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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2003
OR
[ ] 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 1-4304
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 or organization) Identification No.)
6565 MacARTHUR BLVD.
IRVING, TEXAS 75039
(Address of principal executive offices) (Zip Code)
(214) 689-4300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ----------------------------------- -----------------------------------------
Common Stock, $5 par value New York Stock Exchange
Rights to Purchase Series A New York Stock Exchange
Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained herein, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the common stock on November 18, 2003 held by
non-affiliates of the registrant, based on the closing price of $23.72 per share
on November 18, 2003 on the New York Stock Exchange, was approximately
$607,042,430. (For purposes of determination of this amount, only directors,
executive officers, and 10% or greater stockholders have been deemed
affiliates.)
The number of shares outstanding of common stock as of November 18, 2003
was 28,315,855.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following document are incorporated by reference into the
listed Part of Form 10-K:
Registrant's definitive proxy statement for the annual meeting of
stockholders to be held January 22, 2004 --Part III
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COMMERCIAL METALS COMPANY
TABLE OF CONTENTS
PART I
Item 1: Business.......................................................................... 1
Item 2: Properties........................................................................ 18
Item 3: Legal Proceedings................................................................. 19
Item 4: Submission of Matters to a Vote of Security Holders............................... 20
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters............. 20
Item 6: Selected Financial Data........................................................... 22
Item 7: Management's Discussion and Analysis of Financial Condition and Results of
Operation......................................................................... 22
Item 7A: Quantitative and Qualitative Disclosures about Market Risk........................ 41
Item 8: Financial Statements and Supplemental Data........................................ 43
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 69
Item 9A: Controls and Procedures........................................................... 69
PART III
Item 10: Directors and Executive Officers of the Registrant................................ 69
Item 11: Executive Compensation............................................................ 70
Item 12: Security Ownership of Certain Beneficial Owners and Management.................... 70
Item 13: Certain Relationships and Related Transactions.................................... 71
Item 14: Principal Accounting Fees and Services............................................ 71
PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 71
Signatures........................................................................ 76
Independent Auditor's Report on Schedule.......................................... 77
Schedule VIII - Valuation and Qualifying Accounts................................. 78
Index to Exhibits................................................................. 79
PART I
ITEM 1. BUSINESS
GENERAL
We manufacture, recycle, market and distribute steel and metal products and
related materials and services through a network of locations located throughout
the United States and internationally. We consider our business to be organized
into three segments: manufacturing, recycling and marketing and distribution.
We were incorporated in 1946 in the State of Delaware. Our predecessor
company, a secondary metals recycling business, has existed since approximately
1915. We maintain our executive offices at 6565 MacArthur Boulevard in Irving,
Texas, telephone number (214) 689-4300. Our fiscal year ends August 31 and all
references in this Form 10-K to years refer to the fiscal year ended August 31
of that year unless otherwise noted. Financial information for the last three
fiscal years concerning our three business segments and the geographic areas of
our operations is incorporated herein by reference from "Note 13 Business
Segments" of the notes to consolidated financial statements which are in Part
II, Item 8 of this Form 10-K.
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to these reports will be made available
free of charge through the Investor Relations section of our Internet website,
http://www.commercialmetals.com, as soon as practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission.
RECENT DEVELOPMENTS
Acquisition of Huta Zawiercie SA. On July 22, 2003, our subsidiary
Commercial Metals (International) AG entered into an agreement to purchase 71%
of the shares of Huta Zawiercie S.A., the third largest producer of steel in
Poland, from Impexmetal S.A. of Warsaw, Poland. We will pay approximately $50
million for the shares and assume approximately $32 million in debt owed by Huta
Zawiercie S.A. We expect to close the acquisition on or before December 15,
2003.
Completion of Private Offering of Notes Due 2013. On November 6, 2003, we
entered into an agreement with a group of purchasers lead by Goldman, Sachs, &
Co. for the sale of $200 million principal amount of our 5.625% notes due 2013.
This sale was completed on November 12, 2003. We issued the 2013 notes in a
private offering that was exempt from registration under the Securities Act of
1933.
The notes were sold to investors at a price equal to 99.856% of their par
value, resulting in an effective yield to maturity of 5.644%. The amount of net
proceeds that we received from this offering, after giving effect to
underwriting discounts, fees and other expenses, was approximately $198 million.
We used approximately $96 million of the proceeds from this offering to pay for
the 2005 notes that were tendered in connection with the tender offer described
below. We plan to use approximately $50.0 million of these proceeds to fund the
acquisition of Huta Zawiercie S.A. We will use the remaining portion of the
proceeds for general corporate purposes which may include acquisitions or and
investments in complementary companies. We are currently participating in
negotiations regarding a potential acquisition of another company for a cash
purchase price of approximately $50 million. The transaction is subject to the
negotiation of definitive agreements and other conditions and approvals. We can
give no assurance whether these negotiations will be concluded or whether this
transaction will be completed.
Completion of Tender Offer for 2005 Notes. On October 31, 2003, we
commenced a cash tender offer for any and all of our outstanding 7.20% notes due
2005. The tender offer expired at 12:00 p.m. (noon), New York City time, on
November 7, 2003. We received tenders of $89 million principal amount of our
2005 notes from holders in the tender offer, which represents 89% of the
original $100 million principal amount of 2005 notes initially outstanding. In
exchange, on November 13, 2003, we made aggregate cash payments of approximately
$ 96 million for these notes on the terms and conditions specified in our Offer
to Purchase dated October 31, 2003. Approximately $ 11 million principal amount
of our 2005 notes remain outstanding. As discussed above, we used a portion of
the proceeds from the offering of our 2013 notes to pay for the 2005 notes we
received in the tender offer.
MANUFACTURING SEGMENT
Our manufacturing segment is our dominant and most rapidly expanding
segment. The manufacturing segment utilizes the most assets, requires the most
capital expenditures, generally has the highest operating profit and employs the
most employees as compared to the recycling and marketing and distribution
segments. Our manufacturing segment consists of the steel group and Howell Metal
Company. Howell Metal Company, a subsidiary, manufactures copper tubing. Our
steel group is the larger portion of this segment.
STEEL GROUP
Our steel group operates the following:
- 4 steel mills, commonly referred to as "minimills", that produce
reinforcing bar, angles, flats, small beams, rounds, fence-post
sections and other shapes;
- 30 steel plants that bend, cut, weld and fabricate steel, primarily
reinforcing bar and angles;
- 28 warehouses that sell or rent supplies for the installation of
concrete;
- 6 plants that produce special sections for floors and ceiling support;
- 4 plants that produce steel fence posts;
- 1 plant that treats steel with heat to strengthen and provide
flexibility;
- 1 plant that rebuilds railcars; and
- a railroad salvage company
Minimills. We operate four steel minimills which are located in Texas,
Alabama, South Carolina and Arkansas. The minimills produce reinforcing bar,
angles, flats, small beams, rounds, fence-post sections and other shapes. We
utilize a fleet of trucks that we own and private haulers to transport finished
products from the minimills to our customers and our fabricating shops. To
minimize the cost of our products, we try to operate all four minimills at full
capacity. Market conditions such as increases in quantities of competing
imported steel, production rates at domestic competitors or a decrease in
construction activity may reduce demand for our products and limit our ability
to operate the minimills at full capacity. Through our operations and capital
improvements, we strive to increase our capacity and productivity at the
minimills and enhance our product mix.
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Since the steel minimill business is capital intensive, we make substantial
capital expenditures on a regular basis to remain competitive with other low
cost producers. Over the past three fiscal years we have spent approximately $51
million or 31% of our total capital expenditures on minimill projects.
The following table compares the amount of steel (in tons) melted, rolled
and shipped by our four minimills in the past three fiscal years:
2001 2002 2003
---- ---- ----
Tons Melted 1,796,000 2,100,000 2,081,000
Tons Rolled 1,705,000 2,026,000 1,972,000
Tons Shipped 1,903,000 2,171,000 2,284,000
We acquired our largest steel minimill in 1963. It is located in Seguin,
Texas, near San Antonio. In 1983, we acquired our minimill in Birmingham,
Alabama. As part of the acquisition of Owen Steel Company, Inc. and its
affiliates in 1995, we acquired our minimill in Cayce, South Carolina. We have
operated our smallest mill since 1987, and it is located near Magnolia,
Arkansas.
The Texas, Alabama and South Carolina minimills each consist of:
- melt shop with electric arc furnace that melts ferrous scrap;
- continuous casting equipment that shape the molten metal into billets;
- reheating furnace that prepares billets for rolling;
- rolling mill that form products from heated billets;
- mechanical cooling bed that receives hot product from the rolling mill;
- finishing facilities that cut, straighten, bundle and prepare products
for shipping; and
- supporting facilities such as maintenance, warehouse and office areas.
Descriptions of minimill capacity, particularly rolling capacity, are
highly dependent on the specific product mix manufactured. Each of our minimills
can and do roll several different types and sizes of products in their range
depending on pricing and demand. Therefore our capacity estimates assume a
typical product mix and will vary with the products actually produced. Our Texas
minimill has annual capacity of approximately 900,000 tons melted and 800,000
tons rolled. Our Alabama minimill's annual capacity is approximately 650,000
tons melted and 575,000 tons rolled. We have annual capacity at our South
Carolina minimill of approximately 700,000 tons melted and 800,000 tons rolled.
Our Texas minimill manufactures a full line of bar size products including
reinforcing bar, angles, rounds, channels, flats, and special sections used
primarily in building highways, reinforcing concrete structures and
manufacturing. Our Texas minimill sells primarily to the construction, service
center, energy, petrochemical, and original equipment manufacturing industries.
The Texas minimill primarily ships its products to customers located in Texas,
Louisiana, Arkansas, Oklahoma and New Mexico. It also ships products to
approximately 30 other states and to Mexico. Our Texas minimill melted 852,000
tons during 2003, compared to 838,000 tons during 2002, and rolled 708,000 tons,
a decrease of 5,000 tons from 2002.
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The Alabama minimill recorded 2003 melt shop production of 612,000 tons, an
increase of 27,000 tons from 2002. The Alabama minimill rolled 483,000 tons, a
decrease of 10,000 tons from 2002. Our Alabama minimill primarily manufactures
products that are larger in size as compared to products manufactured by our
other three minimills. Such larger size products include mid-size structural
steel products including angles, channels, wide flange beams of up to eight
inches and special bar quality rounds and flats. Our Alabama minimill sells
primarily to service centers, as well as to the construction, manufacturing, and
fabricating industries. The Alabama minimill primarily ships its products to
customers located in Alabama, Georgia, Tennessee, North and South Carolina, and
Mississippi.
Our South Carolina minimill manufactures a full line of bar size products
which primarily include steel reinforcing bar. The minimill also manufactures
angles, rounds, squares, fence post sections and flats. The South Carolina
minimill ships its products to customers located in the Southeast and
mid-Atlantic areas which include the states from Florida through southern New
England. During 2003, the South Carolina minimill melted 617,000 tons and rolled
661,000 tons compared to 677,000 tons melted and 693,000 tons rolled during
2002.
The primary raw material for our Texas, Alabama and South Carolina
minimills is secondary, or scrap, ferrous metal. We purchase the raw material
from suppliers generally within a 300 mile radius of each minimill. Ten
secondary metals recycling plants located in Texas, South Carolina and Georgia
are operated by our steel group due to the predominance of secondary ferrous
metals sales to the nearby steel group operated minimills. Two of the steel
group's ten recycling plants operate automobile shredders. The eight smaller
facilities assist the two larger locations with shredders and our nearby
minimills with the acquisition of ferrous scrap. These metal recycling plants
processed and shipped 930,000 tons of primarily ferrous scrap metals during
2003. We believe the supply of scrap is adequate to meet our future needs, but
it has historically been subject to significant price fluctuations with prices
having increased during 2003 to near record highs by the end of the year. All
three minimills also consume large amounts of electricity and natural gas which
have been readily available. Regional and more recently, national energy supply
and demand levels affect the prices we pay for electricity and natural gas.
Our Arkansas minimill primarily manufactures metal fence post stock, small
diameter reinforcing bar, sign posts and bed frame angles with some flats,
angles and squares. At our Arkansas minimill and at our facilities in San
Marcos, Texas, Brigham City, Utah, and West Columbia, South Carolina, we
fabricate fence post stock into studded "T" metal fence posts. This minimill
utilizes rail salvaged from abandoned railroads and, on occasion, billets from
our minimills, or other suppliers, as its raw material. The minimill's reheat
furnace heats the rail or billets and then a rolling mill processes it. The
product is finished at facilities similar to, but smaller than, the other
minimills. Since our Arkansas minimill does not have melting facilities, the
minimill depends on an adequate supply of competitively priced billets or used
rail. The availability of these raw materials fluctuates with the pace of
railroad abandonments, rail replacement by railroads and the demand for used
rail from domestic and foreign rail rerolling mills. We have annual capacity at
our Arkansas minimill of approximately 150,000 tons rolled.
Steel Fabrication. Our steel group operates a total of 40 facilities that
we consider to be engaged in the various related aspects of steel fabrication.
Thirty facilities engage in general fabrication of reinforcing and structural
steel,, 6 locations specialize in fabricating joists and special beams for floor
and ceiling support and 4 facilities fabricate only steel fence post.. We obtain
steel for these facilities from our own minimills and unrelated vendors. Our
steel fabrication capacity exceeds 1.1 million tons. In 2003, we shipped
1,028,000 tons of fabricated steel, an increase of 44,000 tons from 2002. We
conduct these activities in Texas at Beaumont, Buda, Corpus Christi, Dallas,
Harlingen, Houston (3), Melissa, San Marcos, San Antonio, Seguin, Victoria, and
Waco; Louisiana in Baton Rouge and Slidell; Arkansas in Magnolia and Hope (2);
Utah in Brigham City; Florida in Fort Myers, Jacksonville and Starke; Nevada in
Fallon; South Carolina in Cayce, Columbia, Eastover, Taylors and West Columbia;
in Georgia in the
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cities of Atlanta and Lawrenceville; North Carolina in Gastonia (2); Virginia in
Farmville and Fredericksburg; California in Etiwanda, Fresno, Stockton and
Fontana; Iowa at Iowa Falls; and in Arizona at Chandler. Fabricated steel
products are used primarily in the construction of commercial and non-commercial
buildings, hospitals, convention centers, industrial plants, power plants,
highways, arenas, stadiums, and dams. Generally, we sell fabricated steel in
response to a bid solicitation from a construction contractor or the project
owner. Typically, the contractor or owner of the project awards the job based on
the competitive prices of the bids and does not individually negotiate with the
bidders. During 2003, we purchased the operating assets of the general
reinforcing bar fabrication facilities in Chandler, Arizona and Fresno ,
California and San Antonio, Texas.
Our joist manufacturing operations headquartered in Hope, Arkansas,
manufacture steel joists for roof supports. The joist manufacturing operations
fabricate joists from steel obtained primarily from our steel group's minimills
at facilities in Hope, Arkansas; Starke, Florida; Cayce, South Carolina; Fallon,
Nevada; and Iowa Falls, Iowa. Our typical joist customer is a construction
contractor or large chain store owner. Joists are generally made to order and
sales may include custom design, fabrication and painting. We obtain our sales
primarily on a competitive bid basis. During 1999, we began production and sales
of castellated and cellular steel beams. These beams, recognizable by their
hexagonal or circular pattern of voids, permit greater design flexibility in
steel construction, especially floor structures. We fabricate these beams at a
facility adjacent to our Hope, Arkansas, joist plant.
Concrete-Related Products. We sell and rent concrete related supplies and
equipment to concrete installation businesses. We have twenty eight warehouse
locations in Texas, Louisiana, Mississippi, South Carolina, Florida and Colorado
where we store and sell these products which, with the exception of a small
portion of steel products, are purchased for resale from unrelated suppliers.
During 2003 we purchased the assets, primarily inventory, of the Denver,
Colorado location.
Heat Treating Operation. Our steel group's heat treating operation is
Allegheny Heat Treating, Inc., located in Chicora, Pennsylvania. Allegheny Heat
Treating works closely with our Alabama minimill and other steel mills that sell
specialized heat-treated steel for customer specific use. Such steel is
primarily used in original or special equipment manufacturing. We have annual
operating capacity in our heat treating operation of approximately 30,000 tons.
Railroad Car Plant And Railroad Dismantling. We have a facility in
Victoria, Texas that repairs and rebuilds railroad freight cars. We also provide
custom maintenance and some manufacturing of specialized railroad freight cars.
Owners of private railcar fleets, railroads and leasing companies are our
customers. We primarily obtain this work on a bid and contract basis. We also
operate a business that purchases and removes rail and other materials from
abandoned railroads. Most of the salvaged rail is utilized by our Arkansas
minimill.
HOWELL METAL COMPANY
Our subsidiary, Howell Metal Company, operates a copper tube minimill in
New Market, Virginia. The minimill manufactures copper tube, primarily water
tubing, for the plumbing, air conditioning and refrigeration industries. Both
high quality secondary copper scrap and virgin copper ingot are melted, cast,
extruded and drawn into tubing. The minimill supplies tubing in straight lengths
and coils for use in commercial, industrial and residential construction and by
original equipment manufacturers. Our customers, largely equipment
manufacturers, wholesale plumbing supply firms and large home improvement
retailers, are located primarily east of the Mississippi River and supplied
directly from the minimill or three warehouses located along the east coast.
Recently Howell has undertaken to expand its marketing territory to the west.
The demand for copper tube depends on the level of new apartment, hotel/motel
and residential construction and renovation. Copper scrap is readily available,
but subject to
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rapid price fluctuations. The price or supply of virgin copper causes the price
of copper scrap to fluctuate rapidly. Our recycling segment supplies a small
portion of the copper scrap. Howell Metal Company's facilities include melting,
casting, piercing, extruding, drawing, finishing and office facilities. During
2003, the facility produced approximately 61,000,000 pounds of copper tube.
