination of certain forward financial sales contracts which accounting allegedly resulted in artificial inflation of our stock price and investor losses. Plaintiffs are seeking rescission of our February 2009 common stock offering, unspecified compensatory damages, including interest thereon, costs and expenses and attorneys’ fees. On March 10, 2011, plaintiffs filed a notice of appeal to the order and judgment entered by the court on March 3, 2011. The notice of appeal remains pending before the U.S. Court of Appeals for the Ninth Circuit.
Ravenswood Retiree Medical Benefits changes
Century Aluminum of West Virginia, Inc. (“CAWV”) amended its postretirement medical benefit plan, effective January 1, 2010, for all current and former CAWV salaried employees, their dependents and all bargaining unit employees who retired before June 1, 2006, and their dependents. Effective January 1, 2011, CAWV no longer provided retiree medical benefits to active salaried CAWV personnel or any other personnel who retired prior to November 1, 2010.
The principal changes to the plan as a result of this amendment were that, upon attainment of age 65, all CAWV provided retiree medical benefits ceased for retirees and dependents. In addition, bargaining unit retirees under age 65 and qualified dependents under age 65 were covered by the salary retiree medical plan which required out-of pocket payments for premiums, co-pays and deductibles by participants.
In November 2009, CAWV filed a class action complaint for declaratory judgment against the USWA, the USWA’s local union, and four CAWV retirees, individually and as class representatives, seeking a declaration of CAWV’s rights to modify/terminate retiree medical benefits as described above. Later in November 2009, the USWA and representatives of a retiree class filed a separate suit against CAWV, Century Aluminum Company, Century Aluminum Master Welfare Benefit Plan, and various John Does with respect to the foregoing. These actions, entitled Dewhurst, et al. v. Century Aluminum Co., et al., and Century Aluminum of West Virginia, Inc. v. United Steel, Paper and Forestry, Rubber Manufacturing, Energy, Allied Industrial & Service Workers International Union, AFL-CIO/CLC, et al., have been consolidated and venue has been set in the District Court for the Southern District of West Virginia.
In January 2010, the USWA filed a motion for preliminary injunction to prevent us from implementing the foregoing changes while these lawsuits are pending, which was dismissed by the trial court. In August 2011, the Fourth Circuit Court of Appeals upheld the District Court’s dismissal of the USWA’s motion for preliminary injunction, finding that the USWA had failed to establish the likelihood of success on the merits of the underlying matter. In October 2011, CAWV filed a motion to dismiss plaintiff’s first amended complaint with the trial court. No ruling has yet been made on the motion. In March 2012, the court granted a stay pending negotiations to restart Ravenswood. The plaintiffs have agreed in principle to settle the lawsuit upon a successful restart of Ravenswood, see “CAWV Retiree VEBA contributions” below.
Power Commitments
Hawesville
The Big Rivers Agreement has a term through December 2023, unless extended. The Big Rivers Agreement is a cost-based agreement that provides sufficient power for Hawesville’s full production capacity requirements. The Big Rivers Agreement is take-or-pay for Hawesville’s energy requirements at full production.
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
Mt. Holly
Mt. Holly has a power purchase agreement (the “Santee Cooper Agreement”) with the South Carolina Public Service Authority (“Santee Cooper”) with a term through December 2015, unless extended. The Santee Cooper Agreement provides adequate power for Mt. Holly’s full production capacity requirements at prices fixed based on published rate schedules (which are subject to change), with adjustments for fuel prices and other items. The Santee Cooper Agreement restricts Mt. Holly’s ability to reduce its power consumption (or the associated payment obligations) below contracted levels and to terminate the agreement, unless, in each case, the LME falls below certain negotiated levels.
Ravenswood
CAWV has a power purchase agreement (the “ApCo Agreement”) with the Appalachian Power Company (“ApCo”) with a term through June 2012, unless extended. CAWV currently purchases a limited amount of power under the ApCo Agreement as necessary to maintain its Ravenswood smelter, which is presently curtailed. Power is supplied under the ApCo Agreement at prices set forth in published tariffs (which are subject to change), with certain adjustments. Under the special rate contract, Ravenswood may be excused from, or may defer the payment of, any increase in the tariff rate if LME prices fall below certain negotiated levels. CAWV is in discussions with APCo to provide for a long-term special rate arrangement that establishes the LME-based cap on the tariff rates.
Grundartangi
Nordural Grundartangi ehf has power purchase agreements with HS Orka hf (“HS”), Landsvirkjun and Orkuveita Reykjavikur (“OR”) to provide power to its Grundartangi smelter. These power purchase agreements, which will expire on various dates from 2019 through 2036, provide power at LME-based variable rates. Each power purchase agreement contains take-or-pay obligations with respect to a significant percentage of the total committed and available power under such agreement.
Helguvik
Nordural Helguvik ehf has power purchase agreements with HS and OR to provide power to the Helguvik project. These power purchase agreements provide power at LME-based variable rates and contain take-or-pay obligations with respect to a significant percentage of the total committed and available power under such agreements. The first stage of power under the OR power purchase agreement (approximately 47.5 MW) became available in the fourth quarter of 2011 and is being utilized at Grundartangi until the first stage of the Helguvik project has been completed. No other power is currently available under either power purchase agreement. HS (with respect to all phases) and OR (with respect to all phases other than the first phase) have alleged that certain conditions to the delivery of power under the power purchase agreements have not been satisfied. Nordural Helguvik is in discussion with both HS and OR with respect to such conditions.
Other Commitments and Contingencies
Labor Commitments
Approximately 75% of our U.S. based work force is represented by the USWA. CAKY’s Hawesville plant employees represented by the USWA are under a collective bargaining agreement which expires on March 31, 2015.
In April 2010, Nordural Grundartangi ehf entered into a new labor agreement with the five labor unions representing approximately 84% of Grundartangi’s work force. The labor agreement expires on December 31, 2014.
CAWV’s Ravenswood plant employees represented by the USWA are under a labor agreement that expired on August 31, 2010. Negotiations for a new labor agreement are ongoing.
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
CAWV Retiree VEBA contributions
We have reached an agreement in principle with the CAWV retirees to make contributions to a voluntary employee beneficiary association (“VEBA”) trust that would provide certain health care benefits to these retirees and their eligible dependents in the event of a restart of our Ravenswood facility. If this agreement were entered into, our obligations under the agreement, including any contributions to the VEBA, would be contingent upon the occurrence of several future events that are necessary in order to restart the Ravenswood facility. None of these events, including the finalization of this agreement, are certain to occur.
Other Commitments
The Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act were enacted in March 2010. The Health Care Acts extend health care coverage to many uninsured individuals and expands coverage to those already insured. The Health Care Acts contain provisions which could impact our retiree medical benefits in future periods. However, the extent of that impact, if any, cannot be determined until regulations are promulgated under the Health Care Acts and additional interpretations of the Health Care Acts become available. We are continuing to assess the potential impacts that this legislation may have on our future results of operations, cash flows and financial position related to our health care benefits and other postemployment benefit obligations. Among other things, the Health Care Acts will eliminate the tax deductibility of the Medicare Part D subsidy for companies that provide qualifying prescription drug coverage to retirees effective for years beginning after December 31, 2012.
