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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
- --------------------------------------------------------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
For Quarter ended February 28, 2003
Commission File Number 1-4304
COMMERCIAL METALS COMPANY
- --------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
Delaware 75-0725338
- ------------------------------- ------------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
7800 Stemmons Freeway
Dallas, Texas 75247
-----------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 689-4300
--------------
(Registrant's telephone number, including area code)
---------------------------------------------------
Former name, former address and former fiscal year,
If changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of April 4, 2003 there were 28,123,750 shares of the Company's common stock
issued and outstanding excluding 4,141,416 shares held in the Company's
treasury.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
February 28, 2003 and August 31, 2002 2-3
Consolidated Condensed Statements of Earnings -
Three and Six months ended February 28, 2003 and 2002 4
Consolidated Condensed Statements of Cash Flows -
Six months ended February 28, 2003 and 2002 5
Consolidated Condensed Statement of Stockholders' Equity -
Six months ended February 28, 2003 6
Notes to Consolidated Condensed Financial Statements 7 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION 24
- ---------------------------
SIGNATURES 25
SECTION 302 CERTIFICATIONS 26 - 27
1
ITEM 1 - FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
(In thousands except share data)
February 28, August 31,
2003 2002
CURRENT ASSETS: ----------- -----------
Cash $ 29,670 $ 33,245
Temporary investments 19,999 91,068
Accounts receivable (less allowance for
collection losses of $5,953 and $5,958) 227,483 207,844
Notes receivable from affiliate 110,847 143,041
Inventories 322,362 268,040
Other 55,607 50,914
----------- -----------
TOTAL CURRENT ASSETS 765,968 794,152
PROPERTY, PLANT AND EQUIPMENT:
Land 32,920 29,099
Buildings 123,618 119,592
Equipment 736,683 727,650
Leasehold improvements 35,763 34,637
Construction in process 15,788 10,801
----------- -----------
944,772 921,779
Less accumulated depreciation
and amortization (571,279) (543,624)
----------- -----------
373,493 378,155
OTHER ASSETS 55,518 57,769
----------- -----------
$ 1,194,979 $ 1,230,076
=========== ===========
See notes to condensed consolidated financial statements.
2
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands except share data)
February 28, August 31,
2003 2002
CURRENT LIABILITIES: ------------ ----------
Short-term borrowings $ -- $ --
Accounts payable 264,613 275,209
Accrued expenses and other payables 106,339 133,631
Income taxes payable 4,461 5,676
Current maturities of long-term debt 611 631
------- -------
TOTAL CURRENT LIABILITIES 376,024 415,147
DEFERRED INCOME TAXES 33,788 32,813
OTHER LONG-TERM LIABILITIES 28,297 24,841
LONG-TERM DEBT 257,414 255,969
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock:
Preferred stock -- --
Common stock, par value $5.00 per share:
Authorized 40,000,000 shares; issued
32,265,166 shares;
outstanding 28,213,050 and 28,518,453
shares 161,326 161,326
Additional paid-in capital 772 170
Accumulated other comprehensive income (loss) 762 (1,458)
Retained earnings 392,592 392,004
----------- -----------
555,452 552,042
Less treasury stock,
4,052,116 and 3,746,713 shares at cost (55,996) (50,736)
----------- -----------
499,456 501,306
----------- -----------
$ 1,194,979 $ 1,230,076
=========== ===========
See notes to condensed consolidated financial statements.
3
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except share data)
(Unaudited)
Three months ended Six months ended
February 28, February 28,
------------------------------ ------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET SALES $ 660,809 $ 574,317 $ 1,296,987 $ 1,146,485
COSTS AND EXPENSES:
Cost of goods sold 592,897 499,445 1,168,015 993,518
Selling, general and administrative expenses 56,772 56,078 107,043 111,705
Employees' retirement plans 2,930 3,125 5,885 6,932
Interest expense 3,553 5,069 7,888 10,030
----------- ----------- ----------- -----------
656,152 563,717 1,288,831 1,122,185
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 4,657 10,600 8,156 24,300
INCOME TAXES 1,724 4,028 3,018 9,246
----------- ----------- ----------- -----------
NET EARNINGS $ 2,933 $ 6,572 $ 5,138 $ 15,054
=========== =========== =========== ===========
Basic earnings per share $ 0.10 $ 0.24 $ 0.18 $ 0.57
Diluted earnings per share $ 0.10 $ 0.24 $ 0.18 $ 0.55
Cash dividends per share $ 0.08 $ 0.065 $ 0.16 $ 0.13
Average basic shares outstanding 28,320,223 26,832,546 28,403,401 26,519,786
Average diluted shares outstanding 28,825,167 27,932,996 28,894,450 27,290,828
See notes to condensed consolidated financial statements.
4
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
February 28,
-------------------------
2003 2002
-------- --------
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES:
Net earnings $ 5,138 $ 15,054
Adjustments to earnings not requiring cash:
Depreciation and amortization 30,271 31,231
Provision for losses on receivables 1,257 2,562
Deferred income taxes 975 --
Tax benefits from stock plans 101 1,544
Other 763 194
-------- --------
Cash flows from operations before changes in
operating assets and liabilities 38,505 50,585
Changes in operating assets and liabilities, net of effect
of Coil Steels Group acquisition:
Decrease (increase) in accounts receivable (37,954) (26,650)
Funding from accounts receivable sold, net change 30,550 6,556
Decrease (increase) in inventories (54,197) (44,034)
Decrease (increase) in other assets 16,813 14,731
Increase (decrease) in accounts payable,
accrued expenses, other payables and income taxes (39,283) 13,834
Increase in other long-term liabilities 3,456 1,236
-------- --------
Net Cash Flows From (Used By) Operating Activities (42,110) 16,258
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (23,455) (18,486)
Acquisition of Coil Steels Group, net of cash received -- (6,834)
Sales of property, plant and equipment 162 256
Temporary investments - net change 71,069 3,000
-------- --------
Net Cash From (Used By) Investing Activities 47,776 (22,064)
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:
Short-term borrowings - net change -- (4,830)
Payments on long-term debt (33) (7,915)
Stock issued under incentive and purchase plans 4,533 16,301
Treasury stock acquired (9,191) --
Dividends paid (4,550) (3,426)
-------- --------
Net Cash From (Used by) Financing Activities (9,241) 130
-------- --------
Decrease in Cash (3,575) (5,676)
Cash at Beginning of Year 33,245 32,921
-------- --------
Cash at End of Period $ 29,670 $ 27,245
======== ========
See notes to condensed consolidated financial statements.