Howell has annual manufacturing capacity of approximately 80,000,000 pounds.
No single customer purchases 10% or more of our manufacturing segment's
production Due to the nature of certain stock products we sell in the
manufacturing segment, we do not have a long lead time between receipt of a
purchase order and delivery, with the exception of the steel fabrication and
joist jobs. We generally fill orders for other stock products from inventory or
with products near completion. As a result, we do not believe that backlog
levels are a significant factor in the evaluation of our operations. Backlog in
our steel group at 2003 year-end was approximately $341,983,000 as compared to
backlog in our steel group at 2002 year-end of approximately $286,880,000.
RECYCLING SEGMENT
Our recycling segment processes secondary metals, or scrap metals, for use
as a raw material by manufacturers of new metal products. This segment operates
thirty four secondary metal processing facilities not including the ten
recycling facilities operated by our steel group as a part of our manufacturing
segment.
We purchase ferrous and nonferrous secondary or scrap metals, processed and
unprocessed, from a variety of sources in a variety of forms for our metal
recycling plants. Sources of metal for recycling include manufacturing and
industrial plants, metal fabrication plants, electric utilities, machine shops,
factories, railroads, refineries, shipyards, ordinance depots, demolition
businesses, automobile salvage and wrecking firms. Collectively, small secondary
metal collection firms are a major supplier.
In 2003, our metal recycling segment's plants processed and shipped
approximately 1,881,000 tons of scrap metal compared to 1,741,000 tons in 2002.
Ferrous scrap metals comprised the largest tonnage of metals recycled at
approximately 1,639,000 tons, an increase of approximately 145,000 tons as
compared to 2002. We shipped approximately 241,000 tons of nonferrous scrap
metals, primarily aluminum, copper and stainless steel, a decrease of
approximately 6,000 tons as compared to 2002. With the exception of precious
metals, our metal recycling plants recycle and process practically all types of
metal. In addition our steel group's ten metal recycling facilities processed
and shipped approximately 930,000 tons of primarily ferrous scrap metals during
2003.
Our metal recycling plants consist of an office and warehouse building
equipped with specialized equipment for processing both ferrous and nonferrous
metal. A typical recycling plant also includes several acres of land that we use
for receiving, sorting, processing and storing metals. Several of our recycling
plants use a small portion of their site or a nearby location to display and
sell metal products that may be reused for their original purpose without
further processing. We equip our larger plants with scales, shears, baling
presses, briquetting machines, conveyors and magnetic separators which enable
these plants to efficiently process large volumes of scrap metals. Two plants
have extensive equipment that segregates metallic content from large quantities
of insulated wire. To facilitate processing, shipping and receiving, we equip
our ferrous metal processing centers with either presses, shredders or hydraulic
shears to prepare and compress metal scrap for easier handling. Cranes are
utilized to handle scrap metals for processing and to load material for
shipment. Many facilities have rail access as ferrous scrap is primarily shipped
by open gondola railcar or barge when water access is available.
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We operate five large shredding machines, four in Texas with one in
Florida, capable of pulverizing obsolete automobiles or other ferrous metal
scrap. We have two additional shredders operated by our manufacturing segment.
We sell recycled metals to steel mills and foundries, aluminum sheet and
ingot manufacturers, brass and bronze ingot makers, copper refineries and mills,
secondary lead smelters, specialty steel mills, high temperature alloy
manufacturers and other consumers. Ferrous scrap metal is the primary raw
material for electric arc furnaces such as those operated by our steel
minimills. Some minimills periodically supplement purchases of scrap metal with
direct reduced iron and pig iron for certain product lines. Our Dallas office
coordinates the sales of recycled metals from our metal recycling plants to our
customers. We negotiate export sales through our network of foreign offices as
well as our Dallas office.
We do not purchase a material amount of scrap metal from one source. One
customer's purchases represented approximately 10% of our recycling segment's
revenues. Our recycling segment competes with other secondary processors and
primary nonferrous metals producers, both domestic and foreign, for sales of
nonferrous materials. Consumers of nonferrous scrap metals oftentimes can
utilize primary or "virgin" ingot processed by mining companies instead of
secondary metals. The prices of nonferrous scrap metals are closely related to
but generally less than, the prices of primary or "virgin" ingot.
MARKETING AND DISTRIBUTION SEGMENT
Our marketing and distribution segment buys and sells primary and secondary
metals, fabricated metals and other industrial products. During the past year,
our marketing and distribution segment sold approximately 2.1 million tons of
steel products. We market and distribute these products through a network of 15
offices, 4 processing facilities and joint venture offices located around the
world. We purchase steel, nonferrous metals including copper and aluminum coil,
sheet and tubing, chemicals, industrial minerals, ores, metal concentrates and
ferroalloys from producers in domestic and foreign markets. Occasionally, we
purchase these materials from suppliers, such as trading companies or industrial
consumers, who have a surplus of these materials. We utilize long-term
contracts, spot market purchases and trading or barter transactions to purchase
materials. A majority of the products we purchase are either fabricated
semi-finished product or finished product.
We sell our products to customers, primarily manufacturers, in the steel,
nonferrous metals, metal fabrication, chemical, refractory and transportation
businesses. We sell directly to our customers through and with the assistance of
our offices in Irving, Texas; Fort Lee and Englewood Cliffs, New Jersey;
Arcadia, California; Sydney, Perth, Melbourne, Brisbane and Adelaide, Australia;
Singapore; Zug, Switzerland; Hong Kong; Sandbach, United Kingdom: Kohl, Germany
and as of November, 2003, Guangzhou, China. We have representatives in offices
in Moscow and Beijing. We have agents or joint venture partners in twenty two
additional offices located in significant international markets. Our network of
offices shares information regarding demand for our materials, assists with
negotiation and performance of contracts and other services for our customers,
and identifies and maintains relationships with our sources of supply.
In most transactions, we act as principal by taking title and ownership of
the products. We are also designated as a marketing representative, sometimes
exclusively, by product suppliers. We utilize agents when appropriate, and on
occasion we act as a broker for these products. We buy and sell these products
in almost all major markets throughout the world where trade by American-owned
companies is permitted.
We market physical products as compared to companies that trade commodity
futures contracts and frequently do not take delivery of the commodity. As a
result of sophisticated global communications, our
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customers and suppliers often have easy access to quoted market prices, although
such prices are not always accurate. Therefore, to distinguish ourselves we
focus on creative service functions for both sellers and buyers. Our services
include actual physical market pricing and trend information, as compared to
more speculative metal exchange futures market information, technical
information and assistance, financing, transportation and shipping (including
chartering of vessels), storage, warehousing, just in time delivery, insurance,
hedging and the ability to consolidate smaller purchases and sales into larger,
more cost efficient transactions. We attempt to limit exposure to price
fluctuations by offsetting purchases with concurrent sales. We also enter into
currency exchange contracts as economic hedges of sales and purchase commitments
denominated in currencies other than the United States dollar or, if the
transaction involves our Australian, United Kingdom or German subsidiaries,
their local currency. We do not, as a matter of policy, speculate on changes in
the markets.
We have previously made investments to acquire approximately 11% of the
outstanding stock of a Czech Republic steel mill and 24% of a Belgium business
that processes and pickles hot rolled steel coil. Additionally, as described
under "Recent Developments" above, we have made arrangements to acquire 71% of
the shares of Huta Zawiercie SA, a Polish steel producer. These investments
allow us to expand our marketing and distribution activities.
Our Australian operations have eleven warehousing facilities for
just-in-time delivery of steel and industrial products. We also have a heat
treating facility for steel products at our Australian operations. In 2002, our
Australian operations acquired the remaining 78% interest of Coil Steels Group
that we did not own. Coil Steels Group is the third largest distributor of steel
sheet and coil products in Australia and has processing facilities in Brisbane,
Sydney and Melbourne and warehouses in Adelaide and Perth.
SEASONALITY
Many of our manufacturing segment's customers are in the construction
business. Due to the increase in construction during the spring and summer
months, our sales in the manufacturing segment are generally higher in the third
and fourth quarters than in the first and second quarters of our fiscal year.
COMPETITION
Manufacturing Segment. Our steel manufacturing, steel fabricating and
copper tube manufacturing businesses compete with regional, national and foreign
manufacturers and fabricators of steel and copper. We compete primarily on the
price and quality of our products and our service. See "Risk Factors- Risks
Related to Our Industry". If recently imposed tariffs and duties are relaxed or
substantial exemptions to the tariffs are created, then steel imports into the
U.S. may again rise or domestic prices may fall, which would adversely affect
our sales, margins and profitability" below.
We do not produce a significant percentage of the total national output of
most of our products. However, we are considered a substantial supplier in the
markets near our facilities. We believe that our joist facilities are the second
largest manufacturer of joists in the United States, although significantly
smaller than the largest joist supplier. We believe that we are the largest
manufacturer of steel fence posts in the United States.
Recycling Segment. We believe our recycling segment is one of the larger
entities that recycles nonferrous secondary metals. We are a major regional
processor of ferrous scrap metal. The secondary metals business is subject to
cyclical fluctuations based upon the availability and price of unprocessed scrap
metal and the demand for steel and nonferrous metals. Buying prices and service
to scrap suppliers are the principal competitive factors for the segment. The
price offered for scrap metal is the principal competitive factor in acquiring
material from smaller secondary metals collection firms while industrial
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sources of scrap may also consider other factors such as supplying adequate
containers, timely removal, accurate information and financial ability.
Marketing and Distribution Segment. Our marketing and distribution business
is highly competitive. Our products in the marketing and distribution segment
are standard commodity items. We compete primarily on the price, quality and
reliability of our products, our financing alternatives and our additional
services. In this segment, we compete with other domestic and foreign trading
companies, some of which are larger and may have access to greater financial
resources. In addition, some of our competitors may be able to pursue business
without being restricted by the laws of the United States. We also compete with
industrial consumers, who purchase directly from suppliers, and importers and
manufacturers of semi-finished ferrous and nonferrous products. Internet
ecommerce sites specializing in metals began to develop in the late 1990's but
during the past year most have terminated or scaled back operations. We do not
believe they have had a significant impact on our business.
ENVIRONMENTAL MATTERS
A significant factor in our business is our compliance with environmental
laws and regulations. See "Risk Factors- Risks Related to Our Industry".
Compliance with and changes in various environmental requirements and
environmental risks applicable to our industry may adversely affect our results
of operations and financial condition" below.
Occasionally, we may be required to clean up or take certain remediation
action with regard to sites we formerly used in our operations. We may also be
required to pay for a portion of the costs of clean up or remediation at sites
we never owned or on which we never operated if we are found to have treated or
disposed of hazardous substances on the sites. The EPA has named us a
potentially responsible party, or PRP, at several federal Superfund sites. The
EPA alleges that we and other PRP scrap metal suppliers are responsible for the
cleanup of those sites solely because we sold scrap metal to unrelated
manufacturers for recycling as a raw material in the manufacturing of new
products. We contend that an arms length sale of valuable scrap metal for use as
a raw material in a manufacturing process that we have no control of should not
constitute "an arrangement for disposal or treatment of hazardous substances" as
defined under Federal law. In 2000, Congress approved and signed into law the
Superfund Recycling Equity Act. This statute should, subject to the satisfaction
of certain conditions, provide legitimate sellers of scrap metal for recycling
with some relief from Superfund liability at the Federal level. Despite
Congress' clarification of the intent of the Federal law, various state laws and
environmental agencies still seek to impose such liability. We believe imposing
such liability is contrary to public policy objectives and legislation that
encourage recycling and promote the use of recycled materials and we continue to
support clarification of state laws and regulations consistent with Congress's
action.
New Federal, state and local laws, regulations and the varying
interpretations of such laws by regulatory agencies and the judiciary impact how
much money we spend on environmental compliance. In addition, uncertainty
regarding adequate control levels, testing and sampling procedures, new
pollution control technology and cost benefit analysis based on market
conditions impact our future expenditures in order to comply with environmental
requirements. We cannot predict the total amount of capital expenditures or
increases in operating costs or other expenses that may be required as a result
of environmental compliance. We also do not know if we can pass such costs on to
our customers through product price increases. During 2003, we incurred
environmental costs including disposal, permits, license fees, tests, studies,
remediation, consultant fees and environmental personnel expense of
approximately $11.8 million. In addition, we estimate that we spent
approximately $4.2 million during 2003 on capital expenditures for environmental
projects. We believe that our facilities are in material compliance with
currently applicable environmental laws and regulations. We anticipate capital
expenditures for new environmental control facilities during 2004 of
approximately $4.1 million.
9
EMPLOYEES
As of October 2003, we had approximately 7,873 employees. Our manufacturing
segment employed approximately 6,343 people. Our recycling segment employed 987
people, and our marketing and distribution segment employed 472 people. We have
35 employees in general corporate management and administration and 36 employees
who provide service to our divisions and subsidiaries. Production employees at
one metals recycling plant and one fabrication facility are represented by
unions for collective bargaining purposes. We believe that our labor relations
are generally good to excellent and our work force is highly motivated.
RISK FACTORS
Before making an investment in our company, you should be aware of various
risks, including those described below. You should carefully consider these risk
factors together with all of the other information included in this annual
report on Form 10-K. The risks described below are not the only risks facing us.
Additional risks and uncertainties not currently known to us or those we
currently deem to be immaterial may also materially and adversely affect our
business, financial condition, results of operations or cash flows. If any of
these risks actually occur, our business, financial condition, results of
operations or cash flows could be materially adversely affected and you may lose
all or part of your investment.
RISKS RELATED TO OUR INDUSTRY
EXCESS CAPACITY IN OUR INDUSTRY ADVERSELY AFFECTS PRICES AND MARGINS.
Global steel-making capacity exceeds global demand for steel products. In
many foreign countries steel production greatly exceeds domestic demand and
these countries must export substantial amounts of steel in order to maintain
high employment and production levels. Accordingly, steel manufacturers in these
countries have traditionally exported steel at prices that are significantly
below their home market prices. The high level of imports into the United States
over the last few years has severely depressed domestic steel prices.
Furthermore, this vast supply of imports can decrease the sensitivity of
domestic steel prices to increases in demand. This surge of low priced imports,
coupled with increases in the cost of ferrous scrap and the rise in energy
prices, has resulted in an erosion of our gross margins.
IF RECENTLY IMPOSED DUTIES AND TARIFFS ARE RELAXED OR SUBSTANTIAL EXEMPTIONS TO
THE TARIFFS ARE CREATED, THEN STEEL IMPORTS INTO THE U.S. MAY AGAIN RISE OR
DOMESTIC PRICES MAY FALL, WHICH WOULD ADVERSELY AFFECT OUR SALES, MARGINS AND
PROFITABILITY.
In recent history, the United States has been an importer of steel
products. From 1987 until 1998, less than 20% of the domestic supply was
imported. However, with the cumulative effect of various economic crises,
including economic weakness in Asia, Russia and Latin America, foreign producers
have looked to the United States as the country with the healthiest economy, the
strongest currency and as the buyer of first resort. In addition, foreign
governments that own steel production facilities have sought to increase output.
Consequently, commencing in 1997 foreign steel products began to flood the
domestic market. As a result, imports accounted for approximately 26% of
domestic steel consumption in 1998 and remained above 20% through 2002.
In 2000, our minimills joined other steel manufacturers in an antidumping
petition filed with the United States International Trade Commission, called the
ITC. The ITC determined that there was a reasonable indication of material or
threatened injury to U.S. rebar manufacturers, such as us, due to unfairly
priced imports of rebar from several foreign countries. In the spring of 2001,
the U.S. Department
10
of Commerce determined that dumping of rebar from eight countries had occurred
and the ITC reached a final determination that dumped imports were causing
material injury to our industry. As a result, penalty duties, initially ranging
from 17% to 232%, were imposed. Although adjusted annually as a result of review
investigations by the Department of Commerce, dumping duties are normally in
effect for five years and may be extended if, after five years, the ITC
determines that removal of the duties would lead to a recurrence of injury. We
benefit from these duties. If these duties are subsequently modified or reduced
by the Department of Commerce, our sales, margins and profitability may
decrease.
In 2001, President Bush instituted an investigation under Section 201 of
the Trade Act of 1974 to determine if increased imports of selected steel
products into the United States were an actual or threatened cause of serious
injury to domestic manufacturers of steel products. The ITC, in October 2001,
found that U.S. steel producers had been seriously injured by these imports and,
in December 2001, recommended remedies to President Bush. In March 2002,
President Bush announced three-year tariffs that cover the majority of our
minimills' products, ranging from 15% to 30% for the first year and declining
over the next two years. Excluded from the tariffs were imports from Mexico and
Canada as well as imports from developing countries identified by the World
Trade Organization. These tariffs, which are applied in addition to the
antidumping duties, will be further strengthened by an import licensing and
monitoring system and an anti-surge mechanism that have been implemented to
monitor foreign trade activities in the applicable products.
We benefit from President Bush's decision. However, several foreign
governments have appealed President Bush's decision to the World Trade
Organization. In response, the World Trade Organization ruled against these
tariffs. While the United States government has stated that it will further
appeal this adverse ruling, we cannot predict whether the U.S. appeal will be
successful. If the U.S. appeal is not successful, the U.S. may modify the
tariffs or could be subject to retaliatory sanctions from other countries. Some
countries are engaging in retaliatory tariffs on products other than steel which
may cause the affected U.S. exporters to pressure the Bush Administration to
weaken the steel tariffs. Foreign governments have also requested that the
United States Department of Commerce grant exemptions for specific products
subject to the tariffs. Since March 5, 2002, the Department of Commerce and the
Office of the United States Trade Representative have announced the exclusion of
over 1,000 products from the tariff remedies. Relatively few of our products are
adversely affected by these exclusions. However, other exclusion requests will
be considered in the future. Granting exclusions that affect our products could
undermine the relief that these tariffs give us. The intent of the Section 201
remedies is to give the United States steel industry an opportunity to
reorganize and consolidate into stronger more competitive companies. A lack of
progress in this area, or pressure from steel consuming industries, may cause
President Bush to change the remedy. A U.S. decision to lessen or adversely
change the amount, scope or duration of the tariffs could lead to a resurgence
of steel imports. This result would put downward pressure on steel prices, which
would have a negative impact on our sales, margins and profitability. In any
event, without further action by the President, the Section 201 tariffs will
expire in March 2005.