10. | Forward delivery contracts and financial instruments |
As a producer of primary aluminum, we are exposed to fluctuating raw material and primary aluminum prices. We enter into fixed and market priced contracts for the sale of primary aluminum and the purchase of raw materials in future periods.
Forward Physical Delivery Agreements
Primary Aluminum Sales Contracts
Contract | Customer | Volume | Term | Pricing |
Glencore Metal Agreement (1) | Glencore | 20,400 mtpy | Through December 31, 2013 | Variable, based on U.S. Midwest market |
Glencore Sweep Agreement (2) | Glencore | Surplus primary aluminum produced in the United States | Through December 31, 2012 | Variable, based on U.S. Midwest market |
Glencore Nordural Metal Agreement | Glencore | Approximately 16,000 metric tons | Through December 31, 2012 | Variable, based on LME |
Southwire Metal Agreement (3) | Southwire | 240 million pounds per year (high conductivity molten aluminum) | Through December 31, 2013 | Variable, based on U.S. Midwest market |
(1) | We account for the Glencore Metal Agreement as a derivative instrument under ASC 815. Under the Glencore Metal Agreement, pricing is based on then-current Midwest market prices, adjusted by a negotiated U.S. Midwest premium with a cap and a floor as applied to the current U.S. Midwest premium. |
(2) | The Glencore Sweep Agreement is for all metal produced in the U.S. in 2012, less existing sales agreements and high-purity metal sales. The term of the contract may be extended for one year upon mutual agreement. |
(3) | The Southwire Metal Agreement contains termination rights in the event of a partial or full curtailment of the Hawesville facility. |
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
Long-term Tolling Contracts
Contract | Customer | Volume | Term | Pricing |
Billiton Tolling Agreement (1) | BHP Billiton | 130,000 mtpy | Through December 31, 2013 | LME-based |
Glencore Toll Agreement (1) | Glencore | 90,000 mtpy | Through July 31, 2016 | LME-based |
Glencore Toll Agreement (1) | Glencore | 40,000 mtpy | Through December 31, 2014 | LME-based |
(1) | Grundartangi’s tolling revenues include a premium based on the European Union (“EU”) import duty for primary aluminum. |
Apart from the Glencore Metal Agreement, the Glencore Sweep Agreement, the Glencore Nordural Metal Agreement and the Southwire Metal Agreement, we had the following forward delivery contractual commitments:
Other forward delivery contracts
March 31, 2012 | December 31, 2011 | |||
(in metric tons) | ||||
Other forward delivery contracts – total | 63,898 | 41,504 | ||
Other forward delivery contracts – Glencore | 5,219 | 3,423 | ||
Other forward delivery contracts – fixed price | 1,361 | 41 | ||
Forward Financial Instruments
We are party to various forward financial and physical delivery contracts, including primary aluminum put option contracts, which are accounted for as derivative instruments. See Note 3 Derivative and hedging instruments for additional information about these instruments.
11. | Supplemental cash flow information |
Three months ended March 31, | ||||||
2012 | 2011 | |||||
Cash paid for: | ||||||
Interest | $ | 116 | $ | 533 | ||
Income/withholding taxes (1) | 11,263 | 27,239 | ||||
(1) | We paid withholding taxes in Iceland of $9,484 and $26,900 in the three months ended March 31, 2012 and 2011, respectively. Our tax payments in Iceland for withholding taxes, estimated and prepayments of Icelandic income taxes and any associated refunds are denominated in ISK. |
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
12. | Asset retirement obligations (“ARO”) |
Our asset retirement obligations consist primarily of costs associated with the disposal of spent pot liner used in the reduction cells of our domestic facilities.
The reconciliation of the changes in the asset retirement obligations is presented below:
Three months ended March 31, 2012 | Year ended December 31, 2011 | |||||
Beginning balance, ARO liability | $ | 15,171 | $ | 14,274 | ||
Additional ARO liability incurred | 291 | 1,110 | ||||
ARO liabilities settled | (345 | ) | (1,315 | ) | ||
Accretion expense | 292 | 1,102 | ||||
Ending balance, ARO liability | $ | 15,409 | $ | 15,171 | ||
Certain conditional AROs related to the disposal costs of fixed assets at our primary aluminum facilities have not been recorded because they have an indeterminate settlement date. These conditional AROs will be initially recognized in the period in which sufficient information exists to estimate their fair value.
13. | Components of Accumulated other comprehensive loss |
Components of Accumulated other comprehensive loss: | ||||||
March 31, 2012 | December 31, 2011 | |||||
Unrealized loss on financial instruments | $ | (1,061 | ) | $ | (1,040 | ) |
Defined benefit plan liabilities | (141,100 | ) | (142,259 | ) | ||
Equity in investee other comprehensive income (1) | (8,476 | ) | (8,476 | ) | ||
Other comprehensive loss before income tax effect | (150,637 | ) | (151,775 | ) | ||
Income tax effect | 16,805 | 17,187 | ||||
Accumulated other comprehensive loss | $ | (133,832 | ) | $ | (134,588 | ) |
(1) | The amount includes our equity in the other comprehensive income of Mt. Holly Aluminum Company. |
14. | Components of net periodic benefit cost |
Pension Benefits | Other Postretirement Benefits | ||||||||||||
Three months ended March 31, | Three months ended March 31, | ||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||
Service cost | $ | 895 | $ | 858 | $ | 525 | $ | 359 | |||||
Interest cost | 1,830 | 1,680 | 1,486 | 1,386 | |||||||||
Expected return on plan assets | (1,700 | ) | (1,540 | ) | — | — | |||||||
Amortization of prior service cost (1) | 35 | 35 | (1,060 | ) | (15,155 | ) | |||||||
Amortization of net loss | 688 | 482 | 1,496 | 5,803 | |||||||||
Net periodic benefit cost | $ | 1,748 | $ | 1,515 | $ | 2,447 | $ | (7,607 | ) | ||||
(1) | Plan amendments made in November 2010 resulted in a reduction in OPEB liability and a credit to accumulated other comprehensive loss. The resulting prior service benefit and actuarial losses were amortized ratably into income over the period November 1, 2010 to June 30, 2011 at which time the CAWV OPEB plan terminated. |
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Notes to the Consolidated Financial Statements - continued
(Unaudited)
Employer contributions
During the three months ended March 31, 2012, we have made contributions of approximately $3,900 to the qualified defined benefit plans we sponsor, including both qualified defined benefit plan and non-qualified SERB contributions.
15. | Recently issued and adopted accounting standards |
We evaluate the impact of the Financial and Accounting Standards Board (“FASB”) accounting standards updates (“ASUs”) issued. When the adoption or planned adoption of recently issued ASUs will potentially have a material impact on our consolidated financial position, results of operations, and cash flows, we disclose the quantitative and qualitative effects of the adoption in our consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement.” This ASU amended the requirements for measuring fair value and disclosing information about fair value measurements and is effective for Century on January 1, 2012. Upon adoption, this standard did not have any impact on the reporting of our financial condition or results of operations.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income”. This ASU addresses the financial statement presentation of other comprehensive income and its components. Companies may elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. At December 31, 2011, we adopted ASU 2011-05 and included the updated presentation requirements in the current financial statements. This guidance only impacted the presentation of our financial statements and had no impact on our financial position, results of operations or cash flows.
