CENX

Century Aluminum Company - 10-K Summary (Fiscal Year Ended Dec 31, 2002)

Business Context and Reporting Period

This Annual Report on Form 10-K covers the fiscal year ended December 31, 2002. Century Aluminum Company is a leading North American producer of primary aluminum, operating three domestic reduction facilities: Ravenswood (West Virginia), Mt. Holly (South Carolina), and Hawesville (Kentucky). The Company is the second-largest primary aluminum producer in the United States. In 2002, it produced over 1.0 billion pounds of primary aluminum. The Company's operations are heavily dependent on the cyclical aluminum market, with significant exposure to raw material (alumina) and power costs.

Key Financial Metrics

Margins: Gross margin was 2.8% in 2002 compared to 3.2% in 2001. Operating margin was 0.6% in 2002 compared to 0.3% in 2001.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 8.6% to $711.3 million, driven primarily by a full year of production at the Hawesville facility (acquired in April 2001) and increased shipment volumes. This was partially offset by declining market prices for primary aluminum (average LME price dropped to $0.61/lb in 2002 from $0.66/lb in 2001).
• Profitability: Despite higher sales volume, the Net Loss widened to $18.6 million from $13.7 million. This was due to increased interest expense ($40.8 million vs. $31.6 million) resulting from a full year of debt service on the Exchange Notes issued for the Hawesville acquisition, and higher depreciation/amortization charges.
• Cash Flow: Operating cash flow improved significantly to $54.5 million, aided by a $17.6 million tax refund and higher operating income before depreciation.
• Dividends: The Company suspended common and preferred stock dividends in the fourth quarter of 2002 due to approaching limits on allowable payments under its debt indenture covenants.

Guidance, Outlook, and Risks

• Acquisition Plans: In January 2003, the Company announced a plan to purchase the remaining 20% interest in the Hawesville facility from Glencore for approximately $105 million, expected to close in Q2 2003. This would increase production capacity by 108 million pounds.
• Contract Changes: The Company agreed to terminate the fixed-price portion of its Glencore Metal Agreement for years 2005-2009, replacing it with a market-based contract. This change will result in mark-to-market accounting adjustments in Q1 2003.
• Key Risks:
  • Debt Service: Significant indebtedness ($329.7 million) and strict covenants limiting dividends and additional borrowing.
  • Commodity Prices: Results are highly sensitive to fluctuations in primary aluminum prices and the cost of alumina and electricity.
  • Customer Concentration: Three customers (Pechiney, Southwire, and Glencore) accounted for approximately 68% of 2002 sales.
  • Environmental Liabilities: Ongoing remediation at Ravenswood (linked to prior owner Kaiser's bankruptcy) and Hawesville (linked to prior owner Southwire) poses potential contingent liabilities.
  • Power Supply: Production is vulnerable to power interruptions, which can cause significant equipment damage ("freezing" of pots).

Investor Verification Checklist

• Debt Covenants: Verify the Company's compliance with the restrictive covenants in its $325 million Exchange Notes indenture, specifically regarding dividend restrictions and leverage ratios.
• Acquisition Financing: Confirm the funding sources and terms for the proposed $105 million acquisition of Glencore's Hawesville interest.
• Power Contracts: Review the status of power supply contracts for Ravenswood (expiring July 2003) and Mt. Holly (expiring 2005) to assess future cost stability.
• Environmental Indemnities: Assess the financial strength of Southwire (indemnitor for Hawesville) and the status of Kaiser's bankruptcy (indemnitor for Ravenswood) to evaluate the risk of assumed environmental liabilities.
• Customer Concentration: Monitor the stability of contracts with Pechiney, Southwire, and Glencore, which represent the majority of revenue.