OUR INDUSTRY IS AFFECTED BY CYCLICAL AND REGIONAL FACTORS.
Many of our products are commodities subject to cyclical fluctuations in
supply and demand in metal consuming industries. Periods of economic slowdown or
a recession in the United States, or the public perception that a slowdown or
recession may occur, could decrease the demand for our products and adversely
affect our business. Our overall financial results will be dependent
substantially upon the extent to which conditions in both the United States and
global economies improve. A slower than expected recovery or another recession
will further adversely affect our financial results. Our geographic
concentration in the southern and southwestern United States as well as areas of
Europe, Australia and China exposes us to the local market conditions in these
regions. Economic downturns in these areas or
11
decisions by governments that have an impact on the level and pace of overall
economic activity could adversely affect our sales and profitability.
Our business supports cyclical industries such as commercial and
residential construction, energy, service center, petrochemical and original
equipment manufacturing. These industries experience significant fluctuations in
demand for our products based on economic conditions, energy prices, consumer
demand and decisions by governments to fund infrastructure projects such as
highways, schools, energy plants and airports. Many of these factors are beyond
our control. As a result of the volatility in the industries we serve, we may
have difficulty increasing or maintaining our level of sales or profitability.
If the industries we serve suffer a prolonged downturn, then our business may be
adversely affected.
Our industry is characterized by low backlogs, which means that our results
of operations are promptly affected by short-term economic fluctuations.
COMPLIANCE WITH AND CHANGES IN VARIOUS ENVIRONMENTAL REQUIREMENTS AND
ENVIRONMENTAL RISKS APPLICABLE TO OUR INDUSTRY MAY ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
Existing laws or regulations, as currently interpreted or reinterpreted in
the future, or future laws or regulations, may have a material adverse effect on
our results of operations and financial condition. Compliance with environmental
laws and regulations is a significant factor in our business. We are subject to
local, state, federal and international environmental laws and regulations
concerning, among other matters, waste disposal, air emissions, waste and storm
water effluent and disposal and employee health. Our manufacturing and recycling
operations produce significant amounts of by-products, some of which are handled
as industrial waste or hazardous waste. For example, our minimills generate
electric arc furnace dust, or EAF dust, which the United States Environmental
Protection Agency, or the EPA, and other regulatory authorities classify as
hazardous waste. EAF dust requires special handling, recycling or disposal.
In addition, the primary feed materials for the eight shredders operated by
our scrap metal recycling facilities are automobile hulks and obsolete household
appliances. Approximately 20% of the weight of an automobile hulk consists of
unrecyclable material known as shredder fluff. After the segregation of ferrous
and saleable non-ferrous metals, shredder fluff remains. Federal and state
environmental regulations require shredder fluff to pass a toxic leaching test
to avoid classification as a hazardous waste. We endeavor to remove hazardous
contaminants from the feed material prior to shredding. As a result, we believe
the shredder fluff we generate is not hazardous waste. If the laws, regulations
or testing methods change with regard to EAF dust or shredder fluff, we may
incur additional significant expenditures.
Although we believe that we are in substantial compliance with all
applicable laws and regulations, legal requirements are changing frequently and
are subject to interpretation. New laws, regulations and changing
interpretations by regulatory authorities, together with uncertainty regarding
adequate pollution control levels, testing and sampling procedures, new
pollution control technology and cost benefit analysis based on market
conditions are all factors that may increase our future expenditures to comply
with environmental requirements. Accordingly, we are unable to predict the
ultimate cost of future compliance with these requirements or their effect on
our operations. We cannot predict whether such costs can be passed on to
customers through product price increases.
We may also be required to clean up additional sites than we already are or
take certain remediation action with regard to sites formerly used in connection
with our operations. We may be required to pay
12
for a portion of the costs of clean up or remediation at sites we never owned or
on which we never operated if we are found to have arranged for treatment or
disposal of hazardous substances on the sites.
RISKS RELATED TO OUR COMPANY
WE MAY HAVE DIFFICULTY COMPETING WITH COMPANIES THAT HAVE A LOWER COST STRUCTURE
THAN OURS.
We compete with regional, national and foreign manufacturers and traders.
Some of these competitors are larger, have greater financial resources and more
diverse businesses than us. Some of our foreign competitors may be able to
pursue business opportunities without regard for the laws and regulations with
which we must comply, such as environmental regulations. These companies may
have a lower cost structure, more operating flexibility and consequently they
may be able to offer better prices and more services than we can. We cannot
assure you that we will be able to compete successfully with these companies.
Furthermore, over the past few years, many integrated domestic steel
producers and secondary metal recyclers have entered bankruptcy proceedings.
While in bankruptcy proceedings, these companies can forgo certain costs, giving
them a competitive advantage. The companies that reorganize and emerge from
bankruptcy often have more competitive capital cost structures. In addition,
asset sales by these companies during the reorganization process tend to be at
depressed prices, which enable the purchasers to acquire greater capacity at
lower cost.
THE STRENGTH OF THE UNITED STATES DOLLAR MAY ADVERSELY AFFECT OUR BUSINESS.
Fluctuations in the value of the dollar can be expected to affect our
business. A strong U.S. dollar makes imported metal products less expensive,
resulting in more imports of steel products into the U.S. by our foreign
competitors. Weakening of certain foreign economies, such as Eastern Europe,
Asia and Latin America, has greatly increased competition from foreign
producers. The economic difficulties in these regions have resulted in lower
local demand for steel products and have encouraged greater steel exports to the
U.S. at depressed prices. As a result, our products, which are made in the U.S.,
have become relatively more expensive as compared to imported steel, which has
had and in the future could have a negative impact on our sales, revenues and
profitability.
A strong U.S. dollar hampers our international marketing and distribution
business. Weak local currencies limit the amount of U.S. dollar denominated
products that we can import for our international operations and limits our
ability to be competitive against local producers selling in local currencies.
OUR STEEL MINI-MILL BUSINESS REQUIRES CONTINUOUS CAPITAL INVESTMENTS THAT WE MAY
NOT BE ABLE TO SUSTAIN.
We must make regular substantial capital investments in our steel minimills
to lower production costs and remain competitive. We cannot be certain that we
will have sufficient internally generated cash or acceptable external financing
to make necessary substantial capital expenditures in the future. The
availability of external financing depends on many factors outside of our
control, including capital market conditions and the overall performance of the
economy. If funding is insufficient, we may be unable to develop or enhance our
minimills, take advantage of business opportunities and respond to competitive
pressures.
13
SCRAP AND OTHER SUPPLIES FOR OUR BUSINESSES ARE SUBJECT TO SIGNIFICANT PRICE
FLUCTUATIONS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
We depend on obsolete steel and non-ferrous metals, called scrap, and other
supplies for our businesses. Although the scrap and other supplies may be
sufficient to meet our future needs, the prices of scrap and other supplies have
historically fluctuated greatly. Our future profitability will be adversely
affected if we are unable to pass on higher material costs to our customers. We
may not be able to adjust our product prices, especially in the short-term, to
recover the costs of increases in material prices.
For example, we depend on the ready availability of scrap as feedstock for
our minimills. Although we believe that the supply of scrap is adequate to meet
future needs, the price of scrap has historically been subject to significant
fluctuation. Also, the raw material used in manufacturing copper tubing is
copper scrap, supplemented occasionally by virgin copper ingot. Copper scrap has
generally been readily available, and a small portion of our copper scrap comes
from our metal recycling yards. However, copper scrap is subject to rapid price
fluctuations related to the price and supply of virgin copper. Price increases
for high quality copper scrap could adversely affect our business. Finally, our
Arkansas mill does not have melting capacity, so it is dependent on an adequate
supply of competitively priced used rail. The availability of used rail
fluctuates with the pace of railroad abandonments, rail replacement by railroads
and demand for used rail from domestic and foreign rail rerolling mills. Price
increases for used rail could adversely affect our business.
OUR MINIMILLS CONSUME LARGE AMOUNTS OF ELECTRICITY AND NATURAL GAS, AND
SHORTAGES OR INCREASES IN THE PRICE OF ELECTRICITY AND NATURAL GAS COULD
ADVERSELY AFFECT OUR BUSINESS.
The successful operation of our minimills depends on an uninterrupted
supply of electricity. Accordingly, we are at risk in the event of an energy
disruption. The electricity industry recently has been adversely affected by
shortages and price volatility in regions outside of the locations of our
minimills. Prolonged black-outs or brown-outs would substantially disrupt our
production. Any such disruptions could adversely affect our operating results.
Electricity prices can be volatile and increases would have an adverse effect on
the costs of operating our minimills.
Demand for natural gas depends primarily upon the worldwide number of
natural gas wells being drilled, completed and re-worked and the depth and
drilling conditions of these wells. The level of these activities is primarily
dependent on current and anticipated natural gas prices. Many factors, such as
the supply and demand for natural gas, general economic conditions, political
instability or armed conflict in worldwide natural gas producing regions and
global weather patterns affect these prices.
We purchase most of our electricity and natural gas requirements in local
markets for relatively short periods of time. As a result, fluctuations in
energy prices can have an adverse effect on the costs of operating our
minimills.
UNEXPECTED EQUIPMENT FAILURES MAY LEAD TO PRODUCTION CURTAILMENTS OR SHUTDOWNS.
Interruptions in our production capabilities will adversely affect our
production costs, steel available for sales and earnings for the affected
period. In addition to equipment failures, our facilities are also subject to
the risk of catastrophic loss due to unanticipated events such as fires,
explosions or violent weather conditions. Our manufacturing processes are
dependent upon critical pieces of steel-making equipment, such as our furnaces,
continuous casters and rolling equipment, as well as electrical equipment, such
as transformers, and this equipment may, on occasion, be out of service as a
result of
14
unanticipated failures. We have experienced and may in the future experience
material plant shutdowns or periods of reduced production as a result of such
equipment failures.
THE AVAILABILITY OF INSURANCE COVERAGE AND INCREASED COST MAY ADVERSELY AFFECT
PROFITABILITY.
After the events of September 11, 2001, several high profile corporate
bankruptcies and the downturn in the investment markets, insurance companies
tightened coverages and dramatically increased premium costs. Many insurers no
longer offer certain coverages and the remaining carriers have in many instances
reduced the liability they are willing to insure while raising costs. Our
profitability could be adversely affected when we renew our insurance policies
due to the additional insurance expense as well as the greater exposure to risk
caused by reduced coverage.
HEDGING TRANSACTIONS MAY LIMIT OUR POTENTIAL GAINS OR EXPOSE US TO LOSS.
Our product lines and worldwide operations expose us to risks associated
with fluctuations in foreign currency exchange, commodity prices and interest
rates. As part of our risk management program, we use financial instruments,
including commodity futures or forwards, foreign currency exchange forward
contracts and interest rate swaps. While intended to reduce the effects of the
fluctuations, these transactions may limit our potential gains or expose us to
loss.
We enter into the foreign currency exchange forwards as economic hedges of
trade commitments or anticipated commitments denominated in currencies other
than the functional currency, to mitigate the effects of changes in currency
rates. Although we do not enter into these instruments for trading purposes or
speculation, and although our management believes all of these instruments are
economically effective as hedges of underlying physical transactions, these
foreign exchange commitments are dependent on timely performance by our
counterparties. Their failure to perform could result in our having to close
these hedges without the anticipated underlying transaction and could result in
losses if foreign currency exchange rates have changed.
RISING INTEREST RATES MAY INCREASE OUR BORROWING COSTS AND DAMPEN ECONOMIC
ACTIVITY RESULTING IN LOWER SALES, MARGINS AND PROFITABILITY.
Our financing sources include primarily the short-term commercial paper
market, the sale of certain of our accounts receivable and borrowings from
banks. We also have swapped our fixed-rate interest obligation on $100 million
of debt due in 2005 for a floating rate obligation. If interest rates rise, our
cost of borrowing will increase and lower our profitability. Higher interest
rates may also adversely affect some of the markets for our products, such as
housing and commercial construction, resulting in a lower level of sales,
margins and profitability.
WE ARE INVOLVED AND MAY IN THE FUTURE BECOME INVOLVED IN VARIOUS ENVIRONMENTAL
MATTERS THAT MAY RESULT IN FINES, PENALTIES OR JUDGMENTS BEING ASSESSED AGAINST
US OR LIABILITY IMPOSED UPON US WHICH WE CANNOT PRESENTLY ESTIMATE OR REASONABLY
FORESEE AND WHICH MAY HAVE A MATERIAL IMPACT ON OUR EARNINGS AND CASH FLOWS.
Under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, called CERCLA, or similar state statutes, we may have obligations
to conduct investigation and remediation activities associated with alleged
releases of hazardous substances or to reimburse the EPA (or state agencies as
applicable) for such activities and to pay for natural resource damages
associated with alleged releases. We have been named a potentially responsible
party at fourteen federal and state Superfund sites because the EPA or an
equivalent state agency contends that we and other potentially responsible scrap
metal suppliers are liable for the cleanup of those sites as a result of having
sold scrap metal to unrelated
15
manufacturers for recycling as a raw material in the manufacture of new
products. We are involved in litigation or administrative proceedings with
regard to several of these sites in which we are contesting, or at the
appropriate time may contest, our liability at the sites. In addition, we have
received information requests with regard to other sites which may be under
consideration by the EPA as potential CERCLA sites.
Although we are unable to estimate precisely the ultimate dollar amount of
exposure to loss in connection with various environmental matters or the effect
on our consolidated financial position, we make accruals as warranted. Due to
inherent uncertainties, including evolving remediation technology, changing
regulations, possible third-party contributions, the inherent shortcomings of
the estimation process, the uncertainties involved in litigation and other
factors, the amounts we accrue could vary significantly from the amounts we
ultimately are required to pay.
AN INABILITY TO FULLY AND EFFECTIVELY INTEGRATE PENDING AND FUTURE ACQUISITIONS,
INCLUDING THE HUTA ZAWIERCIE S.A. ACQUISITION, COULD RESULT IN INCREASED COSTS
WHILE DIVERTING MANAGEMENT'S ATTENTION FROM OUR CORE OPERATIONS, AND WE CANNOT
ASSURE YOU THAT WE WILL REALIZE THEIR FULL BENEFITS OR SUCCESSFULLY MANAGE OUR
COMBINED COMPANY, AND FUTURE ACQUISITIONS MAY RESULT IN DILUTIVE EQUITY
ISSUANCES OR INCREASES IN DEBT.
On July 22, 2003, our subsidiary Commercial Metals (International) AG
entered into an agreement to purchase 71% of the shares of Huta Zawiercie S.A.,
the third largest producer of steel in Poland, from Impexmetal S.A. of Warsaw,
Poland. We expect to close the acquisition on or before December 15, 2003 and
will use approximately $50.0 million of the net proceeds from this offering to
fund this acquisition. In connection with the acquisition, we will assume
approximately $32 million in debt. Also, as part of our ongoing business
strategy we regularly evaluate and may pursue acquisitions of and investments in
complementary companies. We cannot assure you that we will be able to fully or
successfully integrate any pending or future acquisitions in a timely manner or
at all. If we are unable to successfully integrate any pending or future
acquisitions, we may incur costs and delays or other operational, technical or
financial problems, any of which could adversely affect our business. In
addition, management's attention may be diverted from core operations which
could harm our ability to timely meet the needs of our customers and damage our
relationships with those customers. To finance future acquisitions, we may need
to raise funds either by issuing equity securities or incurring or assuming
debt. If we incur additional debt, the related interest expense may
significantly reduce our profitability.
WE ARE SUBJECT TO LITIGATION WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY.
We are involved in various litigation matters, including regulatory
proceedings, administrative proceedings, governmental investigations,
environmental matters and construction contract disputes. The nature of our
operations also expose us to possible litigation claims in the future. Although
we make every effort to avoid litigation, these matters are not totally within
our control. We will contest these matters vigorously and have made insurance
claims where appropriate, but because of the uncertain nature of litigation and
coverage decisions, we cannot predict the outcome of these matters. These
matters could have a material adverse effect on our financial condition and
profitability. Litigation is very costly, and the costs associated with
prosecuting and defending litigation matters could have a material adverse
effect on our financial condition and profitability. Although we are unable to
estimate precisely the ultimate dollar amount of exposure to loss in connection
with litigation matters, we make accruals as warranted. However, the amounts
that we accrue could vary significantly from the amounts we actually pay, due to
inherent uncertainties and the inherent shortcomings of the estimation process,
the uncertainties involved in litigation and other factors.
16
WE DEPEND ON OUR SENIOR MANAGEMENT TEAM AND THE LOSS OF ANY MEMBER COULD
ADVERSELY AFFECT OUR OPERATIONS.
Our success is dependent on the management and leadership skills of our
senior management team, including Stanley A. Rabin, our chairman of the board.
If we lose any of these individuals or fail to attract and retain equally
qualified personnel, then we may not be able to implement our business strategy.
We have not entered into employment agreements with any of our senior management
personnel other than Murray R. McClean, president of our marketing and
distribution division.
SOME OF OUR CUSTOMERS MAY DEFAULT ON THE DEBTS THEY OWE TO US.
Economic conditions are not consistent in all the markets we serve. Some
segments are still weak, and our customers may struggle to meet their
obligations, especially if a significant customer of theirs defaults. We
recorded a $5.2 million provision in fiscal 2003 for losses on receivables due
to weakness in the domestic and global economies, which increased our allowance
for collection losses to $9.3 million. Other factors such as management and
accounting irregularities have forced some companies into bankruptcy. A weak
economic recovery and corporate failures could result in higher bad debt costs.