16. | Condensed consolidating financial information |
Our 8.0% senior secured notes due 2014 and 7.5% senior unsecured notes due 2014 are guaranteed by each of our material existing and future domestic subsidiaries, except for Nordural US LLC. Each subsidiary guarantor is 100% owned by Century. All guarantees are full and unconditional; all guarantees are joint and several. These notes are not guaranteed by our foreign subsidiaries (such subsidiaries and Nordural US LLC, collectively the “Non-Guarantor Subsidiaries”). We allocate corporate expenses or income to our subsidiaries and charge interest on certain intercompany balances.
The following summarized condensed consolidating balance sheets as of March 31, 2012 and December 31, 2011, condensed consolidating statements of operations for the three months ended March 31, 2012 and March 31, 2011 and the condensed consolidating statements of cash flows for the three months ended March 31, 2012 and March 31, 2011 present separate results for Century, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries, consolidating adjustments and total consolidated amounts.
This summarized condensed consolidating financial information may not necessarily be indicative of the results of operations or financial position had Century, the guarantor subsidiaries or the non-guarantor subsidiaries operated as independent entities.
24
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET | |||||||||||||||
As of March 31, 2012 | |||||||||||||||
Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | The Company | Reclassifications and Eliminations | Consolidated | |||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | $ | — | $ | 154,506 | $ | 28,039 | $ | — | $ | 182,545 | |||||
Accounts receivable — net | 36,348 | 14,183 | — | — | 50,531 | ||||||||||
Due from affiliates | 615,425 | 8,193 | 2,469,467 | (3,053,868 | ) | 39,217 | |||||||||
Inventories | 103,057 | 67,245 | — | — | 170,302 | ||||||||||
Prepaid and other current assets | 3,624 | 37,315 | 2,911 | — | 43,850 | ||||||||||
Total current assets | 758,454 | 281,442 | 2,500,417 | (3,053,868 | ) | 486,445 | |||||||||
Investment in subsidiaries | 36,730 | — | (998,608 | ) | 961,878 | — | |||||||||
Property, plant and equipment — net | 332,665 | 872,655 | 1,073 | (287 | ) | 1,206,106 | |||||||||
Other assets | 21,842 | 43,823 | 39,210 | — | 104,875 | ||||||||||
Total | $ | 1,149,691 | $ | 1,197,920 | $ | 1,542,092 | $ | (2,092,277 | ) | $ | 1,797,426 | ||||
Liabilities and shareholders’ equity: | |||||||||||||||
Accounts payable, trade | $ | 32,733 | $ | 40,566 | $ | 1,687 | $ | — | $ | 74,986 | |||||
Due to affiliates | 2,107,644 | 77,522 | 202,812 | (2,346,434 | ) | 41,544 | |||||||||
Accrued and other current liabilities | 11,173 | 22,998 | 14,746 | — | 48,917 | ||||||||||
Accrued employee benefits costs — current portion | 13,918 | — | 2,270 | — | 16,188 | ||||||||||
Industrial revenue bonds | 7,815 | — | — | — | 7,815 | ||||||||||
Total current liabilities | 2,173,283 | 141,086 | 221,515 | (2,346,434 | ) | 189,450 | |||||||||
Senior notes payable | — | — | 249,769 | — | 249,769 | ||||||||||
Accrued pension benefit costs — less current portion | 37,395 | — | 30,876 | — | 68,271 | ||||||||||
Accrued postretirement benefit costs — less current portion | 123,252 | — | 5,667 | — | 128,919 | ||||||||||
Other liabilities/intercompany loan | 63,940 | 679,726 | 3,521 | (707,721 | ) | 39,466 | |||||||||
Deferred taxes — less current portion | — | 90,807 | — | — | 90,807 | ||||||||||
Total noncurrent liabilities | 224,587 | 770,533 | 289,833 | (707,721 | ) | 577,232 | |||||||||
Shareholders’ equity: | |||||||||||||||
Preferred stock | — | — | 1 | — | 1 | ||||||||||
Common stock | 60 | 12 | 932 | (72 | ) | 932 | |||||||||
Additional paid-in capital | 297,300 | 144,383 | 2,506,987 | (441,683 | ) | 2,506,987 | |||||||||
Treasury stock, at cost | — | — | (49,924 | ) | — | (49,924 | ) | ||||||||
Accumulated other comprehensive loss | (131,278 | ) | (1,411 | ) | (133,832 | ) | 132,689 | (133,832 | ) | ||||||
Retained earnings (accumulated deficit) | (1,414,261 | ) | 143,317 | (1,293,420 | ) | 1,270,944 | (1,293,420 | ) | |||||||
Total shareholders’ equity | (1,248,179 | ) | 286,301 | 1,030,744 | 961,878 | 1,030,744 | |||||||||
Total | $ | 1,149,691 | $ | 1,197,920 | $ | 1,542,092 | $ | (2,092,277 | ) | $ | 1,797,426 | ||||
25
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET | |||||||||||||||
As of December 31, 2011 | |||||||||||||||
Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | The Company | Reclassifications and Eliminations | Consolidated | |||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | $ | — | $ | 159,157 | $ | 24,244 | $ | — | $ | 183,401 | |||||
Accounts receivable — net | 40,062 | 7,585 | — | — | 47,647 | ||||||||||
Due from affiliates | 616,830 | 13,517 | 2,474,727 | (3,060,409 | ) | 44,665 | |||||||||
Inventories | 96,197 | 75,764 | — | — | 171,961 | ||||||||||
Prepaid and other current assets | 8,668 | 38,809 | 3,169 | (10,000 | ) | 40,646 | |||||||||
Total current assets | 761,757 | 294,832 | 2,502,140 | (3,070,409 | ) | 488,320 | |||||||||
Investment in subsidiaries | 36,965 | — | (995,131 | ) | 958,166 | — | |||||||||
Property, plant and equipment — net | 338,946 | 878,333 | 1,211 | (265 | ) | 1,218,225 | |||||||||
Other assets | 21,870 | 43,269 | 39,410 | — | 104,549 | ||||||||||
Total | $ | 1,159,538 | $ | 1,216,434 | $ | 1,547,630 | $ | (2,112,508 | ) | $ | 1,811,094 | ||||
Liabilities and shareholders’ equity: | |||||||||||||||
Accounts payable, trade | $ | 43,215 | $ | 42,278 | $ | 679 | $ | — | $ | 86,172 | |||||
Due to affiliates | 2,103,687 | 78,411 | 205,651 | (2,345,845 | ) | 41,904 | |||||||||
Accrued and other current liabilities | 10,596 | 29,822 | 10,358 | (10,000 | ) | 40,776 | |||||||||
Accrued employee benefits costs — current portion | 14,267 | — | 2,431 | — | 16,698 | ||||||||||
Industrial revenue bonds | 7,815 | — | — | — | 7,815 | ||||||||||
Total current liabilities | 2,179,580 | 150,511 | 219,119 | (2,355,845 | ) | 193,365 | |||||||||
Senior notes payable | — | — | 249,512 | — | 249,512 | ||||||||||
Accrued pension benefit costs — less current portion | 40,277 | — | 30,622 | — | 70,899 | ||||||||||
Accrued postretirement benefit costs — less current portion | 122,609 | — | 5,469 | — | 128,078 | ||||||||||
Other liabilities/intercompany loan | 63,369 | 686,834 | 4,631 | (714,829 | ) | 40,005 | |||||||||
Deferred taxes — less current portion | — | 90,958 | — | — | 90,958 | ||||||||||
Total noncurrent liabilities | 226,255 | 777,792 | 290,234 | (714,829 | ) | 579,452 | |||||||||
Shareholders’ equity: | |||||||||||||||
Preferred stock | — | — | 1 | — | 1 | ||||||||||
Common stock | 60 | 12 | 932 | (72 | ) | 932 | |||||||||
Additional paid-in capital | 297,300 | 144,383 | 2,506,842 | (441,683 | ) | 2,506,842 | |||||||||
Treasury stock, at cost | — | — | (45,891 | ) | — | (45,891 | ) | ||||||||