5
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands except share data)
(Unaudited)
Accumulated
Common Stock Other Treasury Stock
---------------------- Add'l Comprehensive ---------------------
Number of Paid-in Income Retained Number of
Shares Amount Capital (Loss) Earnings Shares Amount Total
---------- -------- ------- ------------- -------- ---------- --------- --------
Balance September 1, 2002: 32,265,166 $161,326 $170 $(1,458) $392,004 (3,746,713) $(50,736) $501,306
Comprehensive income:
Net earnings for six months
ended February 28, 2003 5,138 5,138
Other comprehensive income:
Foreign currency
translation adjustment,
net of taxes of $1,195 2,220 2,220
--------
7,358
Comprehensive income
Cash dividends (4,550) (4,550)
Stock issued under incentive and
purchase plans 501 288,207 3,931 4,432
Tax benefits from stock plans 101 101
Treasury stock acquired (593,610) (9,191) (9,191)
---------- -------- ----- ------- -------- ---------- --------- ---------
Balance February 28, 2003 32,265,166 $161,326 $772 $762 $392,592 (4,052,116) $(55,996) $499,456
========== ======== ==== ==== ======== ========== ======== ========
See notes to condensed consolidated financial statements.
6
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - QUARTERLY FINANCIAL DATA
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals, except for the voidable preference accrual as
discussed in Note H, Contingencies) necessary to present fairly the financial
position as of February 28, 2003 and August 31, 2002 and the results of
operations for the three and six months ended February 28, 2003 and 2002 and
cash flows for the six months ended February 28, 2003 and 2002. The results of
operations for the six month periods are not necessarily indicative of the
results to be expected for a full year. These interim financial statements
should be read in conjunction with the Company's consolidated financial
statements for the year ended August 31, 2002 included in its Form 10-K filed
with the Securities and Exchange Commission.
NOTE B - ACCOUNTING POLICIES
Effective September 1, 2002, goodwill was no longer amortized. Goodwill
was $6.8 million at February 28, 2003 and August 31, 2002. The comparison to the
prior year period was as follows (in thousands):
Three months ended Six months ended
February 28, February 28,
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Reported net earnings $ 2,933 $ 6,572 $ 5,138 $15,054
Add: goodwill amortization -- 171 -- 337
------- ------- ------- -------
Adjusted net earnings $ 2,933 $ 6,743 $ 5,138 $15,391
======= ======= ======= =======
The goodwill amortization was $0.01 per basic and diluted share for the
three and six months ended February 28, 2002.
During the three months ended February 28, 2003, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The adoption of SFAS No. 146 had no
significant impact on the Company's financial position or results of operations.
During the three months ended February 28, 2003, the Company accrued $773
thousand for medical benefits provided under early retirement arrangements.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees on Indebtedness of Others which
applies to all guarantees issued or modified after December 31, 2002. The
Company has not entered into or modified any significant guarantees since
December 31, 2002, and therefore no liability was recorded at February 28, 2003.
The Company's existing guarantees at December 31, 2002 had been given at the
request of a customer and its surety bond issuer. The Company has agreed to
indemnify the surety against all costs that the surety may incur should the
customer fail to perform its obligations under construction contracts covered by
payment and performance bonds issued by the surety. As of December 31, 2002 and
February 28, 2003, the surety had issued bonds in the total amount (without
reduction for the work performed to date) of $11.9 million, which are subject to
the Company's guarantee obligation under the indemnity agreement. The fair value
of these guarantees is not significant.
7
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 17, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which requires consolidation of certain special
purpose entities. The Company's accounting for its only unconsolidated special
purpose affiliate (see Note C, Sales of Accounts Receivable) will not be
impacted by this Interpretation.
PROPERTY, PLANT AND EQUIPMENT
During the three months ended February 28, 2003, the Company acquired
$1.5 million in property, plant and equipment after foreclosing on a delinquent
note receivable from a customer.
The Company evaluates the carrying value of property, plant and equipment
whenever a change in circumstances indicates that the carrying value may not be
recoverable from the undiscounted future cash flows from operations. Pursuant to
such an evaluation, the Company wrote-down $630 thousand on certain equipment at
a fabrication-related facility during the three months ended February 28, 2003.
During the three months ended February 28, 2002, the Company closed its
recycling facility in Midland, Texas, resulting in a write-down of $455 thousand
on certain equipment. These write-downs were included in selling, general and
administrative expenses.
NOTE C - SALES OF ACCOUNTS RECEIVABLE
As a cost effective short-term financing program, the Company and several
of its subsidiaries periodically sell trade accounts receivable substantially to
the Company's wholly-owned unconsolidated special purpose affiliate. Depending
on the level of financing needs, the affiliate receives funds from third party
financial institutions. The key components were as follows (in thousands):
February 28, August 31,
2003 2002
------------ ----------
Total accounts receivable sold $ 146,106 $ 148,101
Less notes receivable from affiliate 113,415 145,960
----------- ----------
Net proceeds from financial institutions $ 32,691 $ 2,141
=========== ==========
The notes receivable from affiliate are presented in the condensed consolidated
balance sheets net of allowance of $2.6 million at February 28, 2003 and $2.9
million at August 31, 2002. These notes represent amounts withheld for credit
and other reserves, as well as excess funding capacity not currently needed by
the Company. Discounts were $188 thousand and $311 thousand for the three and
six months ended February 28, 2003, and $283 thousand and $630 thousand for the
three and six months ended February 28, 2002, respectively. These discounts
represented primarily the costs of funds and were included in selling, general
and administrative expenses.
NOTE D - INVENTORIES
Before deduction of LIFO reserves of $10.9 million and $8.1 million at
February 28, 2003 and August 31, 2002, respectively, inventories valued under
the first-in, first-out method approximated replacement cost. The majority of
the Company's inventories are in finished goods, with minimal work in process.
Approximately $13.3 million and $16.5 million were in raw materials at February
28, 2003 and August 31, 2002, respectively.