CREDIT RATINGS AFFECT OUR ABILITY TO OBTAIN FINANCING AND THE COST OF SUCH
FINANCING.
Credit ratings affect our ability to obtain financing and the cost of such
financing. Our commercial paper program is ranked in the second highest category
by the following rating agencies: Moody's Investors Service (P-2), Standard &
Poor's Corporation (A-2) and Fitch (F-2). Our senior unsecured debt is
investment grade rated by Standard & Poor's Corporation (BBB), Fitch (BBB) and
Moody's Investors Service (Baa2). On November 5, 2003, Moody's Investors Service
downgraded our debt from Baa1 to Baa2 but changed its outlook from negative to
stable. 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 conditions and contingencies. Lower
ratings on our commercial paper program or our senior unsecured debt could
impair our ability to obtain additional financing and will increase the cost of
the financing that we do obtain.
THE AGREEMENTS GOVERNING THE NOTES AND OUR OTHER DEBT CONTAIN FINANCIAL
COVENANTS AND IMPOSE RESTRICTIONS ON OUR BUSINESS.
The indenture governing our 7.20% notes due 2005, 6.80% notes due 2007,
6.75% notes due 2009 and 5.625% notes due 2013 contains restrictions on our
ability to create liens, sell assets, enter into sale and leaseback transactions
and consolidate or merge. In addition, our credit facility contains covenants
that place restrictions on our ability to, among other things:
- create liens;
- enter into transactions with affiliates;
- sell assets;
- in the case of some of our subsidiaries, guarantee debt; and
- consolidate or merge.
17
Our credit facility also requires that we meet certain financial tests and
maintain certain financial ratios, including a maximum debt to capitalization
and interest coverage ratios. Other agreements that we may enter into in the
future may contain covenants imposing significant restrictions on our business
that are similar to, or in addition to, the covenants under our existing
agreements. These restrictions may affect our ability to operate our business
and may limit our ability to take advantage of potential business opportunities
as they arise.
Our ability to comply with these covenants may be affected by events beyond
our control, including prevailing economic, financial and industry conditions.
The breach of any of these restrictions could result in a default under the
indenture governing the notes or under our other debt agreements. An event of
default under our debt agreements would permit some of our lenders to declare
all amounts borrowed from them to be due and payable, together with accrued and
unpaid interest. If we were unable to repay debt to our secured lenders if we
incur secured debt in the future, these lenders could proceed against the
collateral securing that debt. In addition, acceleration of our other
indebtedness may cause us to be unable to make interest payments on the notes.
ITEM 2. PROPERTIES
Our Texas steel minimill is located on approximately 600 acres of land that
we own. Our Texas minimill facilities include several buildings that occupy
approximately 749,000 square feet. Our Alabama steel minimill is located on
approximately 41 acres of land, and it includes several buildings that occupy
approximately 609,000 square feet. We utilize our facilities at the Texas and
Alabama steel minimills for manufacturing, storage, office and other related
uses. Our South Carolina steel minimill is located on approximately 101 acres of
land, and the buildings occupy approximately 654,000 square feet. Our Arkansas
steel minimill is located on approximately 135 acres of land, and the buildings
occupy approximately 204,000 square feet. We lease approximately 30 acres of
land at the Alabama minimill and all the land at the Arkansas and South Carolina
minimills in connection with revenue bond financing or property tax incentives.
We may purchase the land at the termination of the leases or earlier for a
nominal sum.
All other steel group facilities utilize approximately 1,271 acres of land
and lease approximately 66 acres of land at various locations in Texas,
Louisiana, Arkansas, Utah, South Carolina, Florida, Virginia, Georgia, North
Carolina, Nevada, Iowa, California, Pennsylvania, Mississippi and Arizona.
Howell Metal Company owns approximately 30 acres of land in New Market,
Virginia, with buildings occupying approximately 325,000 square feet.
Our recycling segment's plants occupy approximately 484 acres of land that
we own in Beaumont, Dallas, Galveston, Houston, Lubbock, Midland, Odessa,
Victoria and Vinton, Texas; Jacksonville, Ocala, Gainesville, Lake City, Orlando
and Tampa, Florida; Shreveport, Louisiana; Chattanooga, Tennessee; Springfield
and Joplin, Missouri; Burlington, North Carolina; Frontenac, Kansas; and Miami,
Oklahoma. The recycling segment's other scrap processing locations are on leased
land.
We lease the office space where our corporate headquarters and all of our
domestic marketing and distribution offices are located. We own three warehouse
buildings in Australia, one of which is located on leased real estate. We lease
the other warehouse facilities located in Australia.
The leases on the leased properties described above will expire on various
dates generally over the next ten years. Several of the leases have renewal
options. We have had little difficulty renewing such leases as they expire. We
estimate our minimum annual rental obligation for real estate operating leases
in effect at August 31, 2003, to be paid during fiscal 2004, to be approximately
$5,318,000. We also lease a
18
portion of the equipment we use in our plants. We estimate our minimum annual
rental obligation for equipment operating leases in effect at August 31, 2003,
to be paid during fiscal 2004, to be approximately $4,000,000.
ITEM 3. LEGAL PROCEEDINGS
Our subsidiary, SMI-Owen Steel Company, Inc. or SMI-Owen, prior to our
March 2002, sale of the assets used at its heavy structural steel fabrication
facility, frequently worked on large and complex construction projects. Some of
the projects generated significant disputes. In connection with work completed
prior to the sale, SMI-Owen entered into a fixed price contract with Fluor
Daniel, Inc., or F/D, as design/builder general contractor 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 owned by Aladdin Gaming,
LLC, or Aladdin. F/D secured insurance from St. Paul Fire & Marine Insurance
Company under a subcontractor/vendor default protection policy. That insurance
policy named SMI-Owen as an insured in lieu of performance and payment bonds. A
large subcontractor to SMI-Owen defaulted, and SMI-Owen incurred unanticipated
costs to complete the work. We made a claim under the insurance policy for all
losses, costs, and expenses incurred by SMI-Owen because of the default. The
insurance company refused to pay our claim, so we filed suit against the
insurance company and the insurance broker, J & H Marsh McClennan, in March 2000
(C.A. No. G-00-149 United States District Court Southern District of Texas).
During May 2002, we settled the litigation with the insurance company. The
settlement included our recovery of the $6.6 million claim receivable, receipt
of an additional $7.4 million, the release of the balance of $1.0 million of
previously escrowed funds for payment of certain claims made by our
subcontractors and, subject to certain contingencies, reimbursement of up to an
additional $3.0 million. We have not settled our lawsuit against the insurance
broker for insurance benefits we did not receive due to the broker's acts,
errors and omissions. The project is now complete and we do not anticipate any
additional construction costs.
Other disputes concerning the Aladdin project were submitted to binding
arbitration. During the 4th quarter of 2003, SMI-Owen mediated and settled,
contingent upon completion and approval by the Bankruptcy Court which has
jurisdiction over one of the parties, all disputes between SMI-Owen, Aladdin and
F/D related to the project. SMI-Owen will pay $1.25 million of a $3.5 million
settlement payment with $2.25 million to be paid by an insurance company. The
resolution of this dispute, when finalized, will resolve all material claims
asserted against SMI-Owen arising from the project which is now complete.. The
settlement provides that SMI-Owen reserves all rights with regard to pending
litigation against the insurance broker for insurance benefits not received by
SMI-Owen due to the broker's acts, errors, omissions and other conduct related
to the insurance program for the project.
We have received notices from the EPA or state agencies with similar
responsibility that we and numerous other parties are considered potentially
responsible parties, or PRPs, and may be obligated under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, or CERCLA, or
similar state statute to pay for the cost of remedial investigation, feasibility
studies and ultimately remediation to correct alleged releases of hazardous
substances at fourteen locations. We may contest our designation as a PRP with
regard to certain sites, while at other sites we are participating with other
named PRPs in agreements or negotiations that we expect will result in
agreements to remediate the sites. The EPA or respective state agency refers to
these locations, none of which involve real estate we ever owned or conducted
operations upon, as the Peak Oil Site in Tampa, Florida, the NL
Industries/Taracorp Site in Granite City, Illinois, the Sapp Battery Site in
Cottondale, Florida, the Interstate Lead Company Site in Leeds, Alabama, the
Poly-Cycle Industries Site in Techula, Texas, the Jensen Drive Site in Houston,
Texas, the SoGreen/Parramore Site in Tifton, Georgia, the Stoller Site in
Jericho, South Carolina, the RSR Corporation Site in Dallas, Texas, the Sandoval
Zinc Company Site in
19
Marion County, Illinois, the Ross Metals Site in Rossville, Tennessee, the Li
Tungsten Site in Glen Cove, New York, the NL Industries Site in Pedricktown, New
Jersey, and the Stoller Site in Pelham, Georgia. We periodically receive
information requests from government environmental agencies with regard to other
sites that are apparently under consideration for designation as listed sites
under CERCLA or similar state statutes. We do not know if any of these inquires
will ultimately result in a demand for payment from us.
The EPA notified us and other alleged PRPs that under Sec. 106 of CERCLA we
and the other PRPs could be subject to a maximum fine of $25,000 per day and the
imposition of treble damages if we and the other PRPs refuse to clean up the
Peak Oil, Sapp Battery, NL Industries/Taracorp, SoGreen/Parramore and Stoller
sites as ordered by the EPA. We are presently participating in PRP organizations
at the Peak Oil, Sapp Battery, SoGreen/Parramore and Stoller sites which are
paying for certain site remediation expenses. We do not believe that the EPA
will pursue any fines against us if we continue to participate in the PRP groups
or if we have adequate defenses to the EPA's imposition of fines against us in
these matters.
In 1993, the Federal Energy Regulatory Commission entered an order against
our wholly-owned subsidiary CMC Oil Company, or CMC Oil, which has been inactive
since 1985. As a result of the order, CMC Oil is subject to a judgment which the
Federal District Court upheld in 1994 and the Court of Appeals affirmed in 1995.
The order found CMC Oil liable for overcharges constituting violations of crude
oil reseller regulations from December 1977 to January 1979. The alleged
overcharges occurred in connection with our joint venture transactions with RFB
Petroleum, Inc. The overcharges total approximately $1,330,000 plus interest
calculated from the transaction dates to the date of the District Court judgment
under the Department of Energy's interest rate policy, and with interest
thereafter at the rate of 6.48% per annum. Although CMC Oil accrued a liability
on its books during 1995, it does not have sufficient assets to satisfy the
judgment. No claim has ever been asserted against us as a result of the CMC Oil
litigation. We will vigorously defend ourselves if any such claim is asserted.
We are unable to estimate the ultimate dollar amount of any loss in
connection with the above-described legal proceedings, environmental matters,
government proceedings, and disputes that could result in additional litigation,
some of which may have a material impact on earnings and cash flows for a
particular quarter. Management believes that the outcome of the suits and
proceedings mentioned, and other miscellaneous litigation and proceedings now
pending, will not have a material adverse effect on our business or consolidated
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET AND DIVIDEND INFORMATION
The table below summarizes the high and low sales prices reported on the
New York Stock Exchange for our common stock and the quarterly cash dividends we
paid for the past two fiscal years. The amounts set forth below have been
adjusted to reflect a two-for-one stock split in the form of a stock dividend on
our common stock effective June 28, 2002.
20
PRICE RANGE
OF COMMON STOCK
2002
FISCAL
QUARTER HIGH LOW CASH DIVIDENDS
- ------- -------- ------- --------------
1st $ 16.50 $ 12.25 6.5 (cents)
2nd 18.40 16.33 6.5 (cents)
3rd 23.99 18.00 6.5 (cents)
4th 24.88 16.97 8 (cents)
PRICE RANGE
OF COMMON STOCK
2003
FISCAL
QUARTER HIGH LOW CASH DIVIDENDS
- ------- -------- ------- --------------
1st $ 19.92 $ 15.70 8 (cents)
2nd 17.21 13.75 8 (cents)
3rd 18.79 12.79 8 (cents)
4th 19.94 16.80 8 (cents)
Since 1982, our common stock has been listed and traded on the New York
Stock Exchange. From 1959 until the NYSE listing in 1982, our common stock was
traded on the American Stock Exchange. The number of shareholders of record of
our common stock at November 14, 2003, was approximately 2,578.
EQUITY COMPENSATION PLANS
Information about our equity compensation plans as of August 31, 2003 that
were either approved or not approved by our stockholders is as follows (number
of shares in thousands):
A. B. C.
NUMBER OF SECURITIES
REMAINING FOR FUTURE
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (A)
------------- ------------------- ------------------------- -----------------------
Equity compensation plans 2,945,013 $14.05 2,041,660
approved by security holders
Equity compensation plans not 0 0
approved by security holders 0
TOTAL 2,945,013 $14.05 2,041,660
21
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth a summary of our selected consolidated financial
information for the periods indicated. The per share amounts have been adjusted
to reflect a two-for-one stock split in the form of a stock dividend on our
common stock effective June 28, 2002. Net earnings, diluted earnings per share,
total assets and stockholders' equity have been restated as described in Note 14
to the consolidated financial statements.
FOR THE YEARS ENDED AUGUST 31,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2003 2002 2001 2000 1999
Net Sales $2,875,885 $2,479,941 $2,470,133 $2,661,420 $2,251,442
Net Earnings 18,904 40,525 23,772 44,590 46,974
Diluted Earnings Per Share 0.66 1.43 0.90 1.56 1.61
Total Assets 1,275,406 1,230,076 1,081,946 1,170,092 1,079,074
Stockholders' Equity 506,933 501,306 433,094 418,805 418,312
Long-term Debt 254,997 255,969 251,638 261,884 265,590
Cash Dividends Per Share 0.32 0.275 0.26 0.26 0.26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This annual report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act, Section 21E of the
Exchange Act and the Private Securities Litigation Reform Act of 1995, with
respect to our financial condition, results of operations, cash flows and
business, and our expectations or beliefs concerning future events, including
net earnings, product pricing and demand, production rates, energy expense,
insurance expense, interest rates, inventory levels, acquisitions and general
market conditions. These forward-looking statements can generally be identified
by phrases such as we or our management "expects," "anticipates," "believes,"
"plans to," "ought," "could," "will," "should," "likely," "appears," "projects,"
"forecasts" or other similar words or phrases. 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:
- interest rate changes;
- construction activity;
- decisions by governments affecting the level of steel imports,
including tariffs and duties;
- litigation claims and settlements;
- difficulties or delays in the execution of construction contracts
resulting in cost overruns or contract disputes;
- metals pricing over which we exert little influence;
- increased capacity and product availability from competing steel
minimills and other steel suppliers including import quantities and
pricing;
22
- court decisions;
- industry consolidation or changes in production capacity or
utilization;
- global factors including credit availability;
- currency fluctuations;
- scrap, energy, insurance and supply prices; and
- the pace of overall economic activity.
See the section entitled "Risk Factors" in this annual report for a more
complete discussion of these risks and uncertainties and for other risks and
uncertainties. These factors and the other risk factors described in this annual
report are not necessarily all of the important factors that could cause actual
results to differ materially from those expressed in any of our forward-looking
statements. Other unknown or unpredictable factors also could harm our results.
Consequently, we cannot assure you that the actual results or developments we
anticipate will be realized or, even if substantially realized, that they will
have the expected consequences to, or effects on, us. Given these uncertainties,
we caution prospective investors not to place undue reliance on such
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
This Management's Discussion and Analysis of Financial Condition and
Results of Operation should be read in conjunction with our consolidated
financial statements and the accompanying notes contained in this annual report.
23
We manufacture, recycle, market and distribute steel and metal products through
a network of over 140 locations in the United States and internationally.
Manufacturing Operations
We conduct our manufacturing operations through the following:
- - 4 steel mills, commonly referred to as "minimills," that produce reinforcing
bar, angles, flats, small beams, rounds, fence post sections and other shapes
- - 30 steel plants that bend, cut and fabricate steel, primarily reinforcing bar
and angles
- - 1 plant that produces copper tubing
- - 28 warehouses that sell or rent supplies for the installation of concrete
- - 6 plants that produce special sections for floors and ceiling support
- - 4 plants that produce steel fence posts
- - 1 plant that treats steel with heat to strengthen and provide flexibility
- - 1 plant that rebuilds railcars
- - 1 railroad salvage company
Recycling Operations
We conduct our recycling operations through 44 metal processing plants located
in the states of Texas, South Carolina, Florida, North Carolina, Oklahoma,
Kansas, Missouri, Tennessee, Louisiana and Georgia.
Marketing and Distribution Operations
We market and distribute steel, copper and aluminum coil, sheet and tubing,
ores, metal concentrates, industrial minerals, ferroalloys and chemicals through
our network of 15 marketing and distribution offices, 4 processing facilities
and joint ventures around the world. Our customers use these products in a
variety of industries.
You should read this management's discussion and analysis in connection with
your review of our consolidated audited financial statements and the
accompanying footnotes.
Critical Accounting Policies and Estimates
The following are important accounting policies, estimates and assumptions that
you should understand as you review our financial statements. We apply these
accounting policies and make these estimates and assumptions to prepare
financial statements under generally accepted accounting principles. Our use of
these accounting policies, estimates and assumptions affects our results of
operations and our reported amounts of assets and liabilities. Where we have
used estimates or assumptions, actual results could differ significantly from
our estimates.
REVENUE RECOGNITION Generally, we recognize sales when title passes. For a few
of our steel fabrication operations, we recognize net sales and profits from
certain long-term fixed price contracts by the percentage-of-completion method.
In determining the amount of net sales to recognize, we estimate the total costs
and profits expected to be recorded for the contract term and the recoverability
of costs related to change orders. These estimates could change, resulting in
changes in our earnings.