Accumulated other comprehensive income (loss) | (132,235 | ) | (1,373 | ) | (134,588 | ) | 133,608 | (134,588 | ) | ||||||
Retained earnings (accumulated deficit) | (1,411,422 | ) | 145,109 | (1,289,019 | ) | 1,266,313 | (1,289,019 | ) | |||||||
Total shareholders’ equity | (1,246,297 | ) | 288,131 | 1,038,277 | 958,166 | 1,038,277 | |||||||||
Total | $ | 1,159,538 | $ | 1,216,434 | $ | 1,547,630 | $ | (2,112,508 | ) | $ | 1,811,094 | ||||
26
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS | |||||||||||||||
For the three months ended March 31, 2012 | |||||||||||||||
Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | The Company | Reclassifications and Eliminations | Consolidated | |||||||||||
Net sales: | |||||||||||||||
Third-party customers | $ | 135,854 | $ | 52,985 | $ | — | $ | — | $ | 188,839 | |||||
Related parties | 74,530 | 62,821 | — | — | 137,351 | ||||||||||
210,384 | 115,806 | — | — | 326,190 | |||||||||||
Cost of goods sold | 206,936 | 98,662 | — | — | 305,598 | ||||||||||
Gross profit | 3,448 | 17,144 | — | — | 20,592 | ||||||||||
Other operating loss - net | 3,721 | — | — | — | 3,721 | ||||||||||
Selling, general and admin expenses | 7,979 | 480 | — | — | 8,459 | ||||||||||
Operating income | (8,252 | ) | 16,664 | — | — | 8,412 | |||||||||
Interest expense – third party | (5,978 | ) | — | — | — | (5,978 | ) | ||||||||
Interest expense – affiliates | 16,218 | (16,218 | ) | — | — | — | |||||||||
Interest income – third party | 11 | 127 | — | — | 138 | ||||||||||
Interest income – affiliates | — | 60 | — | — | 60 | ||||||||||
Net loss on forward contracts | (5,159 | ) | — | — | — | (5,159 | ) | ||||||||
Other income (loss) - net | 804 | (498 | ) | — | — | 306 | |||||||||
Income (loss) before taxes and equity in earnings (loss) of subsidiaries and joint ventures | (2,356 | ) | 135 | — | — | (2,221 | ) | ||||||||
Income tax expense | (253 | ) | (2,568 | ) | — | — | (2,821 | ) | |||||||
Income (loss) before equity in earnings (loss) of subsidiaries and joint ventures | (2,609 | ) | (2,433 | ) | — | — | (5,042 | ) | |||||||
Equity earnings (loss) of subsidiaries and joint ventures | (230 | ) | 641 | (4,401 | ) | 4,631 | 641 | ||||||||
Net loss | $ | (2,839 | ) | $ | (1,792 | ) | $ | (4,401 | ) | $ | 4,631 | $ | (4,401 | ) | |
27
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS | |||||||||||||||
For the three months ended March 31, 2011 | |||||||||||||||
Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | The Company | Reclassifications and Eliminations | Consolidated | |||||||||||
Net sales: | |||||||||||||||
Third-party customers | $ | 130,487 | $ | 57,825 | $ | — | $ | — | $ | 188,312 | |||||
Related parties | 67,312 | 70,713 | — | — | 138,025 | ||||||||||
197,799 | 128,538 | — | — | 326,337 | |||||||||||
Cost of goods sold | 187,020 | 97,001 | — | — | 284,021 | ||||||||||
Gross profit | 10,779 | 31,537 | — | — | 42,316 | ||||||||||
Other operating income - net | (5,884 | ) | — | — | — | (5,884 | ) | ||||||||
Selling, general and admin expenses | 9,100 | 1,509 | — | — | 10,609 | ||||||||||
Operating income | 7,563 | 30,028 | — | — | 37,591 | ||||||||||
Interest expense – third party | (6,777 | ) | — | — | — | (6,777 | ) | ||||||||
Interest expense – affiliates | 17,230 | (17,230 | ) | — | — | — | |||||||||
Interest income – third party | 30 | 125 | — | — | 155 | ||||||||||
Interest income – affiliates | — | 113 | — | — | 113 | ||||||||||
Net loss on forward contracts | (4,809 | ) | — | — | — | (4,809 | ) | ||||||||
Other income - net | 616 | 61 | — | — | 677 | ||||||||||
Income before taxes and equity in earnings of subsidiaries and joint ventures | 13,853 | 13,097 | — | — | 26,950 | ||||||||||
Income tax benefit (expense) | 1,821 | (4,944 | ) | — | — | (3,123 | ) | ||||||||
Income before equity in earnings of subsidiaries and joint ventures | 15,674 | 8,153 | — | — | 23,827 | ||||||||||
Equity earnings of subsidiaries and joint ventures | 1,202 | 1,219 | 25,046 | (26,248 | ) | 1,219 | |||||||||
Net income | $ | 16,876 | $ | 9,372 | $ | 25,046 | $ | (26,248 | ) | $ | 25,046 | ||||
28
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME | |||||||||||||||
For the three months ended March 31, 2012 | |||||||||||||||
Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | The Company | Reclassifications and Eliminations | Consolidated | |||||||||||
Comprehensive income (loss) | |||||||||||||||
Net loss | $ | (2,839 | ) | $ | (1,792 | ) | $ | (4,401 | ) | $ | 4,631 | $ | (4,401 | ) | |
Other comprehensive income (loss) before income tax effect: | |||||||||||||||
Net unrealized loss on financial instruments | (246 | ) | — | — | — | (246 | ) | ||||||||
Net loss reclassified to income on financial instruments | 272 | — | — | — | 272 | ||||||||||
Net amount of foreign currency cash flow hedges reclassified as income | — | (47 | ) | — | — | (47 | ) | ||||||||
Defined benefit plans and other postretirement benefits: | |||||||||||||||
Amortization of prior service benefit | (1,035 | ) | — | 10 | — | (1,025 | ) | ||||||||
Amortization of net loss | 1,991 | — | 193 | — | 2,184 | ||||||||||
Other comprehensive income (loss) before income tax effect | 982 | (47 | ) | 203 | — | 1,138 | |||||||||
Income tax effect | (322 | ) | 8 | (68 | ) | — | (382 | ) | |||||||
Other comprehensive income (loss) | 660 | (39 | ) | 135 | — | 756 | |||||||||
Total comprehensive loss | $ | (2,179 | ) | $ | (1,831 | ) | $ | (4,266 | ) | $ | 4,631 | $ | (3,645 | ) | |
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME | |||||||||||||||
For the three months ended March 31, 2011 | |||||||||||||||
Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | The Company | Reclassifications and Eliminations | Consolidated | |||||||||||
Comprehensive income (loss) | |||||||||||||||
Net income | $ | 16,876 | $ | 9,372 | $ | 25,046 | $ | (26,248 | ) | $ | 25,046 | ||||
Other comprehensive income (loss) before income tax effect: | |||||||||||||||
Net unrealized loss on financial instruments | (11 | ) | — | — | — | (11 | ) | ||||||||
Net loss reclassified to income on financial instruments | (6 | ) | — | — | — | (6 | ) | ||||||||
Net amount of foreign currency cash flow hedges reclassified as income | — | (46 | ) | — | — | (46 | ) | ||||||||
Defined benefit plans and other postretirement benefits: | |||||||||||||||
Amortization of prior service benefit | (15,122 | ) | — | 3 | — | (15,119 | ) | ||||||||
Amortization of net loss | 6,125 | — | 160 | — | 6,285 | ||||||||||
Other comprehensive income (loss) before income tax effect | (9,014 | ) | (46 | ) | 163 | — | (8,897 | ) | |||||||
Income tax effect | (2,514 | ) | 8 | 46 | — | (2,460 | ) | ||||||||
Other comprehensive income (loss) | (11,528 | ) | (38 | ) | 209 | — | (11,357 | ) | |||||||
Total comprehensive income | $ | 5,348 | $ | 9,334 | $ | 25,255 | $ | (26,248 | ) | $ | 13,689 | ||||
29
CENTURY ALUMINUM COMPANY