8
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE E - LONG TERM DEBT
Long-term debt (in thousands) was as follows:
February 28, August 31,
2003 2002
------------- -----------
7.20% notes due 2005 $ 106,232 $ 104,775
6.80% notes due 2007 50,000 50,000
6.75% notes due 2009 100,000 100,000
Other 1,793 1,825
------------ -----------
258,025 256,600
Less current maturities 611 631
------------ -----------
$ 257,414 $ 255,969
============ ===========
On April 9, 2002 the Company entered into two interest rate swaps to convert a
portion of the Company's long term debt from a fixed interest rate to a floating
interest rate. The impact of these swaps is to adjust the amount of fixed rate
and floating rate debt and to reduce overall financing costs. The swaps
effectively convert the interest rate on the $100 million debt due July 2005
from the fixed rate of 7.20% to six month LIBOR (determined in arrears) plus a
spread of 2.02%. The interest rate is set on January 15th and July 15th, and for
the quarter ended February 28, 2003, was estimated to be an annualized rate of
3.25%. The total fair value of both swaps was $6.2 million and $4.8 million at
February 28, 2003 and August 31, 2002, respectively. The swaps are recorded in
other long-term assets, with a corresponding increase in the 7.20% long-term
notes, representing the change in fair value of the hedged debt.
NOTE F - EARNINGS PER SHARE
On May 20, 2002, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend on its common stock. All 2002
per share and weighted average share amounts in the accompanying condensed
consolidated financial statements have been restated to reflect this stock
split.
In calculating earnings per share, there were no adjustments to net
earnings to arrive at income for the three or six months ended February 28, 2003
or 2002. The reconciliation of the denominators of earnings per share
calculations are as follows:
Three months ended Six months ended
February 28, February 28,
------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Shares outstanding for basic earnings per share 28,320,223 26,832,546 28,403,401 26,519,786
Effect of dilutive securities-stock options/purchase plans 504,944 1,100,450 491,049 771,042
---------- ---------- ---------- ----------
Shares outstanding for diluted earnings per share 28,825,167 27,932,996 28,894,450 27,290,828
Stock options with total share commitments of 1,208,863 at February 28, 2003
were anti-dilutive based on the average share price for the quarter of $15.42.
All stock options expire by 2010.
At February 28, 2003, the Company had authorization to purchase 473,952
of its common shares. On March 17, 2003, the Company's Board of Directors
authorized the purchase of an additional 1,000,000 shares.
In January 2003, the Company's stockholders approved an amendment to the
Company's General Employees Stock Purchase Plan that increased by 1,000,000 the
maximum number of shares that may be eligible for issuance and increased the
maximum number of shares that an eligible employee may purchase annually from
200 to 400 shares.
9
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - DERIVATIVES AND RISK MANAGEMENT
The Company's worldwide operations and product lines expose it to risks
from fluctuations in foreign currency exchange rates and metals commodity
prices. The objective of the Company's risk management program is to mitigate
these risks using futures or forward contracts (derivative instruments). The
Company enters into metal commodity forward contracts to mitigate the risk of
unanticipated declines in gross margin due to the volatility of the commodities'
prices, and enters into foreign currency forward contracts which match the
expected settlements for purchases and sales denominated in foreign currencies.
The Company designates only those contracts as hedges for accounting purposes
which closely match the terms of the underlying transaction. These hedges
resulted in substantially no ineffectiveness in the statements of earnings for
the three or six months ended February 28, 2003 and 2002. Certain of the foreign
currency and all of the commodity contracts were not designated as hedges for
accounting purposes, although management believes they are essential economic
hedges. The changes in fair value of these instruments resulted in a $158
thousand decrease and a $180 thousand decrease in cost of goods sold for the
three months ended February 28, 2003 and 2002, respectively. Also, cost of goods
sold decreased by $497 thousand and decreased by $333 thousand for the six
months ended February 28, 2003 and 2002, respectively, due to changes in the
fair value of these instruments. All of the instruments are highly liquid, and
none are entered into for trading purposes or speculation.
See Note E, Long-Term Debt, regarding the Company's interest rate risk
management strategy.
NOTE H - CONTINGENCIES
CONSTRUCTION CONTRACT DISPUTES
There were no material developments relating to the Company's
construction contract disputes since August 31, 2002. See Note 10, Commitments
and Contingencies, to the consolidated financial statements for the year ended
August 31, 2002.
At February 28, 2003 and August 31, 2002, $9.8 million and $9.6 million,
respectively, were accrued (including interest) relating to an adverse trial
judgment. The judgment was upheld on appeal in February 2003 and paid subsequent
to the quarter end.
In another matter, a subsidiary of the Company entered into a fixed price
contract with the design/builder general contractor (D/B) to furnish, erect and
install structural steel, hollow core pre-cast concrete planks, fireproofing,
and certain concrete slabs along with related design and engineering work for
the construction of a large hotel and casino complex. In connection with the
contract, the D/B secured insurance under a subcontractor/vendor default
protection policy that named the Company as an insured in lieu of performance
and payment bonds. A large subcontractor to the Company defaulted, and the
Company incurred unanticipated costs to complete the work. During 2002, the
Company recovered $15 million from the insurance company, of which $7.4 million
was recorded as deferred insurance proceeds (in other long-term liabilities at
February 28, 2003 and August 31, 2002) pending final resolution of the Company's
disputes with the D/B. The Company has filed a lawsuit against the insurance
broker for insurance benefits not received due to the broker's acts, errors and
omissions.
Disputes between the Company and the D/B have been submitted to binding
arbitration. Depending upon future rulings in the arbitration, a portion of the
Company's recovery from the insurance company may be credited toward the
Company's claim against the D/B. The Company has filed a claim for approximately
$27 million against the D/B. The claim seeks recovery of unpaid contract
receivables, amounts for delays and change orders all of which have not been
paid by the D/B. At February 28, 2003 and August 31, 2002, the Company
maintained contract receivables of $7.2 million from the D/B. Such amounts are
included within other assets on the accompanying balance sheets.
10
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The D/B has not disputed certain amounts owed under the contract, but
contends that other deductive items, disputed by the Company reduce the contract
balance by approximately $6.3 million which together with other D/B claims
(discussed below) exceed the unpaid contract balance. The Company disputes the
deductive items in the D/B's claim and intends to vigorously pursue recovery of
the contract balance in addition to all amounts not recovered under insurance
program coverage as a result of misrepresentations or omissions of the D/B.