CONTINGENCIES We make accruals as needed for litigation, administrative
proceedings, government investigations (including environmental matters), and
contract disputes. We base our environmental liabilities on estimates regarding
the number of sites for which we will be responsible, the scope and cost of work
to be performed at each site, the portion of costs that we expect we will
24
share with other parties and the timing of the remediation. Where timing of
expenditures can be reliably estimated, we discount amounts to reflect our cost
of capital over time. We record these and other contingent liabilities when they
are probable and when we can reasonably estimate the amount of loss. Where
timing and amounts cannot be precisely estimated, we estimate a range, and we
recognize the low end of the range without discounting. Also, see Note 9,
Commitments and Contingencies, to the consolidated financial statements for the
year ended August 31, 2003.
INVENTORY COST We determine inventory cost for most domestic inventories by the
last-in, first-out method, or LIFO. At the end of each quarter, we estimate both
inventory quantities and costs that we expect at the end of the fiscal year for
these LIFO calculations, and we record an amount on a pro-rata basis. These
estimates could vary substantially from the actual year-end results, causing an
adjustment to cost of goods sold. See Note 14, Quarterly Financial Data, to the
consolidated financial statements. We record all inventories at the lower of
their cost or market value.
PROPERTY, PLANT AND EQUIPMENT Our manufacturing and recycling businesses are
capital intensive. We evaluate the value of these assets and other long-lived
assets whenever a change in circumstances indicates that their carrying value
may not be recoverable. Some of the estimated values for assets that we
currently use in our operations utilize judgments and assumptions of future
undiscounted cash flows that the assets will produce. If these assets were for
sale, our estimates of their values could be significantly different because of
market conditions, specific transaction terms and a buyer's different viewpoint
of future cash flows. Also, we depreciate property, plant and equipment on a
straight-line basis over the estimated useful lives of the assets. Depreciable
lives are based on our estimate of the assets' economically useful lives. To the
extent that an asset's actual life differs from our estimate, there could be an
impact on depreciation expense or a gain/loss on the disposal of the asset in a
later period. We expense major maintenance costs as incurred.
OTHER ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS See Note 1, Summary
of Significant Accounting Policies, to our consolidated financial statements.
Consolidated Results of Operations
Our management uses a non-GAAP measure, adjusted operating profit, to compare
and evaluate the financial performance of our segments. See Note 13, Business
Segments, to the consolidated financial statements. We define adjusted operating
profit as the sum of our earnings before income taxes and financing costs.
Adjusted operating profit provides a core operational earnings measurement that
compares segments without the need to adjust for federal, but more specifically,
state taxes which have considerable variation between domestic jurisdictions.
Tax regulations in international operations add additional complexity. Also, we
exclude interest cost and discounts on the sales of accounts receivable in our
calculation of adjusted operating profit. The results are, therefore, without
consideration of financing alternatives of capital employed.
25
In the following table we are providing a reconciliation of the non-GAAP
measure, adjusted operating profit (loss) to net earnings (loss):
Marketing and Corporate and
(in millions) Manufacturing Recycling Distribution Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------
Year ended August 31, 2003:
Net earnings (loss) $ 13.6 $ 10.0 $ 15.5 $ (20.2) $ 18.9
Income taxes 6.5 5.1 4.8 (4.9) 11.5
Interest expense .1 -- 1.3 13.9 15.3
Discounts on sales of accounts receivable .2 .1 .2 .1 .6
- ------------------------------------------------------------------------------------------------------------------------
Adjusted operating profit (loss) $ 20.4 $ 15.2 $ 21.8 $ (11.1) $ 46.3
========================================================================================================================
Year ended August 31, 2002:
Net earnings (loss) $ 45.0 $ 3.7 $ 8.1 $ (16.3) $ 40.5
Income taxes 25.7 1.2 3.8 (8.1) 22.6
Interest expense .3 -- 2.0 16.4 18.7
Discounts on sales of accounts receivable .4 .2 .3 (.1) .8
- ------------------------------------------------------------------------------------------------------------------------
Adjusted operating profit (loss) $ 71.4 $ 5.1 $ 14.2 $ (8.1) $ 82.6
========================================================================================================================
Year ended August 31, 2001:
Net earnings (loss) $ 34.8 $ (1.5) $ 3.6 $ (13.1) $ 23.8
Income taxes 21.1 (.9) 2.1 (7.7) 14.6
Interest expense .4 -- 1.8 25.4 27.6
Discounts on sales of accounts receivable .4 .1 .3 .2 1.0
- ------------------------------------------------------------------------------------------------------------------------
Adjusted operating profit (loss) $ 56.7 $ (2.3) $ 7.8 $ 4.8 $ 67.0
========================================================================================================================
Year ended August 31,
- --------------------------------------------------------------------------------------
(in millions except share data) 2003 2002 2001
- --------------------------------------------------------------------------------------
Net sales $ 2,876 $ 2,480 $ 2,470
Net earnings 18.9 40.5 23.8
International sales 1,186 771 755
As % of total 41% 31% 31%
LIFO effect on net earnings
expense (income) 6.1 1.0 (1.1)
Per diluted share 0.21 0.04 (0.04)
LIFO reserve 17.4 8.1 6.5
% of inventory on LIFO 64% 72% 70%
The following events had a significant financial impact during our fiscal year
ended August 31, 2003 as compared to our 2002 fiscal year:
1. We recorded a $6.1 million (after-tax) LIFO expense ($0.21 per diluted share)
compared to $1.0 million LIFO expense ($0.04 per diluted share) in 2002.
2. Our steel and copper tube minimills' earnings decreased due primarily to
higher scrap, utility and other input costs which were only partially offset by
increased selling prices and higher shipments.
3. Margins were lower at the steel group's fabrication operations due to lower
selling prices in spite of higher shipments.
4. In 2002, we recorded a $3.4 million (after-tax) gain from the sale of the
assets of SMI-Owen Steel Company.
5. Adjusted operating profits in our recycling segment in 2003 almost tripled
from 2002 due
26
mostly to the rise in prices in steel (ferrous) scrap markets.
6. Marketing and distribution's adjusted operating profit in 2003 was
significantly higher than in 2002, with most of the improvement in international
markets.
Market conditions were difficult during the year ended August 31, 2003, but our
strategy of diversification, both in our vertical integration as well as in our
product lines, enabled us to remain profitable. Throughout much of 2003, our key
markets, especially in the manufacturing segment, were very competitive,
although conditions improved during the fourth quarter. Public construction and
institutional building remained fairly strong. However, construction for
factories, offices and other commercial buildings in the United States was
significantly lower for the second consecutive year. These conditions, along
with higher input costs, resulted in substantially lower operating profits in
2003 at our mills and fabrication operations as compared to 2002. Also, many of
our international markets, except for China and Australia, remained weak. During
the second half of fiscal 2003, demand for our products increased, and we
realized some benefit from the weaker U.S. dollar. Our net earnings increased
significantly in the fourth quarter of fiscal 2003, with net earnings for the
three months ended August 31, 2003 totaling $10.7 million as compared to $9.0
million in 2002.
Segments
Unless otherwise indicated, all dollars below are before income taxes. Financial
results for our reportable segments are consistent with the basis and manner in
which we internally disaggregate financial information for making operating
decisions. We have three reportable segments: manufacturing, recycling, and
marketing and distribution.
The following table shows net sales and adjusted operating profit (loss) by
business segment:
Year ended August 31,
- ---------------------------------------------------------------------------------------
(in millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------
Net sales:
Manufacturing $ 1,340 $ 1,366 $ 1,350
Recycling 441 378 394
Marketing and distribution 1,150 777 771
Adjusted operating profit (loss):
Manufacturing 20.4 71.4 56.7
Recycling 15.2 5.1 (2.3)
Marketing and distribution 21.8 14.2 7.8
2003 COMPARED TO 2002
MANUFACTURING We include our steel group and our copper tube division in our
manufacturing segment. Adjusted operating profit is equal to earnings before
income taxes for our four steel minimills, our copper tube mill and the steel
group's fabrication operations. Our manufacturing adjusted operating profit for
the year ended August 31, 2003 decreased $51.0 million as compared to 2002. The
sale of SMI-Owen and a litigation settlement at the mills in 2002 accounted for
$10.6 million of the decrease. Excluding these items, adjusted operating profit
decreased 66% in 2003 as compared to 2002. Net sales for the year ended August
31, 2003 decreased $26.4 million (2%) as compared to 2002. Steel mill selling
prices were at very low levels for much of 2003. However, scrap purchase prices
were driven sharply higher by offshore demand and the weakening value of the
U.S. dollar. Our steel minimills implemented higher selling prices that became
partially effective during the second half of 2003. However, these price
increases did not fully 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 fabrication operations
were less profitable in 2003 as compared to 2002 primarily due to lower selling
prices
27
which more than offset the impact of higher shipments.
The table below reflects steel and scrap prices per ton:
August 31,
------------------
(dollars per ton) 2003 2002
- ------------------------------------------------------------------
Average mill selling price-total sales $278 $269
Average mill selling price-finished goods
only 287 275
Average fabrication selling price 536 608
Average ferrous scrap purchase price 97 80
MINIMILLS Adjusted operating profit for our four steel minimills decreased $18.2
million (52%) for the year ended August 31, 2003 as compared to 2002. The effect
of valuing inventories under the LIFO method accounted for $3.5 million (19%) of
the decrease in adjusted operating profit for the year ended August 31, 2003 as
compared to 2002. Also, during the year ended August 31, 2002, our steel
minimills received $2.5 million from a nonrecurring graphite electrode
litigation settlement. Even excluding these items, adjusted operating profit in
2003 decreased as compared to 2002 because higher shipments and average selling
prices were not enough to offset higher input costs, including scrap and
utilities. Our adjusted operating profit at SMI Texas decreased 25% to $19.3
million for the year ended August 31, 2003 as compared to an adjusted operating
profit of $25.8 million in 2002. SMI South Carolina lost $7.1 million for the
year ended August 31, 2003 as compared to a $2.8 million adjusted operating
profit in 2002. Higher scrap costs, higher energy costs and a weak demand for
our products were the most significant reasons for SMI South Carolina's loss in
2003 although these factors were partially offset by price increases in the
fourth quarter. SMI Arkansas reported a $160 thousand adjusted operating profit
in 2003 as compared to a $3.5 million adjusted operating profit in 2002. Most of
the decrease in adjusted operating profit at SMI Arkansas was attributable to
LIFO expense caused by higher year end inventories of rerolling rail. However,
adjusted operating profit at our SMI Alabama mill for the year ended August 31,
2003 increased 63% to $4.2 million as compared to $2.5 million in 2002. Cost
reduction efforts, improved operating efficiencies, and better market conditions
were the key factors in SMI Alabama's improved profitability. Our mills shipped
2,284,000 tons in 2003, an increase of 5% as compared to 2,171,000 tons shipped
in 2002, due largely to higher billet sales. Our mills rolled 1,972,000 tons, a
3% decrease as compared to 2002. Our minimills melted 2,081,000 tons during the
year ended August 31, 2003, which was a decrease of 1% as compared to 2002. Our
average total mill selling price at $278 per ton increased $9 (3%) as compared
to 2002. Our mill selling price for finished goods increased $12 per ton (4%) in
2003 as compared to 2002. Our average scrap purchase costs in 2003 increased $17
per ton (21%) as compared to 2002. Utility expenses increased by $9.4 million
for the year ended August 31, 2003 as compared to 2002. The increase in utility
costs was mostly due to higher natural gas costs, although electricity expenses
also increased.
FABRICATION AND OTHER BUSINESSES The steel group's fabrication and other
businesses reported a combined adjusted operating profit of $6.0 million for the
year ended August 31, 2003 as compared to a profit of $33.6 million in 2002. We
recorded a $5.2 million gain from the sale of SMI-Owen Steel Company in March
2002. Also, prior to its sale, SMI-Owen had an adjusted operating profit of $2.9
million for the year ended August 31, 2002. Excluding these items, fabrication
adjusted operating profits decreased by $19.5 million (76%) for the year ended
August 31, 2003 as compared to 2002. Our fabrication plants shipped 1,028,000
tons in 2003, 4% more than the 984,000 tons shipped during 2002. Our fabricated
rebar shipments increased 104,000 tons (19%) as compared to 2002. Lower
structural, joist and post plant shipments partially offset this increase. The
average fabrication selling price for the year ended August 31, 2003 decreased
$72 per ton (12%) as compared to 2002. Our rebar fabrication,
construction-related products, post and heat treating plants were profitable
during the year ended August 31, 2003. Our joist and structural steel fabri-
28
cation operations recorded losses during 2003 due to lower selling prices and
shipments. During the year ended August 31, 2003, the joist plants reduced
certain inventory stock values by $1.8 million to their estimated current market
value. Also, during the year ended August 31, 2003, we wrote-down $711 thousand
of inventory at two of our other fabrication facilities, we recognized a $998
thousand gain on the trade-in of rental forms in construction-related products,
and we reduced our deferred insurance proceeds accrual by $937 thousand (see
Note 9, Commitments and Contingencies to the consolidated financial statements).
During 2003, we acquired substantially all of the operating assets of the
Denver, Colorado location of Symons Corporation, E.L. Wills in Fresno,
California and Dunn Del Re Steel in Chandler, Arizona. The Symons location is a
concrete formwork supplier, and E.L. Wills and Dunn Del Re Steel are rebar
fabrication operations. The purchase prices for these businesses totaled $14.0
million. No single one of these acquisitions was significant to our operations.
COPPER TUBE Our copper tube division reported an adjusted operating profit of
$620 thousand for the year ended August 31, 2003 as compared to an adjusted
operating profit of $5.1 million in 2002. Net sales were 2% lower in 2003 as
compared to 2002. Our copper tube shipments increased 4% to 61.9 million pounds
during 2003 as compared to 2002. However, our average net selling price for
plumbing and refrigeration tube decreased by 7 cents per pound (6%) to $1.17 per
pound as compared to $1.24 per pound in 2002. We increased our production to
60.7 million pounds for the year ended August 31, 2003, which was 8% more than
the 56.2 million pounds that we produced in 2002. Our average copper scrap price
increased 4 cents per pound (6%) during the year ended August 31, 2003 as
compared to 2002. The difference between the sales price ($1.17 and $1.24 in
2003 and 2002, respectively) and copper scrap purchase cost ($0.72 and $0.68 in
2003 and 2002, respectively) are commonly referred to as "the metal spread." The
metal spread declined 21% in 2003 as compared to 2002. Although single family
residential construction held up relatively well, other market sectors were
weaker which put pressure on selling prices.
RECYCLING Our recycling segment reported an adjusted operating profit of $15.2
million for the year ended August 31, 2003 as compared to an adjusted operating
profit of $5.1 million in 2002. All four of the geographic regions where the
segment operates were substantially more profitable. Net sales for the year
ended August 31, 2003 were $441.4 million, an increase of 17% as compared to our
net sales of $378.1 million in 2002. Our gross margins were 24% higher in 2003
as compared to 2002, partially due to controls over costs. The segment processed
and shipped 1,639,000 tons of ferrous scrap during the year ended August 31,
2003, an increase of 10% as compared to 2002. Ferrous sales prices were on
average $100 per ton, 23% higher than in 2002. Greater demand from overseas
markets contributed to this increase, as well as the weaker U.S. dollar.
Nonferrous markets improved moderately during the year ended August 31, 2003.
Our average nonferrous scrap sales price of $1,021 per ton was 8% higher than in
2002, although shipments were 3% lower at 231,000 tons. The total volume of
scrap processed, including the steel group's processing plants, was 2,811,000
tons, an increase of 9% from the 2,568,000 tons processed in 2002.
MARKETING AND DISTRIBUTION Net sales for the year ended August 31, 2003 for our
marketing and distribution segment increased $372.7 million (48%) to $1.15
billion, as compared to 2002 net sales of $777.0 million. Most of the increase
related to sales outside of the United States. Adjusted operating profit for the
year ended August 31, 2003 was $21.8 million, an increase of 53% as compared to
2002, due mostly to better results from our international operations.
International steel prices for flat-rolled products rose and then weakened,
because of decreased demand from China, during the first three quarters of 2003.
However, the prices for flat-rolled steel products rose again during the fourth
quarter. Prices for long products slowly increased during 2003. Our steel
shipments increased, except for imports into the U.S. Our business in the U.S.
was reduced because of the weak economy and the weaker U.S. dollar. Due to these
factors, volumes, prices
29
and margins for nonferrous semi-finished products were lower in 2003 as compared
to 2002. However, sales and margins for ores, minerals, ferroalloys and special
metals were generally higher. Also, freight costs increased in 2003 as compared
to 2002. Our marketing and distribution and service center operations in
Australia were more profitable in 2003 as compared to 2002. Our joint venture
Europickling facility in Belgium became profitable during 2003. Also, the joint
venture arrangements with our 11% investee, Trinecke Zelezarny, a Czech mill,
contributed to our sales in Central Europe. Sales into Asia, including China,
were strong, especially during the first and second quarters of our fiscal 2003.
In July 2003, our international subsidiary entered into a definitive agreement
to purchase a controlling interest in Huta Zawiercie, a Polish steel minimill.
This acquisition is expected to close by December 15, 2003.
OTHER Our employees' retirement plan expenses were 16% lower for the year ended
August 31, 2003 as compared to 2002. Discretionary items such as contributions
were lower for the year ended August 31, 2003 as compared to 2002. We committed
less to these items because 2003 was less profitable. Interest expense for the
year ended August 31, 2003 was lower as compared to 2002 due primarily to lower
overall interest rates on short-term borrowings and two interest rate swaps on
parts of our long-term debt which resulted in lower effective interest rates.
During 2002, we favorably resolved all issues for our federal income tax returns
through 1999. Due to the lack of any material adjustments, we reevaluated the
tax accruals and, consequently, reduced the net tax expense by $1.0 million
during 2002.
On August 8, 2003, we increased our commercial paper program to permit maximum
borrowings of up to $275 million, up from the prior year $174.5 million level.
Commercial paper capacity is reduced by any outstanding standby letters of
credit under the 2003 program which totalled $20.6 million at August 31, 2003.