Notes to the Consolidated Financial Statements - continued
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS | ||||||||||||
For the three months ended March 31, 2012 | ||||||||||||
Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | The Company | Consolidated | |||||||||
Net cash provided by (used in) operating activities | $ | 13,292 | $ | (8,394 | ) | $ | — | $ | 4,898 | |||
Investing activities: | ||||||||||||
Purchase of property, plant and equipment | (1,649 | ) | (1,223 | ) | (27 | ) | (2,899 | ) | ||||
Nordural expansion | — | (1,946 | ) | — | (1,946 | ) | ||||||
Proceeds from the sale of property, plant and equipment | — | 58 | — | 58 | ||||||||
Investments in and advances to joint ventures | — | — | (100 | ) | (100 | ) | ||||||
Payments received on advances to joint ventures | — | — | 3,166 | 3,166 | ||||||||
Net cash provided by (used in) investing activities | (1,649 | ) | (3,111 | ) | 3,039 | (1,721 | ) | |||||
Financing activities: | ||||||||||||
Borrowings under revolving credit facility | — | — | 18,076 | 18,076 | ||||||||
Repayments under revolving credit facility | — | — | (18,076 | ) | (18,076 | ) | ||||||
Intercompany transactions | (11,643 | ) | 6,854 | 4,789 | — | |||||||
Repurchase of common stock | — | — | (4,033 | ) | (4,033 | ) | ||||||
Net cash provided by (used in) financing activities | (11,643 | ) | 6,854 | 756 | (4,033 | ) | ||||||
Net change in cash and cash equivalents | — | (4,651 | ) | 3,795 | (856 | ) | ||||||
Cash and cash equivalents, beginning of the period | — | 159,157 | 24,244 | 183,401 | ||||||||
Cash and cash equivalents, end of the period | $ | — | $ | 154,506 | $ | 28,039 | $ | 182,545 | ||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS | ||||||||||||
For the three months ended March 31, 2011 | ||||||||||||
Combined Guarantor Subsidiaries | Combined Non-Guarantor Subsidiaries | The Company | Consolidated | |||||||||
Net cash provided by (used in) operating activities | $ | 1,251 | $ | (4,881 | ) | $ | — | $ | (3,630 | ) | ||
Investing activities: | ||||||||||||
Purchase of property, plant and equipment | (2,319 | ) | (793 | ) | (16 | ) | (3,128 | ) | ||||
Nordural expansion | — | (4,051 | ) | — | (4,051 | ) | ||||||
Net cash used in investing activities | (2,319 | ) | (4,844 | ) | (16 | ) | (7,179 | ) | ||||
Financing activities: | ||||||||||||
Intercompany transactions | 1,068 | 15,859 | (16,927 | ) | — | |||||||
Net cash provided by (used in) financing activities | 1,068 | 15,859 | (16,927 | ) | — | |||||||
Net change in cash and cash equivalents | — | 6,134 | (16,943 | ) | (10,809 | ) | ||||||
Cash and cash equivalents, beginning of the period | — | 214,923 | 89,373 | 304,296 | ||||||||
Cash and cash equivalents, end of the period | $ | — | $ | 221,057 | $ | 72,430 | $ | 293,487 | ||||
17. | Subsequent events |
We have evaluated all subsequent events through the date the financial statements were issued.
30
FORWARD-LOOKING STATEMENTS
This quarterly report includes forward-looking statements, which are subject to the “safe harbor” created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our SEC filings, press releases, news articles, earnings presentations and when we are speaking on behalf of the Company. Forward-looking statements can be identified by the fact that they do not strictly relate to historical or current facts. Often, they include the words “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may.” Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A of Part I of our 2011 Annual Report on Form 10-K and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Forward-looking statements in this quarterly report, for example, include statements about the following subjects, among other things:
• | Our business objectives, strategies and initiatives, the growth of our business and our competitive position and prospects; |
• | Our assessment of significant economic, financial, political and other factors and developments that may affect our results, including currency risks; |
• | Our assessment of the aluminum market, aluminum prices, aluminum financing, inventories and warehousing arrangements and other similar matters; |
• | Aluminum prices and their effect on our financial position and results of operations; |
• | Future construction investment and development of our facility in Helguvik, Iceland, including our discussions regarding power purchase agreements, future capital expenditures, the costs of completion or cancellation, production capacity and the sources of funding for the facility; |
• | Our hedging and other strategies to mitigate risk and their potential effects; |
• | Our curtailed operations, including the potential restart of curtailed operations, and potential curtailment of other domestic assets; |
• | Our procurement of electricity, alumina, carbon products and other raw materials and our assessment of pricing and other terms relating thereto; |
• | Estimates of our pension and other postemployment liabilities and future payments, deferred income tax assets and property plant and equipment impairment, environmental liabilities and other contingent liabilities and contractual commitments; |
• | Our agreement in principle with the CAWV retirees and any contributions to a voluntary employee benefit association relating to that agreement; |
• | Changes in, or the elimination of, the retiree medical benefit plans and programs of certain of our subsidiaries and their effect on our financial position and results of operation; |
• | Discussions with the Pension Benefit Guaranty Corporation regarding our Ravenswood facility; |
• | Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or changes in accounting principle; |
• | Our anticipated tax liabilities, benefits or refunds; |
• | Our assessment of the ultimate outcome of outstanding litigation, including litigation with our former CEO, and environmental matters and liabilities relating thereto; |
• | Compliance with laws and regulations and the effect of future laws and regulations; |
• | Our capital resources, projected financing sources and projected uses of capital; and |
• | Our debt levels and intentions to incur or repay debt in the future. |
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Developments
CAWV Retiree VEBA contributions
We have reached an agreement in principle with the CAWV retirees to make contributions to a voluntary employee beneficiary association (“VEBA”) trust that would provide certain health care benefits to these retirees and their eligible dependents in the event of a restart of our Ravenswood facility. If this agreement were entered into, our obligations under the agreement, including any contributions to the VEBA, would be contingent upon the occurrence of several future events that are necessary in order to restart the Ravenswood facility. None of these events, including the finalization of this agreement, are certain to occur.