The owner of the Project and the D/B have filed joint claims in the
arbitration proceeding against the Company, primarily for alleged delay damages,
totaling approximately $144 million which includes alleged delay damages in
construction of a retail area adjacent to the Project. Management believes the
claims are generally unsubstantiated, and the Company has valid legal defenses
against such claims and intends to vigorously defend these claims. Management is
unable to determine a range of potential loss related to such claims, and
therefore no losses have been accrued; however, it believes the ultimate
resolution will not have a material effect on the Company's consolidated
financial statements. Due to the uncertainties inherent in the estimating
process, it is at least reasonably possible that a change in the Company's
estimate of its collection of amounts receivable and possible liability could
occur in the near term.
ENVIRONMENTAL AND OTHER MATTERS
In the ordinary course of conducting its business, the Company becomes
involved in litigation, administrative proceedings and governmental
investigations, including environmental matters. Management believes that
adequate provision has been made in the financial statements for the potential
impact of these issues, and that the outcomes will not significantly impact the
results of operations or the financial position of the Company, although they
may have a material impact of earnings for a particular quarter.
A subsidiary of the Company has been notified that a customer, now in
bankruptcy proceedings, alleges the subsidiary received payments from the
customer within 90 days of bankruptcy filing which are voidable and should be
returned to the bankruptcy estate. The payments were for materials and services
sold by the subsidiary to the customer. The Company believes it has valid legal
defenses against such claim and intends to vigorously defend this claim. The
Company accrued $1 million during the 2003 second quarter relating to this
matter.
The Company is involved in various other claims and lawsuits incidental
to its business. In the opinion of management, these claims and suits in the
aggregate will not have a material adverse effect on the results of operations
or the financial position of the Company.
NOTE I - RECLASSIFICATIONS
Certain reclassifications have been made in the 2002 financial statements
to conform to the classifications used in the current year.
11
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE J - BUSINESS SEGMENTS
The following is a summary of certain financial information by reportable
segment (in thousands):
Three months ended February 28, 2003
---------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ ------- ------------
Net sales - unaffiliated customers $ 306,739 $ 93,952 $ 259,967 $ 151 $ 660,809
Inter-segments sales 760 6,516 4,839 (12,115) --
--------- --------- --------- --------- ---------
307,499 100,468 264,806 (11,964) 660,809
Earnings (loss) before income taxes 1,072 4,031 4,805 (5,251) 4,657
Three months ended February 28, 2002
-----------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ -------- ------------
Net sales - unaffiliated customers $ 322,624 $ 78,526 $ 173,126 $ 41 $ 574,317
Inter-segments sales 816 4,392 5,255 (10,463) --
--------- --------- --------- --------- ---------
323,440 82,918 178,381 (10,422) 574,317
Earnings (loss) before income taxes 15,688 159 1,733 (6,980) 10,600
Six months ended February 28, 2003
-----------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ --------- ------------
Net sales - unaffiliated customers $ 602,269 $ 183,659 $ 510,703 $ 356 $ 1,296,987
Inter-segments sales 1,560 13,165 10,466 (25,191) --
----------- --------- ----------- --------- -----------
603,829 196,824 521,169 (24,835) 1,296,987
Earnings(loss) before income taxes 4,743 5,416 9,175 (11,178) 8,156
Total assets - February 28, 2003 709,228 96,769 312,025 76,957 1,194,979
Six months ended February 28, 2002
-------------------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- -------- ------------- -------- -------------
Net sales - unaffiliated customers $ 660,416 $ 156,407 $ 329,531 $ 131 $ 1,146,485
Inter-segments sales 1,620 9,142 8,043 (18,805) --
----------- ----------- ----------- ----------- -----------
662,036 165,549 337,574 (18,674) 1,146,485
Earnings(loss) before income taxes 35,622 (1,136) 3,386 (13,572) 24,300
Total assets - February 28, 2002 741,079 84,970 237,177 69,651 1,132,877
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
(in millions)
Three Months Ended Six Months Ended
February 28, February 28,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 661 $ 574 $ 1,297 $ 1,146
Net earnings 2.9 6.6 5.1 15.1
Cash flows * 20.4 25.1 38.5 50.6
EBITDA ** 23.2 31.2 46.3 65.6
Ending LIFO reserve 10.9 6.5
* From operations before changes in operating assets and liabilities.
** Earnings before income taxes plus interest expense plus depreciation and
amortization.
The following financial events were significant during the second quarter ended
February 28, 2003:
- - Key markets in our manufacturing segment remained weak early in the
quarter, but improved some in January and February 2003.
- - Our steel and the copper tube minimills' earnings decreased due
primarily to higher scrap, utility and other input costs which were not
offset by increased selling prices.
- - Margins were lower at the steel group's fabrication operations due to
lower selling prices.
- - LIFO expense (primarily in manufacturing) was $1.9 million (after-tax)
for the three months ended February 28, 2003 compared to $404 thousand
last year.
- - We accrued $650 thousand (after-tax) during the three months ended
February 28, 2003 for our estimated likely loss in a lawsuit relating to
a customer's bankruptcy.
- - Our recycling segment reported better profits with continued
improvements in both ferrous and nonferrous scrap markets over last
year.
- - Marketing and distribution's operating profit was higher than last
year's second quarter, with most of the improvement in international
markets.
- - We reduced our bonuses, contributions and employee's retirement plan
expenses in line with our lower earnings.
- - Our financial position remained strong, with excess cash and no
short-term debt at February 28, 2003.
13
CONSOLIDATED DATA -
The last in, first out (LIFO) method of inventory valuation decreased net
earnings by $1.9 million and $1.8 million for the three and six months ended
February 28, 2003, respectively. LIFO reduced diluted earnings per share by 7
cents and 6 cents for the three and six months ended February 28, 2003,
respectively. For the three months ended February 28, 2002, LIFO decreased net
earnings by $404 thousand (1 cent per diluted share). LIFO had substantially no
impact on the six months ended February 28, 2002. We have restated the prior
year's per share numbers to reflect the stock split referred to in Note F,
Earnings per Share, to the condensed consolidated financial statements.
SEGMENT OPERATING DATA -
Unless otherwise indicated, all dollars below are before income taxes.
The following table shows net sales and operating profit (loss) by business
segment. Our operating profit (loss), as presented below, is the sum of our
earnings (loss) before income taxes, interest expense owed to third parties and
discounts on the sales of accounts receivable.