Near-Term Outlook
We expect our fiscal year ending August 31, 2004 to be significantly more
profitable than 2003, partially because of the internal cost reductions and
productivity improvements that we have made. We also are expecting better
economic conditions in 2004, mostly in global manufacturing. We believe that our
first quarter of 2004 will have comparable profits to the quarter ended August
31, 2003. We anticipate net earnings (excluding the effect of revaluing
inventories on the LIFO method) to be approximately $9 million to $10 million
for the first quarter of fiscal 2004. We have noted signs of increasing demand
in the U.S. manufacturing sector, and some improvement in construction. However,
office, lodging and industrial construction will be slower to recover. Also,
orders for capital goods are higher. Asian markets are relatively strong and
European markets are partially recovering. We anticipate that our overall
results will be better in the second half of 2004 as compared to the first half.
We anticipate our profits will be higher in 2004 in our manufacturing segment as
compared to 2003 because of higher metal spreads and increased production,
shipments and prices. We have implemented several steel minimill price increases
on most of our products. The cumulative price increases are $70 per ton for
merchant bar and $55 per ton for reinforcing bar. We are expecting these price
increases to become fully effective during the first half of fiscal 2004. As a
result, gross margins at our steel minimills should increase. We expect the
gross margins in our fabrication and other related businesses to continue at
current levels during the first few months in fiscal 2004. However, these
margins should improve later in that year.
We anticipate that our recycling segment will continue to report significant
profits, due to strong demand for steel scrap and nonferrous metal scrap and the
relatively weak U.S. dollar.
30
Our marketing and distribution segment should remain profitable during our
fiscal 2004. We expect that our U.S. operations will be more profitable, but
that our international subsidiary will have lower profits in 2004 as compared to
2003. Overall, prices and volumes should remain constant. We are expecting that
our purchase of the controlling interest in Huta Zawiercie will be completed by
December 15, 2003.
We anticipate that our capital spending for 2004 will be $61 million, excluding
the $50 million acquisition cost for 71.1% of the shares of Huta Zawiercie. Most
of these expenditures will be in our manufacturing segment including a major
improvement project at our SMI-Texas melt shop.
Long-Term Outlook
We believe we are well-positioned to exploit long term opportunities. Long term,
we expect stronger demand for our products due to the increased possibility of a
recovery in demand throughout the major global economies as well as continued
growth in developing countries. Emerging countries often have a higher growth
rate for steel and nonferrous metals consumption. We believe that the demand
will increase in Asia, particularly in China, as well as in Central and Eastern
Europe.
Further consolidation is a virtual certainty in the industries in which we
participate, and we plan to continue to participate in a prudent way. The
reasons for further consolidation include an inadequate return on capital for
most companies, numerous bankruptcies, a high degree of fragmentation, the need
to eliminate non-competitive capacity and more effective marketing.
31
2002 COMPARED TO 2001
Segments
MANUFACTURING We include our steel group and our copper tube division in our
manufacturing segment.
Adjusted operating profit is equal to earnings before income taxes for our four
steel minimills, our copper tube mill and the steel group's fabrication
operations. Our manufacturing adjusted operating profit in 2002 increased $14.7
million (26%) as compared to 2001 on marginally more ($12 million) net sales. We
achieved this increase in adjusted operating profit for two primary reasons in
2002: (i) the nonrecurrence of the prior year litigation accrual in the amount
of $8.3 million, and (ii) the current year gain on the sale of the steel group's
heavy structural fabrication operation, SMI-Owen, in the amount of $5.2 million.
Excluding those items, our manufacturing segment's adjusted operating profit was
slightly higher than last year.
Increased production and shipments at our steel group's minimills more than
offset lower selling prices, increased scrap purchase costs and lower copper
tube earnings. Also, we spent less in 2002 on utilities, and we recorded lower
depreciation and amortization expense. However, fiscal 2002 adjusted operating
profits decreased from fiscal 2001 in the steel group's downstream steel
fabrication and related businesses due to lower profits in rebar fabrication and
structural steel fabrication, excluding SMI-Owen.
The table below reflects steel and scrap prices per ton:
August 31,
------------------
(dollars per ton) 2002 2001
- ------------------------------------------------------------------
Average mill selling price-total sales $269 $284
Average mill selling price-finished goods
only 275 290
Average fabrication selling price 608 646
Average ferrous scrap purchase price 80 74
MINIMILLS During 2002, adjusted operating profit for our four steel minimills
rose 27% compared with 2001, despite lower selling prices. SMI South Carolina
had a $2.8 million adjusted operating profit in 2002 compared to a $1.6 million
loss in 2001. SMI Alabama turned around as well with a $2.5 million adjusted
operating profit in 2002 compared to a $2.2 million loss in 2001. Adjusted
operating profits at SMI Arkansas were up 4% in the current year period. These
improvements more than offset a 7% decline in adjusted operating profits at SMI
Texas as compared to 2001. A major reason for the minimills' improved
profitability was a 14% increase in shipments because of continued public
projects infrastructure construction. Shipments were 2,171,000 tons in 2002
compared to 1,903,000 in 2001. Mill production also increased over last year.
Tons rolled were up 19% to 2,026,000 in 2002. Tons melted were up 17% to
2,100,000 in 2002. Even though demand was strong, the average total mill selling
price at $269 per ton was $15 (5%) below last year. Also, in 2002, we sold more
semi-finished billets, a product with a lower selling price than our average.
Average scrap purchase costs were $6 per ton (8%) higher than in 2001, resulting
in smaller margins. Utility expenses declined by $2.4 million as compared to
2001. Decreases in natural gas costs more than offset higher electricity costs.
Also, depreciation and amortization expenses decreased by $5.2 million in 2002,
primarily because SMI-South Carolina fully depreciated its mill rolls and guides
as well as certain melt shop equipment. The mills also received $2.5 million
from a nonrecurring graphite electrode litigation settlement in 2002.
32
The U.S. government's new tariffs cover most of the steel minimills' products
and range from 15-30% the first year, declining over the next two years. An
import licensing and monitoring system and an anti-surge mechanism will further
strengthen these remedies. Also, the U.S. administration plans to continue
discussions with other steel producing nations to remove excess global capacity
and eliminate subsidies.
FABRICATION AND OTHER BUSINESSES Adjusted operating profit in the steel group's
fabrication and other businesses increased by $12.1 million (57%) in 2002 as
compared to 2001. Excluding the 2002 gain on the sale of SMI-Owen ($5.2 million)
and the 2001 litigation accrual ($8.3 million), adjusted operating profits in
2002 decreased by $1.3 million (4%) as compared to 2001.
Near the end of fiscal 2002, we discovered two significant, but unrelated
events, requiring retroactive writedowns at two rebar fabrication operations.
The total amount of the adjustments required to correct the August 31, 2002
balance sheets of these two facilities was $4.6 million. These adjustments
affected fiscal years from 1999 to 2002. In August 2002, we uncovered a theft
and an accounting fraud which occurred over four years at a rebar fabrication
plant in South Carolina. The total adjustment required to revert the accounting
records to their proper balances was $2.7 million. In September 2002, we
discovered accounting errors related to losses on rebar fabrication and
placement jobs at one facility in California, some of which date back to its
acquisition in fiscal 2000. The resulting charge was $1.9 million. The South
Carolina incident resulted in a $900 thousand expense in fiscal 2002. The
remaining $3.7 million for both instances was attributed $885 thousand to fiscal
2001, $2.6 million to fiscal 2000, and $227 thousand to 1999, resulting in prior
period adjustments to these previously reported financial statements. We took
immediate action to strengthen compliance with our internal control policies in
the areas of segregation of duties, personnel and management review and
oversight. Controllers at both locations were replaced as well as the general
manager of the rebar fabrication plant in South Carolina. The steel group has
increased the level of detail, the frequency of submission and the amount of
review of its operating locations' reporting. The Company has renewed emphasis
on periodic and timely internal balance sheet audits at all operating locations
and completed audits of all its operating locations in fiscal 2003. No major
areas of noncompliance were noted. Senior management and area managers of all
the Company's locations attended internal meetings led by the CEO and CFO
regarding management's responsibility for internal control, dealing with
noncompliance issues and the Company's commitment to only the highest of ethical
standards of conduct.
Fabrication plant shipments totaled 984,000 tons, down fractionally from 986,000
tons shipped in 2001. The average fabrication selling price in 2002 decreased
$38 per ton (6%) as compared to 2001. Rebar fabrication markets were softer in
2002 as a result of intense competition, and several plants reported losses.
During 2002, we acquired the real estate, equipment, inventory and work in
process of Varmicon, Inc. in Harlingen, Texas. We now operate this rebar
fabrication facility under the name of SMI-Valley Steel. The steel joist
operations, which includes cellular and castellated beams, were break even in
2002, an improvement over the loss in 2001. Both prices and shipments decreased,
but lower operating costs and shop efficiencies helped significantly. Also, in
2001 these operations incurred $8.9 million in start-up costs. Structural steel
fabrication profits, excluding SMI-Owen and the prior year litigation accrual,
were down in 2002 compared to 2001. However, our concrete-related products
operations were more profitable in 2002. We continued to expand this business
through the acquisition of Dowel Assembly Manufacturing Company, or DAMCO, in
Jackson, Mississippi. DAMCO manufactures dowel baskets and has an epoxy coating
business. In 2002, the steel group started Spray Forming International, a
stainless steel cladding operation located in South Carolina.
COPPER TUBE Our copper tube division's adjusted operating profit decreased 59%
with 7% less net sales as compared to 2001. Copper tube shipments increased 3%
from 2001 to a record 59.3 million pounds, and production increased 5% from 2001
to a record 56.2 million pounds. However, average sales prices dropped 10% in
2002 to $1.24 per pound as compared to the average sales
33
price in 2001 of $1.38. The biggest factor was lower apartment and hotel/motel
construction. Consequently, demand for plumbing and refrigeration tube was not
as strong. The 2002 product mix included increased quantities of HVAC products
and line sets. In the marketplace, we continued to adapt to the consolidation
among our buyers. The difference between sales price and copper scrap purchase
cost (commonly referred to as "the metal spread"), declined 8% in 2002 compared
to 2001. Lower raw material purchase costs did not fully compensate for the
decline in selling prices.
RECYCLING Our recycling segment reported an adjusted operating profit of $5.1
million in 2002 compared with an adjusted operating loss of $2.3 million in
2001. Net sales in 2002 were 4% lower at $378 million as compared to 2001.
However, gross margins were 11% above last year, primarily because we shipped 8%
more total tons. Demand for ferrous scrap improved both in the U.S. and
internationally. The segment processed and shipped 1,494,000 tons of ferrous
scrap in 2002, 10% more than in 2001. Ferrous sales prices were on average $81
per ton, an increase of $6 from 2001. Nonferrous shipments were flat at 238,000
tons. The average 2002 nonferrous scrap sales price of $947 per ton was 9% lower
than in 2001. Increased productivity, higher asset turnover and reduced costs
contributed to the improved 2002 results. The total volume of scrap processed,
including the steel group's processing plants, was 2,568,000 tons, an increase
of 11% from the 2,308,000 tons processed in 2001.
In 2002, we acquired most of the transportation assets of Sampson Steel
Corporation in Beaumont, Texas. These assets were combined with our existing
scrap processing facility in Beaumont. Also, we closed our Midland, Texas
facility, resulting in a writedown of $455,000 on certain equipment.
MARKETING AND DISTRIBUTION Net sales in 2002 for our marketing and distribution
segment increased 1% to $777 million as compared to 2001. Adjusted operating
profit in 2002 increased 82% to $14.2 million as compared to 2001, mostly due to
better results from our Australian operations. International steel prices and
volumes for steel and nonferrous semifinished products improved during the
second half of 2002, primarily in the distribution and processing businesses.
However, depressed economies, oversupply in most markets and intense competition
from domestic suppliers in the respective markets caused compressed margins for
numerous steel products, nonferrous metal products and industrial raw materials
and products. The U.S. dollar weakened against major currencies, a beneficial
development.
In September 2001, we completed our acquisition of Coil Steels Group, an
Australian service center in which we already owned a 22% share. This
acquisition provided $2.2 million of additional profits and $69.0 million in net
sales during 2002. Sales and profits for the Company's pre-existing business in
Australia also improved significantly. However, this increase in net sales was
more than offset by decreased sales in our U.S. operations due to fewer imports
into the United States.
Operating profits for the U.S. divisions improved significantly due to Cometals
which returned to more historical levels, and Dallas Trading which benefited
from the U.S. tariff legislation. Lower margins at Commonwealth on semi-finished
products almost offset these improvements. Our European operations' net sales
decreased slightly in 2002 as compared to 2001, but profits improved
significantly. The segment's recent strategy of growing its downstream marketing
and distribution business offset the continuing very difficult trading
conditions.
OTHER Selling, general and administrative, as well as employees' retirement
plans expenses, were higher in 2002 as compare to 2001, mostly due to our
acquisition of CSG in 2001 and discretionary items such as bonuses and profit
sharing. This increase was consistent with the improvement in our operating
profitability. Interest expense decreased by $8.9 million (32%) from 2001
largely due to lower interest rates and much lower average short-term
borrowings. Also, during 2002 we entered into two interest rate swaps which
resulted in interest expense sav-
34
ings. During 2002, we favorably resolved all issues for our federal income tax
returns through 1999. Due to the lack of any material adjustments, we
reevaluated the tax accruals and, consequently, reduced the net tax expense by
$1.0 million during 2002.
2003 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
commercial paper, sales of certain accounts receivable, short-term trade
financing arrangements and borrowing under our bank credit facilities. From time
to time, we have issued long-term public and private debt 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 commercial paper program in the second highest category. To
support our commercial paper program, on August 8, 2003, we entered into a $275
million unsecured, contractually committed revolving credit agreement with a
group of sixteen banks. Our $275 million facility expires in August 2006. This
agreement provides for borrowing in U.S. dollars with the interest rate indexed
to LIBOR. The spread over LIBOR may vary between 33 basis points and 105 basis
points based upon the rating of our non-credit enhanced senior unsecured
long-term debt by Moody's Investors Service and Standard & Poor's Corporation.
Actual borrowings are subject to a facility fee which may vary between 17 and 45
basis points based on the same debt ratings. In addition, if we borrow more than
33% of the authorized borrowings under the credit agreement, we will incur an
additional 12.5 basis point fee on actual borrowings. No compensating balances
are required. The credit agreement serves as a backup to our commercial paper
program. 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 securitized sales of
certain accounts receivable in an amount not to exceed $130 million and direct
sales of accounts receivable. We may 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 $254 million at August 31, 2003 and is
investment grade rated by Standard & Poor's Corporation (BBB), Fitch (BBB) and
by Moody's Investors Service (Baa2). We have access to the public markets for
potential refinancing or the issuance of additional long-term debt. See Note 15,
Subsequent Events, to our consolidated financial statements regarding our
issuance of bonds and repayment of certain debt after year end. Also, we have
numerous informal, uncommitted credit facilities available from domestic and
international banks. These credit facilities are priced at current market rates.
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. On November 5, 2003,
Moody's Investors Service downgraded our senior unsecured debt rating from Baa1
to Baa2, but changed its outlook from negative to stable, equal to that of
Standard & Poor's. 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
conditions and contingencies. We are
35
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 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 year ended August 31,
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 six 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 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 also sell and rent construction-related products and accessories.
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.
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 operating activities.
Despite these fluctuations, we have historically relied on operating activities
as a steady source of cash.
Our net cash flows from operating activities were $15.3 million for the year
ended August 31, 2003, which were $81.3 million lower as compared to the $96.6
million of net cash flows from our operating activities for the year ended
August 31, 2002. Our net earnings decreased $21.6 million in 2003 as compared to
2002. Also, our accounts receivable and inventories increased by $112.6 million
in 2003 as compared to an increase of $85.9 million in 2002. These items
increased in 2003 primarily in our marketing and distribution operations due to
higher sales orders from outside of the United States. Our accounts payable at
August 31, 2003 was higher than at August 31, 2002, but the increase in accounts
payable was not commensurate with the increase in inventories. During the year
ended August 31, 2003, we paid more bonuses and other discretionary expenses,
which had been accrued at August 31, 2002, than we did during the year ended
August 31, 2002. As a result, our accrued expenses decreased during the year
ended August 31, 2003. Also, we paid $9.6 million during the year ended August
31, 2003 relating to an adverse trial judgment that was upheld on appeal. This
judgment had been accrued at August 31,
36
2002. During 2002, we had received $15.0 million from a favorable litigation
settlement and $5.2 million for the contract balance and settlement of disputed
change orders on an old large structural steel fabrication contract at SMI-Owen.
We invested $49.8 million in property, plant and equipment during the year ended
August 31, 2003, an increase of $2.6 million (5%) as compared to 2002. The
capital expenditures in 2003 were primarily in our manufacturing segment. In
addition, we acquired the operating assets of two rebar fabrication operations
and one construction-related products business in 2003, for a total of $13.4
million cash. In 2002, we acquired the remaining shares of the Coil Steels Group
(CSG) for $6.8 million. Also, in 2002, we received $19.7 million from the sale
of the assets of SMI-Owen, our large structural steel fabrication operation
located in Columbia, South Carolina. We assess our capital spending each quarter
and reevaluate our requirements based upon current and expected results.
At August 31, 2003, 27,994,690 common shares were issued and outstanding,
including 4,270,476 held in our treasury. We paid dividends of $9.0 million
during the year ended August 31, 2003, as compared to $7.5 million in 2002.
During the year ended August 31, 2003, we purchased 951,410 shares of our common
stock at an average price of $15.36 per share. These shares were held in our
treasury. During 2003, we received $6.2 million from the issuance of stock from
our treasury under our stock incentive and purchase plans, as compared to $30.2
million received from these transactions in 2002.
During the year ended August 31, 2003, we used our excess cash and cash
equivalents, sold accounts receivable and entered into short-term trade
financing arrangements to help meet our operating cash requirements, purchase
property, plant and equipment and acquire our common stock for the treasury. No
amounts were outstanding under our commercial paper program at August 31, 2003
or 2002. We have no significant amounts due on our long-term debt until July
2005.