Century appoints Michael Bless as President and Chief Executive Officer
In February 2012, we announced that our Board of Directors had appointed Michael Bless President and Chief Executive Officer of Century. Mr. Bless, who was named Acting President and Chief Executive Officer in November 2011, had previously served as Century's Executive Vice President and Chief Financial Officer since January 2006.
Results of Operations
The following discussion reflects our historical results of operations.
Century’s financial highlights include:
Three months ended March 31, | ||||||
2012 | 2011 | |||||
(In thousands, except per share data) | ||||||
Net sales: | ||||||
Third-party customers | $ | 188,839 | $ | 188,312 | ||
Related parties | 137,351 | 138,025 | ||||
Total | $ | 326,190 | $ | 326,337 | ||
Gross profit | $ | 20,592 | $ | 42,316 | ||
Net income (loss) | $ | (4,401 | ) | $ | 25,046 | |
Earnings (loss) per common share: | ||||||
Basic and Diluted | $ | (0.05 | ) | $ | 0.25 | |
Three months ended March 31, | ||||
2012 | 2011 | |||
Shipments – primary aluminum (metric tons): | ||||
Direct | 94,087 | 80,479 | ||
Toll | 65,880 | 63,699 | ||
Total | 159,967 | 144,178 | ||
32
Net sales (in millions) | 2012 | 2011 | $ Difference | % Difference | |||||||
Three months ended March 31, | $ | 326.2 | $ | 326.3 | $ | (0.1 | ) | — | % | ||
Lower price realizations for our primary aluminum shipments in the three months ended March 31, 2012 were due to lower LME prices for primary aluminum, which were partially off-set by increased Midwest premiums. The lower price realizations resulted in a $38.3 million sales decrease. Higher shipment volumes had a $38.2 million positive impact on net sales. Direct shipments from our three operating smelters increased 13,608 metric tons in the three months ended March 31, 2012 due to the restart of idled capacity at our Hawesville facility. Toll shipments increased 2,181 metric tons relative to the same period last year.
Gross profit (in millions) | 2012 | 2011 | $ Difference | % Difference | |||||||
Three months ended March 31, | $ | 20.6 | $ | 42.3 | $ | (21.7 | ) | (51.3 | )% | ||
During the three months ended March 31, 2012, lower price realizations, net of LME-based alumina cost and LME-based power cost, reduced gross profit by $34.2 million. The increased volume increased gross profit by $3.1 million. In addition, we experienced $7.5 million in net cost increases, relative to the same period in 2011, comprised of: increased power and natural gas costs at our U.S. smelters, $2.9 million; increased costs for materials, supplies and maintenance, $8.5 million; offset by reduced depreciation, $0.3 million and other cost decreases, $3.6 million.
Our operating costs in the three months ended March 31, 2011 include the costs to restart idled capacity at the Hawesville facility. The impact of the restart costs is included in the amounts reported above.
Declines in LME prices at the end of the fourth quarter of 2011 resulted in a decline in the market value of our inventory below its cost basis, resulting in a lower of cost or market reserve of $19.8 million on the balance sheet as of December 31, 2011. During the three months ended March 31, 2012, our cost of goods sold was reduced by $17.1 million to reflect the market basis of inventory sold during the quarter that had previously been written-down to its market value and to reflect the lower of cost or market value of the March 31, 2012 inventory. This represents a quarter to quarter positive impact on gross profit of $16.9 million.
Other operating expenses (income) - net (in millions) | 2012 | 2011 | $ Difference | % Difference | |||||||
Three months ended March 31, | $ | 3.7 | $ | (5.9 | ) | $ | 9.6 | (163.2 | )% | ||
Other operating expenses (income) reflects the on-going costs at the curtailed Ravenswood facility. In addition, net benefits of $9.4 million were recorded at Ravenswood in the three months ended March 31, 2011, a substantial portion of the net benefits recorded represents the amortization of prior service credits and actuarial losses resulting from the elimination of medical benefits for retirees of the Ravenswood facility.
Selling, general and administrative expenses (in millions) | 2012 | 2011 | $ Difference | % Difference | |||||||
Three months ended March 31, | $ | 8.5 | $ | 10.6 | $ | (2.1 | ) | (19.8 | )% | ||
Reduced expenditures related to the Helguvik power arbitration and reduced accruals for our variable compensation programs were the primary items contributing to the reduction in selling, general and administration expenses in the first quarter of 2012.
Net loss on forward contracts (in millions) | 2012 | 2011 | $ Difference | % Difference | |||||||
Three months ended March 31, | $ | (5.2 | ) | $ | (4.8 | ) | $ | (0.4 | ) | 8.3 | % |
The net loss on forward contracts for the three months ended March 31, 2012 and 2011 related primarily to marking-to-market primary aluminum put options that were put in place to provide partial downside price protection for our domestic facilities. During the three months ended March 31, 2012 and 2011, movements in the LME price for aluminum and the passage of time caused declines in the value of the unexpired put options, resulting in the recording of net losses on forward contracts.
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Income tax expense (in millions) | 2012 | 2011 | $ Difference | % Difference | |||||||
Three months ended March 31, | $ | (2.8 | ) | $ | (3.1 | ) | $ | 0.3 | (9.6 | )% | |
Our 2012 and 2011 income tax expense was primarily driven by our earnings in Iceland. In addition, during the three months ended March 31, 2011, we had a partial offset to income tax expense due to a discrete tax benefit arising from the elimination of medical benefits for retirees of the Ravenswood facility.
Equity in the earnings of joint ventures (in millions) | 2012 | 2011 | $ Difference | % Difference | |||||||
Three months ended March 31, | $ | 0.6 | $ | 1.2 | $ | (0.6 | ) | (50.0 | )% | ||
The amounts reported in both periods primarily reflect Century's equity in the earnings of its joint venture, BHH.
Liquidity and Capital Resources
Our principal sources of liquidity are available cash, cash flow from operations and available borrowings under our revolving credit facility. We have also raised capital in the past through the public equity and debt markets. We continuously explore various other financing alternatives. Our principal uses of cash are the funding of operating costs (including postemployment benefits), maintenance of curtailed production facilities, payments of principal and interest on our outstanding debt, the funding of capital expenditures, investments in our growth activities and in related businesses, repurchases of common stock, working capital and other general corporate requirements.
Our consolidated cash and cash equivalents balance at March 31, 2012 was approximately $183 million compared to $183 million at December 31, 2011. Century's revolving credit facility matures in July 2014. As of March 31, 2012, our credit facility had no loan amounts outstanding and approximately $53 million of net availability. We have approximately $41 million of letters of credit outstanding under our credit facility, which allowed us to eliminate our restricted cash deposits. Future curtailments of domestic production capacity would reduce domestic accounts receivable and inventory, which comprise the borrowing base of our credit facility, and would result in a corresponding reduction in availability under the credit facility.
In August 2011, our Board of Directors approved a $60 million stock repurchase program. Through March 31, 2012, we have expended approximately $50 million under the program. We have approximately $10 million remaining under the repurchase program authorization. The repurchase program may be suspended or discontinued at any time.