Three months ended Six months ended
February 28, February 28,
------------------------------- -------------------------------
(in thousands)
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET SALES:
Manufacturing $ 307,499 $ 323,440 $ 603,829 $ 662,036
Recycling 100,468 82,918 196,824 165,549
Marketing and Distribution 264,806 178,381 521,169 337,574
Corporate and Eliminations (11,964) (10,422) (24,835) (18,674)
----------- ----------- ----------- -----------
$ 660,809 $ 574,317 $ 1,296,987 $ 1,146,485
=========== =========== =========== ===========
OPERATING PROFIT (LOSS):
Manufacturing $ 1,148 $ 15,850 $ 4,892 $ 36,050
Recycling 4,050 198 5,454 (1,024)
Marketing and Distribution 5,341 2,206 10,113 4,486
Corporate and Eliminations (2,141) (2,301) (4,104) (4,552)
----------- ----------- ----------- -----------
$ 8,398 $ 15,953 $ 16,355 $ 34,960
=========== =========== =========== ===========
MANUFACTURING -
We include our steel group and our copper tube division in our manufacturing
segment. Our manufacturing operating profit for the three months ended February
28, 2003 decreased $14.7 million (93%) as compared to 2002 on $15.9 million (5%)
less net sales. Scrap purchase prices rose significantly because of the high
demand for U.S. scrap, export restrictions in Russia and Ukraine, severe weather
hampering transportation, the decline in the value of the U.S. dollar and
increased demand in Asia, particularly China. Our steel minimills implemented
higher selling prices late in the second quarter 2003, but these price increases
will take effect gradually in our third and fourth quarters of fiscal 2003.
Therefore, the price increases did not offset higher scrap and utility costs.
Gross margins were significantly lower as a result of these conditions. Our
copper tube mill's gross margins were also lower due to increased copper scrap
purchase prices and lower selling prices for its products. Our steel group's
downstream fabrication operations were less profitable due to much lower selling
prices combined with slightly lower shipments. Lower business spending and
commercial construction in the United States resulted in reduced demand for the
segment's products, and thus resistance to selling price increases.
14
The table below reflects steel and scrap prices per ton:
Three months ended
February 28,
------------------------
2003 2002
---- ----
Average mill selling price (total sales) $271 $266
Average mill selling price (finished goods) 277 270
Average fabrication selling price 535 620
Average ferrous scrap purchase price 89 71
Operating profit for our four steel minimills decreased 62% for the three months
ended February 28, 2003 compared to 2002. Modest increases in selling prices and
more shipments were not enough to offset the higher input costs. Our profits at
SMI Texas decreased $1.2 million (22%) for the three months ended February 28,
2003 as compared to 2002. SMI South Carolina lost $2.4 million for the three
months ended February 28, 2003 as compared to a $1.9 million profit in 2002.
Combined results for SMI Alabama and SMI Arkansas were slightly better than last
year. The mills shipped 537,000 tons in the current quarter compared to 501,000
last year, an increase of 7%. We scheduled downtime at the mills in December in
order to manage inventories. As a result, mill production decreased with tons
rolled down 10% to 429,000. Tons melted decreased 1% to 475,000. The average
total mill selling price at $271 per ton was $5 (2%) above last year. Our mill
selling price for finished goods increased $7 per ton (3%). Average scrap
purchase costs were $18 per ton (25%) higher than last year. Utility expenses
increased by $2.0 million as compared to last year, mostly due to higher natural
gas costs. During the three months ended February 28, 2003, we accrued $773
thousand for medical benefits provided under early retirement arrangements at
SMI Alabama and SMI South Carolina. In the three months ended February 28, 2002,
the mills received $2.5 million from a graphite electrode litigation settlement.
The steel group's fabrication and other businesses reported a combined loss of
$2.0 million for the three months ended February 28, 2003 as compared to a
profit of $6.6 million in 2002. We recorded a $1.3 million expense to value our
inventories under the last-in, first-out (LIFO) method during the three months
ended February 28, 2003, as compared to a $487 thousand expense in 2002.
Excluding SMI-Owen (which was sold in March 2002), operating profits decreased
by $8.2 million. Fabrication plant shipments totaled 231,000 tons, 2% less than
last year's second quarter shipments of 235,000 tons. Excluding SMI Owen,
shipments increased by 3,000 tons (1%). One of our subsidiaries has been
notified that a bankrupt customer alleges the subsidiary received payments from
the customer within 90 days of bankruptcy filing. The customer claims that these
payments are voidable and should be returned to the bankruptcy estate. The
payments were for materials and services that we sold to the customer. We
accrued $1 million during the 2003 second quarter related to this matter. The
average fabrication selling price for the three months ended February 28, 2003
decreased $85 per ton (14%). Our rebar fabrication, construction-related
products and post plants reported higher profits during the second quarter 2003,
as compared to 2002. We recognized a $482 thousand gain on the trade-in of
rental forms in construction-related products. Also, selling prices increased
for rebar fabricators. However, our joist and structural steel fabrication
plants reported losses on a combined basis for the second quarter 2003, as
compared to profits in 2002. In general, our continued cost reduction efforts
and initiatives to improve productivity were not enough to offset the drop in
gross margins. Joist shipments and joist and structural fabrication selling
prices decreased during the second quarter 2003 as compared to 2002. During the
three months ended February 28, 2003 the joist plants reduced their inventory
book values by $747,000 to their estimated current market value. Also, during
the three months ended February 28, 2003, we wrote-down $630 thousand on
equipment at one of our other facilities because our projected cash flows from
this operation decreased significantly. During the second quarter 2003, we
acquired substantially all of the operating assets of E.L. Wills, Inc. in
Fresno, California, and D&G Enterprises, Inc., in San Antonio, Texas and
American Steel Fabricators in Ft. Myers, Florida. These operations are rebar
fabricators. The aggregate purchase price for these operations was not
significant.
15
Our Copper tube division's operating profit decreased $748 thousand (67%)
despite 6% more net sales. Copper tube shipments increased 9% to 13.7 million
pounds. Production increased 11% to 14.8 million pounds. However, the average
selling price dropped 3 cents per pound (3%). The average copper scrap price
increased 6 cents per pound (9%) during the three months ended February 28, 2003
as compared to 2002. Although construction of new homes held up relatively well,
other market sectors were weaker, which put pressure on selling prices. Other
copper tube producers switched production to compete in our primary product
line. We delayed some shipments due to bad weather. The division continued to
expand its sales of line sets.