We believe that we have sufficient liquidity for fiscal 2004.
Contractual Obligations
The following table represents our contractual obligations as of August 31, 2003
(dollars in thousands):
Payments Due Within*
----------------------------------------------------------------
Total 1 Year 2-3 Years 4-5 Years After 5 Years
-------- -------- --------- --------- -------------
Contractual Obligations:
Long-term debt(1) $255,637 $ 640 $ 104,884 $ 50,041 $100,072
Operating leases(2) 40,670 9,318 14,068 8,386 8,898
Unconditional purchase obligations(3) 186,100 79,831 68,911 13,493 23,865
-------- -------- --------- -------- --------
Total contractual cash obligations $482,407 $ 89,789 $ 187,863 $ 71,920 $132,835
*We have not discounted the cash obligations in this table.
(1) Total amounts are included in the August 31, 2003 consolidated balance
sheet. See Note 4, Credit Arrangements, and Note 15, Subsequent Event, to
the consolidated financial statements.
(2) Includes minimum lease payment obligations for noncancelable equipment and
real-estate leases in effect as of August 31, 2003. See Note 9, Commitments
and Contingencies, to the consolidated financial statements.
(3) About 68% of these purchase obligations are for inventory items to be sold
in the ordinary course of business; most of the remainder are for freight
and supplies associated with normal revenue-producing activities.
37
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain
transactions that our customers or suppliers request. At August 31, 2003, we had
committed $20.6 million under these arrangements. All 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 August 31, 2003, the surety had issued bonds in the total amount
(without reduction for work performed to that date) of $11.9 million which are
subject to our guaranty obligation under the indemnity agreement.
Contingencies
In the ordinary course of conducting our business, we become involved in
litigation, administrative proceedings, government 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 or loss in connection
with these matters, we make accruals 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.
CONSTRUCTION CONTRACT DISPUTES See Note 9, Commitments and Contingencies, to the
consolidated financial statements.
ENVIRONMENTAL AND OTHER MATTERS
GENERAL We are subject to federal, state and local pollution control laws and
regulations. We anticipate that compliance with these laws and regulations will
involve continuing capital expenditures and operating costs.
Our original business and one of our core businesses for over eight decades is
metals recycling. In the present era of conservation of natural resources and
ecological concerns, we are committed to sound ecological and business conduct.
Certain governmental regulations regarding environmental concerns, however well
intentioned, are contrary to the goal of greater recycling. Such regulations
expose us and the industry to potentially significant risks.
We believe that recycled materials are commodities that are diverted by
recyclers, such as us, from the solid waste streams because of their inherent
value. Commodities are materials that are purchased and sold in public and
private markets and commodities exchanges every day around the world. They are
identified, purchased, sorted, processed and sold in accordance with carefully
established industry specifications.
38
Environmental agencies at various federal and state levels classify certain
recycled materials as hazardous substances and subject recyclers to material
remediation costs, fines and penalties. Taken to extremes, such actions could
cripple the recycling industry and undermine any national goal of material
conservation. Enforcement, interpretation, and litigation involving these
regulations are not well developed.
SOLID AND HAZARDOUS WASTE We currently own or lease, and in the past owned or
leased, properties that have been used in our operations. Although we used
operating and disposal practices that were standard in the industry at the time,
wastes may have been disposed or released on or under the properties or on or
under locations where such wastes have been taken for disposal. We are currently
involved in the investigation and remediation of several such properties. State
and federal laws applicable to wastes and contaminated properties have gradually
become stricter over time. Under new laws, we could be required to remediate
properties impacted by previously disposed wastes. We have been named as a
potentially responsible party at a number of contaminated sites.
We generate wastes, including hazardous wastes, that are subject to the federal
Resource Conservation and Recovery Act ("RCRA") and comparable state and/or
local statutes where we operate. These statutes, regulations and laws may have
limited disposal options for certain wastes.
SUPERFUND The U.S. Environmental Protection Agency, or EPA, or an equivalent
state agency notified us that we are considered a potentially responsible party,
or PRP, at fourteen sites, none owned by us. We may be obligated under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
or CERCLA, or a similar state statute to conduct remedial investigation,
feasibility studies, remediation and/or removal of alleged releases of hazardous
substances or to reimburse the EPA for such activities. We are involved in
litigation or administrative proceedings with regard to several of these sites
in which we are contesting, or at the appropriate time we may contest, our
liability at the sites. In addition, we have received information requests with
regard to other sites which may be under consideration by the EPA as potential
CERCLA sites.
CLEAN WATER ACT The Clean Water Act ("CWA") imposes restrictions and strict
controls regarding the discharge of wastes into waters of the United States, a
term broadly defined. These controls have become more stringent over time and it
is probable that additional restrictions will be imposed in the future. Permits
must generally be obtained to discharge pollutants into federal waters;
comparable permits may be required at the state level. The CWA and many state
agencies provide for civil, criminal and administrative penalties for
unauthorized discharges of pollutants. In addition, the EPA has promulgated
regulations that may require us to obtain permits to discharge storm water
runoff. In the event of an unauthorized discharge, we may be liable for
penalties and costs.
CLEAN AIR ACT Our operations are subject to regulations at the federal, state
and local level for the control of emissions from sources of air pollution. New
and modified sources of air pollutants are often required to obtain permits
prior to commencing construction, modification and/or operations. Major sources
of air pollutants are subject to more stringent requirements, including the
potential need for additional permits and to increased scrutiny in the context
of enforcement. The EPA has been implementing its stationary emission control
program through expanded enforcement of the New Source Review Program. Under
this program, new or modified sources are required to construct what is referred
to as the Best Available Control Technology. Additionally, the EPA is
implementing new, more stringent standards for ozone and fine particulate
matter. The EPA recently has promulgated new national emission stands for
hazardous air pollutants for steel mills which will require all major sources in
this category to meet the standards by reflecting
39
application of maximum achievable control technology. Compliance with the new
standards could require additional expenditures.
In fiscal 2003, we incurred environmental expense of $11.8 million. This expense
included the cost of environmental personnel at various divisions, permit and
license fees, accruals and payments for studies, tests, assessments,
remediation, consultant fees, baghouse dust removal and various other expenses.
Approximately $4.2 million of our capital expenditures for 2003 related to costs
directly associated with environmental compliance. At August 31, 2003, $2.9
million was accrued for environmental liabilities of which $1.3 million is
classified as other long-term liabilities.
Dividends
We have paid quarterly cash dividends in each of the past 40 consecutive years.
We paid dividends in 2003 at the rate of 8 cents per share each quarter.
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
APPROACH TO MINIMIZING MARKET RISK See Note 5, Financial Instruments, Market and
Credit Risk, for disclosure regarding our approach to minimizing market risk.
Also, see Note 1, Summary of Significant Accounting Policies, to the
consolidated financial statements. The following types of derivative instruments
were outstanding at August 31, 2003, in accordance with our risk management
program.
CURRENCY EXCHANGE FORWARDS We enter into currency exchange forward contracts as
economic hedges of international trade commitments denominated in currencies
other than the United States dollar, or, if the transaction involves our
Australian or European subsidiaries, their local currency. No single foreign
currency poses a primary risk to us. Fluctuations that cause temporary
disruptions in one market segment tend to open opportunities in other segments.
Effective September 1, 2002, we changed most of our European subsidiaries'
functional currency to the Euro. We do not anticipate that this change will have
a significant impact on our financial results.
COMMODITY PRICES We base pricing in some of our sales and purchase contracts on
forward metal commodity exchange quotes which we determine at the beginning of
the contract. Due to the volatility of the metal commodity indexes, we enter
into metal commodity forward or futures contracts for copper, aluminum and zinc.
These forwards or futures mitigate the risk of unanticipated declines in gross
margins on these contractual commitments. Physical transaction quantities will
not match exactly with standard commodity lot sizes, leading to small gains and
losses from ineffectiveness.
INTEREST RATE SWAPS See Note 4, Credit Arrangements, regarding our strategy for
managing the fluctuations in interest rates on our long-term debt.
The following table provides certain information regarding the foreign exchange
and commodity financial instruments discussed above.
41
FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS AS OF AUGUST 31, 2003:
U.S. $
Amount Range of Equivalent
(in thousands) Currency Hedge Rates (in thousands)
- -------------- -------- ----------- --------------
16,780 Euro $ 1.123-1.003 $ 18,457
584,447 Japanese yen 0.0080-0.0075 4,872
10,547 British pound 1.6692-1.5630 16,755
114,192 Australian dollar 0.6757-0.5484 73,563
133 New Zealand dollar 0.5330 76
80,142 Polish zloty 0.2506-0.2485 20,000
- -----------------------------------------------------------------------
133,723
Revaluation as of August 31, 2003, at quoted market 133,724
- -----------------------------------------------------------------------
Unrealized loss $ (1)
- - Substantially all foreign currency exchange contracts mature within one year.
- - Hedge rates reflect foreign currency conversion to U.S. dollar.
AS OF AUGUST 31, 2002 (IN THOUSANDS):
Revaluation at quoted market $ 98,619
Unrealized gain $ 253
METAL COMMODITY CONTRACT COMMITMENTS AS OF AUGUST 31, 2003:
Range or Total Contract
Amount of Value at
Long/ # of Standard Total Hedge Rates Inception
Terminal Exchange Metal Short Lots Lot Size Weight Per MT (in thousands)
- ----------------- ----- ----- ---- -------- ------ ------ --------------
London Metal
Exchange (LME) Copper Long 125 25 MT 3,125 MT $ 1,476.00-1,777.00 $ 206
Copper Short 25 25 MT 625 MT 1,778.00 44
Nickel Short 167 6 MT 1,002 MT 8,735.00-9,595.00 2,620
Aluminum Long 452 25 MT 11,300 MT 1,301.50-1,449.00 3,162
Aluminum Short 4,500 25 MT 112,500 MT 1,346.00-1,424.75 6,420
New York Mercantile Per 100/wt.
Exchange Copper Long 193 25,000 lbs. 4.8 MM lbs. 69.55-81.90 3,832
Commodities Division
(Comex) Copper Short 73 25,000 lbs. 1.8 MM lbs. 78.95-81.85 1,411
17,695
Revaluation as of August 31, 2003, at quoted market 17,537
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain $ 158
- - Seven lots mature after one year
- - MT = Metric Tons
- - MM = Millions
AS OF AUGUST 31, 2002 (IN THOUSANDS):
Revaluation at quoted market $16,502
Unrealized loss $ 161
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended August 31,
------------------------------------
(in thousands, except share data) 2003 2002 2001
- --------------------------------- -------- -------- ----------
Net sales $2,875,885 $2,479,941 $2,470,133
Costs and expenses:
Cost of goods sold 2,586,845 2,162,527 2,172,813
Selling, general and administrative expenses 231,037 220,883 212,428
Employees' retirement plans 12,271 14,685 10,611
Interest expense 15,338 18,708 27,608
Litigation accrual -- -- 8,258
---------- ---------- ----------
2,845,491 2,416,803 2,431,718
---------- ---------- ----------
Earnings before income taxes 30,394 63,138 38,415
Income taxes 11,490 22,613 14,643
---------- ---------- ----------
Net earnings $ 18,904 $ 40,525 $ 23,772
========== ========== ==========
Basic earnings per share $ 0.67 $ 1.48 $ 0.91
========== ========== ==========
Diluted earnings per share $ 0.66 $ 1.43 $ 0.90
========== ========== ==========
See notes to consolidated financial statements.
43
Commercial Metals Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
August 31,
--------------------------
(in thousands, except share data) 2003 2002
- ------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 75,058 $ 124,397
Accounts receivable (less allowance for collection
losses of $9,275 and $8,877) 397,490 350,885
Inventories 310,816 268,040
Other 61,053 50,930
- ------------------------------------------------------------------------------------
Total current assets 844,417 794,252
Property, plant and equipment:
Land 34,617 29,099
Buildings 127,780 119,592
Equipment 747,207 727,650
Leasehold improvements 38,117 34,637
Construction in process 15,503 10,801
- ------------------------------------------------------------------------------------
963,224 921,779
Less accumulated depreciation and amortization (588,842) (543,624)
- ------------------------------------------------------------------------------------
374,382 378,155
Other assets 56,607 57,669
- ------------------------------------------------------------------------------------
$ 1,275,406 $ 1,230,076
==========================
See notes to consolidated financial statements.
44
August 31,
---------------------------
(in thousands, except share data) 2003 2002
- ---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term trade financing arrangement $ 15,000 $ --
Accounts payable 300,662 275,232
Accrued expenses and other payables 126,971 133,608
Income taxes payable 1,718 5,676
Current maturities of long-term debt 640 631
- ---------------------------------------------------------------------------------------------
Total current liabilities 444,991 415,147
Deferred income taxes 44,419 32,813
Other long-term liabilities 24,066 24,841
Long-term debt 254,997 255,969
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 27,994,690 and 28,518,453 shares 161,326 161,326
Additional paid-in capital 863 170
Accumulated other comprehensive income (loss) 2,368 (1,458)
Retained earnings 401,869 392,004
- ---------------------------------------------------------------------------------------------
566,426 552,042
Less treasury stock 4,270,476 and 3,746,713 shares at cost (59,493) (50,736)
- ---------------------------------------------------------------------------------------------
506,933 501,306
---------------------------
$ 1,275,406 $ 1,230,076
===========================
See notes to consolidated financial statements.
45
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
August 31,
--------------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES:
Net earnings $ 18,904 $ 40,525 $ 23,772
Adjustments to earnings not requiring cash:
Depreciation and amortization 61,203 61,579 67,272
Provision for losses on receivables 5,162 3,985 4,371
Deferred income taxes 11,605 2,408 (726)
Tax benefits from stock plans 330 4,467 404
Gain on sale of SMI-Owen -- (5,234) --
Other (256) (307) (148)
Changes in operating assets and liabilities, net of effect
of acquisitions and sale of SMI-Owen:
Decrease (increase) in accounts receivable (71,938) (48,690) (8,276)
Funding from accounts receivable sold 18,662 -- 58,498
Decrease (increase) in inventories (40,676) (37,206) 46,508
Decrease (increase) in other assets (1,028) 912 5,837
Increase (decrease) in accounts payable, accrued
expenses, other payables and income taxes 14,594 66,927 (2,389)
Increase (decrease) in other long-term liabilities (1,275) 7,231 (2,431)
- --------------------------------------------------------------------------------------------------------
Net Cash Flows From Operating Activities 15,287 96,597 192,692
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (49,792) (47,223) (53,022)
Acquisition of Coil Steels Group, net of cash received -- (6,834) --
Acquisition of fabrication businesses (13,416) -- --
Sale of assets of SMI-Owen -- 19,705 --
Sales of property, plant and equipment 1,388 3,496 2,866
- --------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (61,820) (30,856) (50,156)
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:
Short-term trade financing arrangement 15,000 -- --
Short-term borrowings, net change -- (9,981) (88,673)
Payments on long-term debt (373) (10,101) (8,786)
Stock issued under incentive and purchase plans 6,216 30,238 4,383
Treasury stock acquired (14,610) -- (6,716)
Dividends paid (9,039) (7,521) (6,780)
- --------------------------------------------------------------------------------------------------------
Net Cash From (Used By) Financing Activities (2,806) 2,635 (106,572)
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (49,339) 68,376 35,964
Cash and Cash Equivalents at Beginning of Year 124,397 56,021 20,057
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 75,058 $ 124,397 $ 56,021
========================================================================================================
See notes to consolidated financial statements.
46
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
------------------------
Accumulated
Additional Other
Number of Paid-In Comprehensive Retained
(in thousands, except share data) Shares Amount Capital Income (Loss) Earnings
- -----------------------------------------------------------------------------------------------------------
Balance, September 1, 2000 16,132,583 $ 80,663 $ 14,231 $ (1,591) $405,317
Comprehensive income:
Net earnings 23,772
Other comprehensive loss-
Unrealized loss on derivatives,
net of taxes of $7 (14)
Foreign currency translation
adjustment (356)
Comprehensive income
Cash dividends (6,780)
Treasury stock acquired
Stock issued under incentive
and purchase plans (301)
- -----------------------------------------------------------------------------------------------------------
Balance, August 31, 2001 16,132,583 80,663 13,930 (1,961) 422,309
===========================================================================================================
Comprehensive income:
Net earnings 40,525
Other comprehensive income (loss)-
Foreign currency translation
adjustment 513
Unrealized loss on derivatives,
net of taxes of $(5) (10)
Comprehensive income
Cash dividends (7,521)
2-for-1 stock split 16,132,583 80,663 (17,354) (63,309)
Stock issued under incentive
and purchase plans (873)
Tax benefits from stock plans 4,467
- -----------------------------------------------------------------------------------------------------------
Balance, August 31, 2002 32,265,166 161,326 170 (1,458) 392,004
===========================================================================================================
Comprehensive income:
Net earnings 18,904
Other comprehensive income (loss)-
Foreign currency translation
adjustment 3,855
Unrealized loss on derivatives,
net of taxes of $(16) (29)
Comprehensive income
Cash dividends (9,039)
Treasury stock acquired
Stock issued under incentive
and purchase plans 363
Tax benefits from stock plans 330
- -----------------------------------------------------------------------------------------------------------
Balance, August 31, 2003 32,265,166 $ 161,326 $ 863 $ 2,368 $401,869
===========================================================================================================
Treasury Stock
---------------------------------
Number of
(in thousands, except share data) Shares Amount Total
- -----------------------------------------------------------------------------
Balance, September 1, 2000 (2,959,908) $(79,815) $418,805
Comprehensive income:
Net earnings 23,772
Other comprehensive loss-
Unrealized loss on derivatives,
net of taxes of $7 (14)
Foreign currency translation
adjustment (356)
--------
Comprehensive income 23,402
Cash dividends (6,780)
Treasury stock acquired (271,500) (6,716) (6,716)
Stock issued under incentive
and purchase plans 177,419 4,684 4,383
- -----------------------------------------------------------------------------
Balance, August 31, 2001 (3,053,989) (81,847) 433,094
=============================================================================
Comprehensive income:
Net earnings 40,525
Other comprehensive income (loss)-
Foreign currency translation
adjustment 513
Unrealized loss on derivatives,
net of taxes of $(5) (10)
--------
Comprehensive income 41,028
Cash dividends (7,521)
2-for-1 stock split (3,053,989)
Stock issued under incentive
and purchase plans 2,361,265 31,111 30,238
Tax benefits from stock plans 4,467
- -----------------------------------------------------------------------------
Balance, August 31, 2002 (3,746,713) (50,736) 501,306
=============================================================================
Comprehensive income:
Net earnings 18,904
Other comprehensive income (loss)-
Foreign currency translation
adjustment 3,855
Unrealized loss on derivatives,
net of taxes of $(16) (29)
--------
Comprehensive income 22,730
Cash dividends (9,039)
Treasury stock acquired (951,410) (14,610) (14,610)
Stock issued under incentive
and purchase plans 427,647 5,853 6,216
Tax benefits from stock plans 330
- -----------------------------------------------------------------------------
Balance, August 31, 2003 (4,270,476) $(59,493) $506,933
=============================================================================
See notes to consolidated financial statements.