We have $249.6 million in 8.0% senior secured notes payable that will mature on May 15, 2014. We may be required to make installment payments for the E.ON contingent obligation. These payments are contingent based on the LME price of primary aluminum and the level of Hawesville’s operations. Based on the LME forward market at March 31, 2012 and management’s estimate, we do not expect to make any payments for the E.ON contingent obligation until 2019.
Based on current actuarial and other assumptions, we expect to make contributions to the qualified defined benefit plans we sponsor of approximately $9 million during 2012. Through March 31, 2012, we have made contributions to these plans of $3.9 million. We may choose to make additional contributions to these plans from time to time at our discretion.
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In June 2011, the Pension Benefit Guaranty Corporation (the “PBGC”) informed us that it believed that a “cessation of operations” under the Employee Retirement Income Security Act of 1974 (“ERISA”) had occurred at our Ravenswood facility as a result of the curtailment of operations at the facility and requested that we engage in discussions with the PBGC relating thereto. We have notified the PBGC that we do not believe that a “cessation of operations” has occurred and have entered into ongoing discussions with the PBGC to resolve the matter. If a “cessation of operations” is ultimately determined to have occurred under ERISA, it may be necessary for Century Aluminum of West Virginia to accelerate the timing of additional contributions to certain of its defined pension plans or post other collateral with the PBGC or negotiate an alternative agreement.
In March 2012, we reached an agreement in principle with the CAWV retirees to make contributions to a voluntary employee beneficiary association (“VEBA”) trust that would provide certain health care benefits to these retirees and their eligible dependents in the event of a restart of our Ravenswood facility. If this agreement were entered into, our obligations under the agreement, including any contributions to the VEBA, would be contingent upon the occurrence of several future events that are necessary in order to restart the Ravenswood facility. None of these events, including the finalization of this agreement, are certain to occur.
Under an agreement with the Government of Iceland, Nordural Grundartangi ehf agreed to prepay taxes during 2012, 2011 and 2010 as an advance levy of income taxes and other governmental taxes for the period of 2013 through 2018. The amount of prepaid taxes paid through March 31, 2012 was approximately $6.1 million and we expect to prepay an additional $3.2 million in 2012. The prepaid taxes will offset taxes otherwise payable in equal installments over the period 2013 through 2018. In addition, in 2012, we expect to make estimated income tax payments in Iceland of approximately $12.1 million. Through March 31, 2012, we made approximately $1.7 million of these payments.
We paid $20 million in net withholding tax for intercompany dividend payments in Iceland in 2011 and paid an additional $9.5 million in the first quarter of 2012. We expect to receive a withholding tax refund in the fourth quarter of 2012 related to intercompany dividend payments. The withholding taxes and associated refunds are payable in Icelandic krona (“ISK”) and we are subject to foreign currency risk associated with fluctuations in the value of the U.S. dollar as compared the ISK. We do not expect to receive any material domestic tax refunds in the near future.
Capital Resources
We intend to finance our future recurring capital expenditures from available cash and our cash flow from operations. For major investment projects, such as the Helguvik project, we would seek financing from various capital and loan markets and may potentially pursue the formation of strategic alliances. We may be unable to issue additional debt or equity securities, or to issue these securities on attractive terms, due to a number of factors including a lack of demand, unfavorable pricing, poor economic conditions, unfavorable interest rates, or our financial condition or credit rating at the time. Future uncertainty in the U.S. and international markets and economies may adversely affect our liquidity, our ability to access the capital markets and our financial condition.
Capital expenditures for the three months ended March 31, 2012 were $4.8 million, $1.9 million of which was related to the Helguvik project, with the balance principally related to upgrading production equipment, improving facilities and complying with environmental requirements. We believe capital spending in 2012, excluding the activity on the Helguvik project, will be approximately $25 to 30 million.
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We have made and continue to make capital expenditures for the construction and development of our Helguvik project. We have substantial future contractual commitments for the Helguvik project. If we were to cancel the Helguvik project, we estimate that our exposure to contract cancellation costs would be approximately $20 million. We are continuing to negotiate with the power suppliers to the project to remove all the remaining conditions to their obligations to supply contracted power. The timing of the power availability together with other factors, including financing, will determine the timing of any resumption of major construction activity at Helguvik. We expect that the portion of capital expenditures for this project that we will fund from our existing cash and operating cash flow will be approximately $1 million per month until the restart of major construction activities. We cannot, at this time, predict when the restart of major construction activity will occur.
Historical
Our statements of cash flows for the three months ended March 31, 2012 and 2011 are summarized below:
Three months ended March 31, | ||||||
2012 | 2011 | |||||
(dollars in thousands) | ||||||
Net cash provided by (used in) operating activities | $ | 4,898 | $ | (3,630 | ) | |
Net cash used in investing activities | (1,721 | ) | (7,179 | ) | ||
Net cash used in financing activities | (4,033 | ) | — | |||
Net change in cash and cash equivalents | $ | (856 | ) | $ | (10,809 | ) |
Net cash provided by operating activities in the three months ended March 31, 2012 was $4.9 million compared to net cash used in operating activities of $3.6 million in the first three months of 2011. The increase in cash from operations in 2012 was primarily due to reduced withholding tax payments in Iceland, lower pension and benefit contributions, an increase in working capital, which were partially offset by the impact of lower LME prices.
Our net cash used in investing activities for the first three months of 2012 was $1.7 million compared to $7.2 million in the three months ended March 31, 2011. The decrease in cash used was primarily due to lower capital expenditures in 2012 and a $3.2 million payment received on advances to joint ventures.
Our net cash used in financing activities for the three months ended March 31, 2012 was $4.0 million. The use was due to the repurchase of common stock.
Other Commitments and Contingencies
We are a defendant in several actions relating to various aspects of our business. While there are uncertainties relating to the ultimate disposition of any litigation, management, based on information currently available, does not believe that the resolution of any of these lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or liquidity. See Note 9 Commitments and contingencies to the consolidated financial statements included herein for additional information.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity price risk
We are exposed to price risk for primary aluminum. We manage our exposure to fluctuations in the price of primary aluminum through financial instruments designed to protect our downside price risk exposure for our domestic production. In addition, we manage our exposure to fluctuations in our costs by purchasing certain of our alumina and power requirements under supply contracts with prices tied to the same indices as our aluminum sales contracts (the LME price of primary aluminum). Our risk management activities do not include any trading or speculative transactions.
Apart from the Glencore Metal Agreement, the Glencore Sweep Agreement, the Glencore Nordural Metal Agreement and the Southwire Metal Agreement, we had the following forward delivery contractual commitments:
Other forward delivery contracts
March 31, 2012 | December 31, 2011 | |||
(in metric tons) | ||||
Other forward delivery contracts – total | 63,898 | 41,504 | ||
Other forward delivery contracts – Glencore | 5,219 | 3,423 | ||
Other forward delivery contracts – fixed price | 1,361 | 41 | ||
We had no outstanding primary aluminum forward financial sales contracts at March 31, 2012. We had no fixed price forward financial contracts to purchase aluminum at March 31, 2012.
Primary aluminum put option contracts
We entered into primary aluminum put option contracts that settle monthly through June 2012 based on LME prices. The volume of put option contracts is summarized below. These options were purchased to partially mitigate primary aluminum price risk.