RECYCLING -
Our recycling segment reported an operating profit of $4.1 million for the three
months ended February 28, 2003. This was our most profitable quarter since 1997.
For the same period in 2002, the segment reported an operating profit of $198
thousand after incurring a $455 thousand charge for the closure of its shredder
operation in Midland, Texas. Net sales for the three months ended February 28,
2003 were 21% higher at $100 million. Gross margins were 30% higher than the
same period last year. The segment processed and shipped 374,000 tons of ferrous
scrap during the three months ended February 28, 2003, 11% more than 2002.
Ferrous sales prices were on average $94 per ton, or 32% higher than 2002. The
following factors contributed to the increase:
o Greater demand from overseas markets caused by higher Chinese
demand for steel-making raw materials,
o winter weather which caused lower scrap collections,
o the weaker U.S. dollar,
o export restrictions from Russia and Ukraine.
Nonferrous shipments were slightly lower at 55,000 tons. The average nonferrous
scrap sales price of $1,020 per ton for the three months ended February 28, 2003
was 12% higher than in 2002. The total volume of scrap processed, including the
steel group's processing plants, was 642,000 tons, an increase of 10% from the
583,000 tons processed in 2002.
MARKETING AND DISTRIBUTION -
Net sales in the three months ended February 28, 2003 for our marketing and
distribution segment increased to $265 million, a 48% increase from 2002. Most
of the increase related to sales outside of the United States. Operating profit
for the three months ended February 28, 2003 was $5.3 million, up 142% from
2002, mostly due to better results from our international operations. Our U.S.
divisions were also more profitable on a combined basis for the three months
ended February 28, 2003, as compared to 2002. Sales to and within Asia,
especially China, were up significantly. Also, the economy in Australia was
still strong. Except for nonferrous semi-finished goods, prices and shipments
were generally higher. More demand in several of our key markets, including that
for processed material contributed to the improved results. Also, the increased
profitability in marketing and distribution was largely due to our strategy in
recent years to build up our regional business around the world and to increase
our downstream presence. Overall, the weaker U.S. dollar had a positive impact
on our marketing and distribution segment.
OTHER -
Employee's retirement plan expenses were lower for the three months ended
February 28, 2003 as compared to 2002, and selling general and administrative
expenses were flat. Discretionary items, such as bonuses, contributions and
profit sharing were much lower commensurate with less profitability. Interest
expense was lower due to two interest rate swaps, (see Note E, Long Term Debt,
to the condensed consolidated financial statements) which resulted in interest
expense savings.
16
CONTINGENCIES -
See Note H, Contingencies, to the consolidated condensed financial statements.
In the ordinary course of conducting our business, we become involved in
litigation, administrative proceedings, governmental investigations including
environmental matters, and contract disputes. We may incur settlements, fines,
penalties or judgments because of some of these matters. While we are unable to
estimate precisely the ultimate dollar amount of exposure to loss in connection
with these matters, we make accruals as we deem necessary. The amounts we accrue
could vary substantially from amounts we pay due to several factors including
the following: evolving remediation technology, changing regulations, possible
third-party contributions, the inherent shortcomings of the estimation process,
and the uncertainties involved in litigation. Accordingly, we cannot always
estimate a meaningful range of possible exposure. We believe that we have
adequately provided in our financial statements for the estimable potential
impact of these contingencies. We also believe that the outcomes will not
significantly affect the long-term results of operations or our financial
position. However, they may have a material impact on earnings for a particular
period.
We are subject to federal, state and local pollution control laws and
regulations in all locations we have operating facilities. We anticipate that
compliance with these laws and regulations will involve continuing capital
expenditures and operating costs.
OUTLOOK -
Assuming limited geopolitical fallout, we expect the second half of our fiscal
year ending August 31, 2003 to be more profitable due to increased production,
shipments and selling prices. We are expecting to achieve between 50% and 60% of
our historical second half net earnings over the past three years. During the
second half of fiscal 2003, we anticipate that public construction and
institutional building will increase despite tighter budgets at the state and
local level. Construction activity typically increases in the spring partially
due to better weather conditions. We are expecting some improvement in demand
from the industrial sector as well, and no further deterioration in commercial
construction.
During the second quarter 2003, we implemented two price increases for most of
our steel mill products. These price increases totaled $35 per ton and will
become partly effective in the third quarter and fully effective during our
fourth quarter fiscal 2003. These increases should help restore gross margins at
our steel minimills. We are also anticipating better profits at our copper tube
mill during the second half of fiscal 2003 due to higher demand in the spring.
We are expecting ferrous scrap prices to possibly decline by our fiscal year
end. We think that nonferrous prices will flatten. The recycling segment should
continue to be profitable under these conditions. We believe that our marketing
and distribution markets will have continued good results.
Our 2004 fiscal year should be much more profitable, and we should experience
stronger demand for construction-related products and services. We are also
expecting that various end-use markets around the world will improve, especially
manufacturing activity. We think that emerging markets will show a
disproportionate increase in the consumption of steel and nonferrous metals, and
we are well-positioned to take advantage of these markets.
This outlook section contains forward-looking statements regarding the outlook
for our financial results including net earnings, product pricing and demand,
production rates, interest rates, inventory levels, results of litigation, steel
import restrictions, and general market conditions. These forward-looking
statements can generally be identified by phrases such as we "expect",
"anticipate", "believe", "presume", "think", "plan to", "should", "likely",
"appear", "projects", or other similar words or phrases of similar impact. There
is inherent risk and uncertainty in any forward-looking statements. Variances
will occur and some could be materially different from our current opinion.
Developments that could impact our expectations include the following:
o interest rate changes
17
o construction activity
o litigation claims and settlements
o difficulties or delays in the execution of construction
contracts resulting in cost overruns or contract disputes
o metals pricing over which we exert little influence
o increased capacity and product availability from competing steel
minimills and other steel suppliers including import quantities
and pricing
o court decisions
o industry consolidation or changes in production capacity or
utilization
o global factors including credit availability and political
uncertainties
o currency fluctuations
o energy and insurance prices
o decisions by governments impacting the level of steel imports
and pace of overall economic activity.
