CENX

Century Aluminum Company 2003 10-K Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2003. Century Aluminum Company is a leading North American producer of primary aluminum, operating three facilities: Hawesville (Kentucky), Ravenswood (West Virginia), and a 49.7% interest in Mt. Holly (South Carolina). In April 2003, the Company acquired the remaining 20% interest in the Hawesville facility from Glencore International AG, achieving 100% ownership. The Company's largest shareholder is Glencore, which owned 37.5% of common stock and all convertible preferred stock as of year-end.

Key Financial Metrics

Note: 2003 Net Income includes a one-time non-cash charge of $5.9 million for the adoption of SFAS No. 143 (Asset Retirement Obligations) and a $25.7 million gain on forward contracts.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 10.0% to $782.5 million, driven by a 77.2 million pound increase in shipment volume (due to the Hawesville acquisition) and higher realized aluminum prices.
• Profitability: Gross profit surged 139.5% to $48.0 million. This was aided by lower depreciation/amortization, reduced inventory write-downs, and improved price realizations, partially offset by higher alumina costs.
• Acquisition Impact: The April 2003 acquisition of the remaining Hawesville interest eliminated the minority interest previously associated with Glencore's 20% stake, consolidating full results into the Company's statements.
• Derivative Gains: A significant $25.7 million pre-tax gain was recorded in 2003 from the early termination and settlement of a fixed-price forward sales contract with Glencore. No such gain existed in 2002.
• Dividends: The Company suspended common and preferred stock dividends in Q4 2002 due to debt covenants. No dividends were paid in 2003, resulting in $2.5 million in cumulative preferred dividend arrearages.

Guidance, Outlook, and Risks

Outlook: Management anticipates capital expenditures of approximately $20.0 million in 2004. The Company expects cash flow from operations and its revolving credit facility to meet working capital and debt service needs. The aluminum industry is currently experiencing strong prices due to global demand recovery and tightening alumina supply.

Key Risks and Contingencies:

• Customer Concentration: Three customers (Pechiney, Southwire, and Glencore) accounted for 66% of 2003 sales. Loss of a major customer could significantly impact production costs.
• Raw Material Supply: The Hawesville facility relies on Kaiser Aluminum for alumina. Kaiser is in Chapter 11 bankruptcy; while it has assumed supply agreements, disruption could materially increase costs.
• Environmental Liabilities: The Company faces remediation obligations at Hawesville (indemnified by Southwire) and Ravenswood (indemnified by Kaiser). While management does not expect material adverse effects, future environmental laws or indemnity failures could impact liquidity.
• Debt Covenants: High indebtedness limits the ability to pay dividends or incur additional debt. The Company is subject to strict covenants regarding capital expenditures and leverage.
• Power Supply: Interruption of electrical power could cause significant losses due to the "freezing" of molten aluminum in pots. Insurance may not cover all losses.

Investor Verification Checklist

• Derivative Accounting: Verify the sustainability of the $25.7 million gain on forward contracts, which was a one-time settlement event and not indicative of recurring operating performance.
• Kaiser Bankruptcy Status: Monitor the status of Kaiser Aluminum's Chapter 11 proceedings and its ability to continue supplying alumina to the Hawesville facility.
• Debt Service Capacity: Assess the Company's ability to service $344 million in debt, particularly given the suspension of dividends and the high interest rate on the 11 3/4% senior notes.
• Environmental Indemnities: Review the financial health of Southwire and Kaiser to ensure they can meet their indemnification obligations for environmental remediation at Hawesville and Ravenswood, respectively.
• Customer Concentration: Evaluate the stability of contracts with Pechiney (subject to merger with Alcan) and Southwire, which together represent 50% of revenue.