Primary Aluminum option contracts outstanding as of March 31, 2012 (in metric tons): | ||||
Glencore | Other counterparties | |||
Put option contracts, settle monthly in 2012 | 9,000 | 7,500 | ||
Natural gas forward financial contracts
To mitigate the volatility of our natural gas cost due to the natural gas markets, we have entered into fixed-price forward financial contracts which settle in cash in the period corresponding to the intended usage of natural gas. These forward contracts were designated as cash flow hedges.
As of March 31, 2012, we did not have a significant exposure to the market price of natural gas for the natural gas forward financial contracts outstanding.
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Foreign currency
We are exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the Icelandic krona (“ISK”), euro and the Chinese yuan. Grundartangi’s labor costs, part of its maintenance costs and other local services are denominated in ISK and a portion of its anode costs are denominated in euros and Chinese yuan. Our tax payments in Iceland for withholding taxes on intercompany dividends, estimated and prepayments of Icelandic income taxes and any associated refunds are denominated in ISK. As a result, an increase or decrease in the value of those currencies relative to the U.S. dollar would affect Grundartangi’s operating margins. In addition, we expect to incur capital expenditures for the construction of the Helguvik project, although we continue to evaluate the Helguvik project’s cost, scope and schedule. A significant portion of the capital expenditures for the Helguvik project are forecasted to be denominated in currencies other than the U.S. dollar, with a significant portion in ISK, euros and Swiss francs.
We may manage our exposure by entering into foreign currency forward contracts or option contracts for forecasted transactions and projected cash flows for foreign currencies in future periods. As of March 31, 2012, we had no foreign currency forward contracts outstanding.
Natural Economic Hedges
The following estimate of our exposure to the commodity price of aluminum is necessarily limited, as it does not take into consideration our inventory or forward delivery contracts, or the offsetting impact on the sales price of primary aluminum products. Our alumina contracts are indexed to the LME price for primary aluminum and provide a natural hedge for approximately 16% of our production. As of March 31, 2012, approximately 33% of our production for 2012 was hedged by our LME-based alumina contracts and by Grundartangi’s electrical power and tolling contracts.
Risk Management
Our metals, foreign currency and natural gas risk management activities are subject to the control and direction of senior management within guidelines established by Century’s Board of Directors. These activities are regularly reported to Century’s Board of Directors.
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Item 4. Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures
As of March 31, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, our management, including the Chief Executive Officer and our principal financial officer, has concluded that our disclosure controls and procedures were effective as of March 31, 2012.
b. Changes in Internal Controls over Financial Reporting
During the three months ended March 31, 2012, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
In November 2011, we were named as a defendant in a lawsuit filed by our former Chief Executive Officer, Logan Kruger, alleging breach of contract and wrongful termination in violation of public policy. The lawsuit alleges that Century anticipatorily breached the employment and severance protection agreements between Century and Mr. Kruger and that Century is obligated to make various severance payments in excess of $20 million to Mr. Kruger under such agreements. In addition, the complaint seeks unspecified damages, including exemplary and punitive damages, for wrongful termination, as well as costs and attorneys’ fees. The trial court has transferred the matter to an arbitration panel for resolution. We believe these claims are without merit and intend to vigorously defend our self against them. The matter is in a preliminary stage, and we cannot predict the ultimate outcome of this action or estimate a range of possible losses related to this matter at this time. We do not expect that the ultimate costs to resolve this action will have a material adverse effect on our financial condition, results of operations or liquidity, regardless of the ultimate outcome.
In March 2011, the purported stockholder class actions pending against us consolidated as In re: Century Aluminum Company Securities Litigation were dismissed with prejudice by the United States District Court for the Northern District of California. The plaintiffs in the class actions allege that we improperly accounted for cash flows associated with the termination of certain forward financial sales contracts which accounting allegedly resulted in artificial inflation of our stock price and investor losses. Plaintiffs are seeking rescission of our February 2009 common stock offering, unspecified compensatory damages, including interest thereon, costs and expenses and attorneys’ fees. In March 2011, plaintiffs filed a notice of appeal to the order and judgment entered by the court dismissing their claims. The notice of appeal remains pending before the U.S. Court of Appeals for the Ninth Circuit. See Note 9 Commitments and contingencies – Legal contingencies for additional information.
Item 1A. Risk Factors
For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our 2011 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Purchases of Equity Securities by the Issuer
In August 2011, we announced that our Board of Directors approved a $60 million stock repurchase program. Under the program, Century is authorized to repurchase up to $60 million of our outstanding shares of common stock, from time to time, on the open market at prevailing market prices, in block trades or otherwise. The timing and amount of any shares repurchased will be determined by our management based on its evaluation of market conditions, the trading price of our common stock and other factors. The stock repurchase program may be suspended or discontinued at any time.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | ||||||
January 1 – January 31 | — | — | ||||||||
February 1 – February 29 | — | — | ||||||||
March 1 – March 31 | 400,000 | $ | 10.08 | 400,000 | $ | 10,076,076 | ||||
400,000 | 400,000 | |||||||||
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Item 5. Other Information
On April 24, 2012, we furnished a Form 8-K that incorporated by reference an earnings release announcing our results of operations for the quarter ended March 31, 2012. We subsequently determined a non-material correction was required related to our depreciation expense. The depreciation expense correction increased our reported cost of goods sold, negatively impacting our March 31, 2012 results. The non-cash adjustment increased our cost of goods sold by $625 thousand, lowered our income tax expense by $112 thousand, and as a result increased our loss for the quarter by $513 thousand to a net loss of $4,401 thousand.
The financial statements contained in Item 1 of this Form 10-Q reflect this correction.
Item 6. Exhibits
Exhibit Number | Description of Exhibit | Incorporated by Reference | Filed Herewith | ||
Form | File No. | Filing Date | |||
31.1 | Rule 13a-14(a)/15d-14(a) Certifications of the Chief Executive Officer and Principal Financial Officer | X | |||
32.1* | Section 1350 Certifications | X | |||
101.INS** | XBRL Instance Document | X | |||
101.SCH** | XBRL Taxonomy Extension Schema | X | |||
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase | X | |||
101.DEF** | XBRL Taxonomy Extension Definition Linkbase | X | |||
101.LAB** | XBRL Taxonomy Extension Label Linkbase | X | |||
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase | X | |||
_______________________________
* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
** In accordance with Rule 406T of Regulation S-T, the information furnished in these exhibits will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act.
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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 10, 2012 | By: | /s/ Michael A. Bless | |
Michael A. Bless | ||||
President and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Authorized Officer) | ||||
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Exhibits
Exhibit Number | Description of Exhibit | Incorporated by Reference | Filed Herewith | ||
Form | File No. | Filing Date | |||
31.1 | Rule 13a-14(a)/15d-14(a) Certifications of the Chief Executive Officer and Principal Financial Officer | X | |||
32.1* | Section 1350 Certifications | X | |||
101.INS** | XBRL Instance Document | X | |||
101.SCH** | XBRL Taxonomy Extension Schema | X | |||
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase | X | |||
101.DEF** | XBRL Taxonomy Extension Definition Linkbase | X | |||
101.LAB** | XBRL Taxonomy Extension Label Linkbase | X | |||
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase | X | |||
_______________________________
* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
** In accordance with Rule 406T of Regulation S-T, the information furnished in these exhibits will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act.
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