LIQUIDITY AND CAPITAL RESOURCES -
We discuss liquidity and capital resources on a consolidated basis. Our
discussion includes the sources and uses of our three operating segments and
centralized corporate functions. We have a centralized treasury function and use
inter-company loans to efficiently manage the short-term cash needs of our
operating divisions. We invest any excess funds centrally.
We rely upon cash flows from operating activities, and to the extent necessary,
external short-term financing sources. Our short-term financing sources include
the issuance of commercial paper, sales of accounts receivable and borrowing
under our bank credit facilities. From time to time, we have issued long-term
public debt and private placements. Our investment grade credit ratings and
general business conditions affect our access to external financing on a
cost-effective basis. Depending on the price of our common stock, we may realize
significant cash flows from the exercise of stock options.
Moody's Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch
(F-2) rate our $174.5 million commercial paper program in the second highest
category. To support our commercial paper program, we have unsecured
contractually committed revolving credit agreements with a group of eight banks.
Our $129.5 million facility expires in August 2003, and our $45 million facility
expires in August 2004. We plan to continue our commercial paper program and the
revolving credit agreements in comparable amounts to support the commercial
paper program.
For added flexibility, we may secure financing through sales of certain accounts
receivable in an amount not to exceed $130 million. We continually sell accounts
receivable on an ongoing basis to replace those receivables that have been
collected from our customers. Our long-term public debt was $256 million at
February 28, 2003 and is investment grade rated by Standard & Poors' Corporation
(BBB), Fitch (BBB) and by Moody's Investors Services (Baa1). We have access to
the public markets for potential refinancing or the issuance of additional
long-term debt. Also, we have numerous informal, uncommitted credit facilities
available from domestic and international banks. These credit facilities are
priced at bankers' acceptance rates on a cost of funds basis.
Credit ratings affect our ability to obtain short- and long-term financing and
the cost of such financing. If the rating agencies were to reduce our credit
ratings, we would pay higher financing costs and probably would have less
availability of the informal, uncommitted facilities. In determining our credit
ratings, the rating agencies consider a number of both quantitative and
qualitative factors. These factors include earnings, fixed charges such as
interest, cash flows, total debt outstanding, off balance sheet obligations and
other commitments, total capitalization and various ratios calculated from these
factors. The rating agencies also consider predictability of cash flows,
business strategy, industry condition and contingencies. We are committed to
maintaining our investment grade ratings.
Certain of our financing agreements include various covenants. The most
restrictive of these covenants requires us to maintain an interest coverage
ratio of greater than three times and a debt to capitalization
18
ratio of 55%, as defined in the financing agreement. A few of the agreements
provide that if we default on the terms of another financing agreement, it is
considered a default under these agreements. We have complied with the
requirements, including the covenants of our financing agreements as of and for
the three months ended February 28, 2003.
Our revolving credit agreements and accounts receivable securitization agreement
include ratings triggers. The trigger in the revolving credit agreements is
solely a means to reset pricing for facility fees and, if a borrowing occurs, on
loans. Within the accounts receivable securitization agreement, the ratings
trigger is contained in a "termination event", but the trigger is set at
catastrophic levels. The trigger requires a combination of ratings actions on
behalf of two independent rating agencies and is set at levels seven ratings
categories below our current rating.
Our manufacturing and recycling businesses are capital intensive. Our capital
requirements include construction, purchases of equipment and maintenance
capital at existing facilities. We plan to invest in new operations. We also
plan to invest in working capital to support the growth of our businesses,
maintain our ability to repay maturing long-term debt when due at its earliest
maturity in 2005 and pay dividends to our stockholders.
We continue to assess alternative means of raising capital, including potential
dispositions of under-performing or non-strategic assets. Any potential future
major acquisitions could require additional financing from external sources
including the issuance of common or preferred stock.
Cash Flows
Our cash flows from operating activities primarily result from sales of steel
and related products, and to a lesser extent, sales of nonferrous metal
products. We have a diverse and generally stable customer base. We use futures
or forward contracts as needed to mitigate the risks from fluctuations in
foreign currency exchange rates and metals commodity prices. See Note G,
Derivatives and Risk Management, to the condensed consolidated financial
statements.
The volume and pricing of orders from our U.S. customers in the manufacturing
and construction sectors affect our cash flows from operating activities. Our
international marketing and distribution operations also significantly affect
our cash flows from operating activities. The weather can influence the volume
of products we ship in any given period. Also, the general economy, the strength
of the U.S. dollar, governmental action, and various other factors beyond our
control influence our volume and prices. Periodic fluctuations in our prices and
volumes can result in variations in cash flows from operations. Despite these
fluctuations, we have historically relied on operating activities as a steady
source of cash.
Cash flows from operations before changes in operating assets and liabilities
for the six months ended February 28, 2003 decreased to $38.5 million from $50.6
million in 2002 due mostly to lower earnings. We used $42.1 million of net cash
flows in our operating activities for the six months ended February 28, 2003 as
compared with the $16.3 million of net cash flows provided from our operating
activities for the six months ended February 28, 2002. During the six months
ended February 28, 2003, we paid more bonuses and other discretionary expenses,
which had been accrued at August 31, 2002, than we did during the six months
ended February 28, 2002. Net working capital increased to $390 million at
February 28, 2003 from $379 million at August 31, 2002. We used funds from
temporary investments to pay the accrued expenses as warranted. Also,
inventories in marketing and distribution increased mostly due to higher sales
orders from outside of the United States and for goods in transit. The current
ratio was 2.0 at February 28, 2003, up from 1.9 at August 31, 2002.
We invested $23.5 million in property, plant and equipment during the six months
ended February 28, 2003, which was comparable to 2002. In 2002, we acquired the
remaining shares of the Coil Steels Group (CSG) for $6.8 million. We expect our
capital spending for fiscal 2003 to be less than our $87 million budget,
including both new construction and acquisitions to expand our downstream
businesses.
19
We assess our capital spending each quarter and reevaluate our requirements
based upon current and expected results. We believe that our capital spending
may be about $50 million for fiscal 2003.
Our short-term financing needs were minimal during the six months ended February
28, 2003 mostly due to continued management of working capital and our
significant amount of temporary investments. We had no short-term borrowings at
February 28, 2003 or 2002. We have no significant amounts due on our long-term
debt until July 2005. During the six months ended February 28, 2003, we used
$30.6 million from sales of accounts receivable to financial institutions. See
Note C, Sales of Accounts Receivable, to the condensed consolidated financial
statements.
At February 28, 2003 , 28,213,050 common shares were issued and outstanding,
with 4,052,116 held in our treasury. We paid dividends of $4.6 million during
the six months ended February 28, 2003, compared to the $3.4 million paid during
2002. During the six months ended February 28, 2003, we purchased 593,610 shares
of our common stock at an average price of $15.48 per share. These shares were
held in our treasury.
We believe that we have sufficient liquidity for fiscal 2003 and the foreseeable
future.
20
CONTRACTUAL OBLIGATIONS
The following table represents our contractual obligations as of February 28,
2003 (dollars in thousands):
Payments Due Within *
----------------------------------------------------------------
2-3 4-5 After
Total 1 Year Years Years 5 Years
-------- -------- -------- -------- --------
Contractual Obligations:
Long-term Debt (1) $258,025 $ 611 $107,313 $ 50,027 $100,074
Operating Leases (2) 54,131 7,889 13,054 9,831 23,357
Unconditional Purchase
Obligations (3) 84,821 29,185 31,740 6,902 16,994
-------- -------- -------- -------- --------
Total Contractual Cash
Obligations $396,977 $ 37,685 $152,107 $ 66,760 $140,425
======== ======== ======== ======== ========
* Cash obligations herein are not discounted.
(1) Total amounts are included in the February 28, 2003 condensed consolidated
balance sheet. See Note E, Long-Term Debt, to the condensed consolidated
financial statements.
(2) Includes minimum lease payment obligations for noncancelable equipment and
real-estate leases in effect as of February 28, 2003.
(3) About 54% of these purchase obligations are for inventory items to be sold
in the ordinary course of business; most of the remainder are for supplies
associated with normal revenue-producing activities.
At February 28, 2003, we received $32.7 million of net funding from the sales of
accounts receivable. See Note C, Sales of Accounts Receivable, to the condensed
consolidated financial statements. If we terminated the accounts receivable
program on February 28, 2003 we would have to pay the first $32.7 million of
collections from accounts sold to third party financial institutions. We have
complied with the terms of this program as of, and for the six months ended
February 28, 2003.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for our own
commitments to perform in certain instances when our customers and suppliers
request. A cash deposit of $10.2 million included in other current assets on the
condensed consolidated balance sheet collateralized a portion of our outstanding
letters of credit. All of the commitments expire within one year.
At the request of a customer and its surety bond issuer, we have agreed to
indemnify the surety against all costs the surety may incur should our customer
fail to perform its obligations under construction contracts covered by payment
and performance bonds issued by the surety. We are the customer's primary
supplier of steel, and steel is a substantial portion of our customer's cost to
perform the contracts. We believe we have adequate controls to monitor the
customer's performance under the contracts including payment for the steel we
supply. As of February 28, 2003, the surety had issued bonds in the total amount
(without reduction for the work performed to date) of $11.9 million which are
subject to our guaranty obligation under the indemnity agreement. See Note B,
Accounting Policies, to the condensed consolidated financial statements.
ACCOUNTING POLICIES-
See Note B, Accounting Policies, to the condensed consolidated financial
statements.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Company is not significantly
different from the information set forth in Item 7a. Quantitative and
Qualitative Disclosures About Market Risk included in the Company's Annual
Report of Form 10-K for the year ended August 31, 2002, filed with the
Securities Exchange Commission, and is therefore not presented herein.
Also, see Note G, Derivatives and Risk Management, to the condensed consolidated
financial statements.
22
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The term
"disclosure controls and procedures" is defined in Rule 13a-14(c) of the
Securities Exchange Act of 1934, or the Exchange Act. This term refers to the
controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of this quarterly
report and they have concluded that as of that date, our disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Controls. There were no significant changes to
our internal controls or in other factors that could significantly affect our
internal controls subsequent to the date of their evaluation by our Chief
Executive Officer and our Chief Financial Officer, including any corrective
actions with regard to significant deficiencies and material weaknesses.
23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the information incorporated by reference from
Item 3. Legal Proceedings in the Company's Annual Report on Form 10-K for the
year ending August 31, 2002, filed November 26, 2002, with the Securities and
Exchange Commission.
In January, 2003, the Texas Commission on Environmental Quality, or
TCEQ, notified our subsidiary, Structural Metals, Inc., or SMI-Texas, of the
terms of a proposed Agreed Order to resolve seven pending alleged violations
relating to air emissions, record keeping and reporting requirements. The
monetary sanction initially proposed by TCEQ in the Agreed Order exceeded
$100,000 but was subsequently amended to provide for a proposed administrative
penalty of approximately $95,000. SMI-Texas is continuing to review the terms of
the proposed Agreed Order as amended, including future air emission monitoring
requirements requested by the TCEQ, and has not yet determined if it will
contest the alleged violations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the registrant's annual meeting of stockholders held January 23,
2003, the three nominees named in the Company's Proxy Statement dated December
11, 2002, were elected to serve as directors until the 2006 annual meeting, the
proposal to amend the Company's General Employee Stock Purchase Plan to increase
by 1,000,000 the number of shares available for issuance pursuant to the Plan,
and to increase the maximum number of shares that an eligible employee may elect
to purchase annually from 200 to 400 was approved and the appointment of
Deloitte & Touche, LLP, as auditors of the registrant for the fiscal year ending
August 31, 2003 was ratified. There was no solicitation in opposition to
management's nominees for directors.
ITEM 5. OTHER INFORMATION
Not Applicable
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits required by Item 601 of Regulation S-K.
99.1 Certification of Principal Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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.
COMMERCIAL METALS COMPANY
/s/ William B. Larson
-----------------------------------
April 11, 2003 William B. Larson
Vice President
& Chief Financial Officer
/s/ Malinda G. Passmore
----------------------------------
April 11, 2003 Malinda G. Passmore
Controller
25
SECTION 302 CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Stanley A. Rabin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commercial Metals
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 11, 2003
/s/ Stanley A. Rabin
------------------------------------
Stanley A. Rabin
Chairman of the Board, President and
Chief Executive Officer
26
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, William B. Larson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commercial Metals
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 11, 2003
/s/ William B. Larson
-------------------------------------------
William B. Larson
Vice President and Chief Financial Officer
27
INDEX TO EXHIBITS
Exhibit No Description
99.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.