47
Commercial Metals Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS The Company manufactures, recycles and markets steel and
metal products and related materials. Its manufacturing and recycling facilities
and primary markets are located in the Sunbelt from the mid-Atlantic area
through the West. Through its global marketing offices, the Company markets and
distributes steel and nonferrous metal products and other industrial products
worldwide. As more fully discussed in Note 13, the manufacturing segment is the
most dominant in terms of capital assets and adjusted operating profit.
CONSOLIDATION The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
Investments in 20% to 50% owned affiliates are accounted for on the equity
method. All investments under 20% are accounted for under the cost method.
REVENUE RECOGNITION Generally, sales are recognized when title passes to the
customer. Some of the revenues related to the steel fabrication operations are
recognized on the percentage of completion method. Due to uncertainties inherent
in the estimation process, it is at least reasonably possible that completion
costs for certain projects will be further revised in the near-term.
CASH AND CASH EQUIVALENTS The Company considers temporary investments that are
short term (generally with original maturities of three months or less) and
highly liquid to be cash equivalents.
INVENTORIES Inventories are stated at the lower of cost or market. Inventory
cost for most domestic inventories is determined by the last-in, first-out
(LIFO) method; cost of international and remaining inventories is determined by
the first-in, first-out (FIFO) method.
Elements of cost in finished goods inventory in addition to the cost of material
include depreciation, amortization, utilities, consumable production supplies,
maintenance and production wages. Also, the costs of departments that support
production including materials management and quality control, are allocated to
inventory.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost
and is depreciated on a straight-line basis over the estimated useful lives of
the assets. Provision for amortization of leasehold improvements is made at
annual rates based upon the estimated useful lives of the assets or terms of the
leases, whichever is shorter. At August 31, 2003, the useful lives used for
depreciation and amortization were as follows:
Buildings 7 to 40 years
Equipment 3 to 15 years
Leasehold improvements 3 to 10 years
We evaluate 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. If we determine that
impairment exists, we reduce the net book values to fair values as warranted.
Major maintenance is expensed as incurred.
START-UP COSTS Start-up costs associated with the acquisition and expansion of
manufacturing and recycling facilities are expensed as incurred.
48
ENVIRONMENTAL COSTS The Company accrues liabilities for environmental
investigation and remediation costs based upon estimates regarding the number
of sites for which the Company will be responsible, the scope and cost of work
to be performed at each site, the portion of costs that will be shared with
other parties and the timing of remediation. Where amounts and timing can be
reliably estimated, amounts are discounted. Where timing and amounts cannot be
reasonably determined, a range is estimated and the lower end of the range is
recognized on an undiscounted basis.
STOCK-BASED COMPENSATION The Company accounts for stock options granted to
employees and directors using the intrinsic value based method of accounting.
Under this method, the Company does not recognize compensation expense for the
stock options because the exercise price is equal to the market price of the
underlying stock on the date of the grant.
The Black-Scholes option pricing model was used to calculate the pro forma
stock-based compensation costs. The following assumptions were required as of
August 31:
- -----------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------
Risk-free interest rate 3.05% 4.42% 4.84%
Expected life 5.44 years 5.44 years 4.60 years
Expected volatility .257 .250 .232
Expected dividend yield 1.8% 1.7% 1.7%
If the Company had used the Black-Scholes fair-value based method of accounting,
net earnings and earnings per share would have been reduced to the pro forma
amounts listed in the table below. For purposes of pro forma earnings
disclosures, the assumed compensation expense is amortized over the options'
vesting periods. The pro forma information includes options granted in preceding
years.
(in thousands,
except per share data) 2003 2002 2001
- -----------------------------------------------------------------------------
Net earnings, as reported $ 18,904 $ 40,525 $ 23,772
Pro forma stock-based
compensation cost 1,875 1,637 1,195
------------------------------------
Net earnings, pro forma $ 17,029 $ 38,888 $ 22,577
Net earnings per share, as reported
Basic $ 0.67 $ 1.48 $ 0.91
Diluted $ 0.66 $ 1.43 $ 0.90
Net earnings per share, pro forma
Basic $ 0.60 $ 1.42 $ 0.86
Diluted $ 0.60 $ 1.37 $ 0.86
The Black-Scholes weighted-average per share fair value of the options granted
in 2003, 2002 and 2001 was $3.47, $4.52 and $2.77, respectively.
INCOME TAXES The Company and its U.S. subsidiaries file a consolidated federal
income tax return, and federal income taxes are allocated to subsidiaries based
upon their respective taxable income or loss. Deferred income taxes are provided
for temporary differences between financial and tax reporting. The principal
differences are described in Note 6, Income Taxes. Benefits from tax credits
are reflected currently in earnings. The Company provides for taxes on
unremitted earnings of foreign subsidiaries.
FOREIGN CURRENCY The functional currency of the Company's international
subsidiaries in Australia, the United Kingdom, and Germany is the local
currency. Effective September 1, 2002, most of
49
the Company's subsidiaries in Europe changed their functional currency to the
Euro. This change did not materially impact the financial condition or results
of operations of the Company. The remaining international subsidiaries'
functional currency is the United States dollar. Translation adjustments are
reported as a component of accumulated other comprehensive loss.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make significant
estimates regarding assets and liabilities and associated revenues and
expenses. Management believes these estimates to be reasonable; however, actual
results may vary.
DERIVATIVES The Company records derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses from the changes in the
values of the derivatives are recorded in the statement of earnings, or are
deferred if they are highly effective in achieving offsetting changes in fair
values or cash flows of the hedged items during the term of the hedge.
RECLASSIFICATIONS Certain reclassifications have been made in the 2002 and 2001
financial statements to conform to the classifications used in the current
year.
RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
effective September 1, 2002. Goodwill was no longer amortized after that date.
Goodwill was $6.8 million at August 31, 2003 and 2002. The comparison of 2003 to
the prior year period was as follows:
Year ended August 31,
------------------------------------------
(in thousands) 2003 2002 2001
- -----------------------------------------------------------------------
Reported net earnings $ 18,904 $ 40,525 $ 23,772
Add: goodwill amortization -- 684 682
- -----------------------------------------------------------------------
Adjusted net earnings $ 18,904 $ 41,209 $ 24,454
- -----------------------------------------------------------------------
The goodwill amortization was $0.02 per basic and diluted share for the year
ended August 31, 2002, and $0.03 per basic and diluted share for the year ended
August 31, 2001.
Effective September 1, 2002, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires entities to record the fair value
of a liability for an asset retirement obligation when it is incurred by
increasing the carrying amount of the related longlived asset. The liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful lives of the assets. The Company has asset
retirement obligations relating to landfills which were no longer in use at the
date of adoption of SFAS No. 143. The Company had previously recorded
environmental liabilities related to the capping, closure and monitoring costs
required for these landfills. Therefore, the transition to SFAS No. 143 did not
have a significant impact on the Company's net earnings and related per share
amounts. At August 31, 2003 and 2002, the Company had recorded $1.5 million and
$1.7 million, respectively, relating to the landfill obligations.
In September 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The adoption of SFAS No. 144 did
not significantly affect the Company's financial position, results of
operations, or cash flows.
The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," for all such activities initiated after December 31, 2002.
The adoption of SFAS No. 146 did not have a significant impact on the results of
operations or financial position or cash flows of the Company.
50
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) 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 August 31, 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 August 31, 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 was not significant.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." The consolidation requirement applies to entities established on or
prior to January 31, 2003, in the first fiscal year or interim period ending
after December 15, 2003. The Company does not expect FIN No. 46 to have an
impact on its financial reporting.
NOTE 2. SALES OF ACCOUNTS RECEIVABLE
The Company has an accounts receivable securitization program (Securitization
Program) which it utilizes as a cost-effective, short-term financing
alternative. Under the Securitization Program, the Company and several of its
subsidiaries (the Originators) periodically sell accounts receivable to the
Company's wholly-owned consolidated special purpose subsidiary (CMCR). CMCR is
structured to be a bankruptcy-remote entity. CMCR, in turn, sells an undivided
percentage ownership interest (Participation Interest) in the pool of
receivables to an affiliate of a third party financial institution (Buyer). CMCR
may sell undivided interests of up to $130 million, depending on the Company's
level of financing needs.
This Securitization Program is designed to enable receivables sold by the
Company to CMCR to constitute true sales under U.S. Bankruptcy Laws, and the
Company has received an opinion from counsel relating to the "true sale" nature
of the program. As a result, these receivables are available to satisfy CMCR's
own obligations to its third party creditors. The Company accounts for the
Securitization Program in accordance with SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The transfers meet all of the criteria for a sale under SFAS No. 140. At the
time a Participation Interest in the pool of receivables is sold, the amount
is removed from the consolidated balance sheet and the proceeds from the sale
are reflected as cash provided by operating activities.
At August 31, 2003 and 2002, uncollected accounts receivable of $152 million and
$146 million, respectively, had been sold to CMCR, and the Company's undivided
interest in these receivables was subordinate to any interest owned by the
Buyer. At August 31, 2003 and 2002, no Participation Interests in CMCR's
accounts receivable pool were owned by the Buyer and, therefore, none were
reflected as a reduction in accounts receivable on the Company's consolidated
balance sheets.
Discounts (losses) on the sales of accounts receivable to the Buyer under this
Program were $584 thousand, $793 thousand and $976 thousand for the years ended
August 31, 2003, 2002 and 2001, respectively. These losses represented primarily
the costs of funds and were included in selling, general and administrative
expenses. The carrying amount of the Company's retained interest in the
receivables approximated fair value due to the short-term nature of the
collection period. The retained interest is determined reflecting 100% of any
allowance for collection losses
51
on the entire receivables pool. No other material assumptions are made in
determining the fair value of the retained interest. The Company is responsible
for servicing the entire pool of receivables. At August 31, 2003, the carrying
amount of the Company's retained interest (representing the Company's interest
in the receivable pool) was $152 million (100%) in the revolving pool of
receivables of $152 million. The carrying amount of the Company's retained
interest was $146 million (100%) in the revolving pool of receivables of $146
million at August 31, 2002.
In addition to the Securitization Program described above, the Company's
international subsidiaries periodically sell accounts receivable. These
arrangements also constitute true sales and, once the accounts are sold, they
are no longer available to satisfy the Company's creditors in the event of
bankruptcy. Uncollected accounts receivable that had been sold under these
arrangements and removed from the consolidated balance sheets were $20.8
million and $2.1 million at August 31, 2003 and 2002, respectively.
NOTE 3. INVENTORIES
Before deduction of LIFO reserves of $17,403,000 and $8,074,000 at August 31,
2003 and 2002, respectively, inventories valued under the first-in, first-out
method approximated replacement cost.
At August 31, 2003 and 2002, 64% and 72%, respectively, of total inventories
were valued at LIFO. The remainder of inventories, valued at FIFO, consisted
mainly of material dedicated to the marketing and distribution business.
The majority of the Company's inventories are in the form of finished goods,
with minimal work in process. Approximately $20.5 million and $16.5 million were
in raw materials at August 31, 2003 and 2002, respectively.
NOTE 4. CREDIT ARRANGEMENTS
In August 2003, the Company increased its commercial paper program to permit
maximum borrowings of up to $275 million, an increase from the prior year
$174.5 million level. The Company's commercial paper capacity is reduced by
outstanding standby letters of credit under the 2003 program which totalled
$20.6 million at August 31, 2003.
It is the Company's policy to maintain contractual bank credit lines equal to
100% of the amount of all commercial paper outstanding. On August 8, 2003, the
Company arranged an unsecured revolving credit agreement with a group of sixteen
banks consisting of a three-year, $275 million facility. These agreements
provide for borrowing in United States dollars indexed to LIBOR. Facility fees
of 22.5 basis points per annum are payable on the multi-year credit lines. The
revolving credit agreement includes various covenants. The most restrictive of
these requires maintenance of an interest coverage ratio of greater than three
times and a debt/capitalization ratio of 55% (as defined). No compensating
balances are required. The Company was in compliance with these requirements at
August 31, 2003.
At August 31, 2003 and 2002, no borrowings were outstanding under the commercial
paper program or the related revolving credit agreements.
The Company has numerous informal credit facilities available from domestic and
international banks. These credit facilities are priced at bankers' acceptance
rates or on a cost of funds basis. No compensating balances or commitment fees
are required under these credit facilities. Amounts outstanding on these
facilities relate to trade payables settled under Bankers Acceptances.
52
During August 2003, an international subsidiary of the Company entered into a
$15 million short-term trade financing arrangement with a financial institution
as a risk management technique relating to the subsidiary's purchase agreement
with a Chinese supplier. Under the agreements, the Company advanced the $15
million to the supplier and will repay the bank only after the product is
shipped in conformance with the specifications in the supply agreement. In the
event of a default by the supplier, the Company's obligation to the bank would
not exceed $1.5 million. The advance to the supplier was recorded in other
current assets on the consolidated balance sheet.
Long-term debt and amounts due within one year are as follows, as of August 31:
(in thousands) 2003 2002
- ------------------------------------------------------
7.20% notes due July 2005 $ 104,185 $ 104,775
6.75% notes due February 2009 100,000 100,000
6.80% notes due August 2007 50,000 50,000
Other 1,452 1,825
- ------------------------------------------------------
255,637 256,600
Less current maturities 640 631
- ------------------------------------------------------
$ 254,997 $ 255,969
======================================================
Interest on these notes is payable semiannually.
On April 9, 2002, the Company entered into two interest rate swaps to convert a
portion of its fixed interest rate long-term debt commitment to a floating
interest commitment. These arrangements adjust the Company's fixed to floating
interest rate exposure as well as reduce overall financing costs. The swaps
effectively convert interest on the $100 million debt due July 2005 from a fixed
rate of 7.20% to a six month LIBOR (determined in arrears) plus 2.02%. The
floating rate was 3.13% at July 15, 2003, the most recent reset date. The
total fair value of both swaps, including accrued interest, was $4.6 million and
$5.2 million at August 31, 2003 and 2002, respectively, and is 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, net of accrued
interest. These hedges were highly effective for the years ended August 31, 2003
and 2002.
The aggregate amounts of all long-term debt maturities for the five years
following August 31, 2003 are (in thousands): 2004-$640; 2005-$104,819;
2006-$65; 2007-$50,028; 2008 and thereafter-$100,085.
Interest expense is comprised of the following:
Year ended August 31,
--------------------------------
(in thousands) 2003 2002 2001
- -------------------------------------------------------
Long-term debt $ 13,835 $ 16,499 $ 17,532
Commercial paper 189 145 7,076
Notes payable 1,314 2,064 3,000
- -------------------------------------------------------
$ 15,338 $ 18,708 $ 27,608
=======================================================
Interest of $254,000, $447,000, and $1,111,000 was capitalized in the cost of
property, plant and equipment constructed in 2003, 2002, and 2001, respectively.
Interest of $14,393,000, $18,879,000, and $28,704,000 was paid in 2003, 2002,
and 2001, respectively.
53
NOTE 5. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISK
Generally accepted accounting principles require disclosure of an estimate of
the fair value of the Company's financial instruments as of year end. These
estimated fair values disregard management intentions concerning these
instruments and do not represent liquidation proceeds or settlement amounts
currently available to the Company. Differences between historical presentation
and estimated fair values can occur for many reasons including taxes,
commissions, prepayment penalties, make-whole provisions and other restrictions
as well as the inherent limitations in any estimation technique.
Due to near-term maturities, allowances for collection losses, investment grade
ratings and security provided, the following financial instruments' carrying
amounts are considered equivalent to fair value:
- Cash and cash equivalents
- Accounts receivable/payable
- Short-term trade financing arrangement
The Company's long-term debt is predominantly publicly held. Fair value was
determined by indicated market values.
August 31,
--------------------
(in thousands) 2003 2002
- -----------------------------------------------------
Long-Term Debt:
Carrying amount $ 255,637 $ 256,600
Estimated fair value 278,497 259,656
=====================================================
The Company maintains both corporate and divisional credit departments. Credit
limits are set for customers. Credit insurance is used for some of the Company's
divisions. Letters of credit issued or confirmed by sound financial institutions
are obtained to further ensure prompt payment in accordance with terms of sale;
generally, collateral is not required.
In the normal course of its marketing activities, the Company transacts business
with substantially all sectors of the metals industry. Customers are
internationally dispersed, cover the spectrum of manufacturing and distribution,
deal with various types and grades of metal and have a variety of end markets in
which they sell. The Company's historical experience in collection of accounts
receivable falls within the recorded allowances. Due to these factors, no
additional credit risk, beyond amounts provided for collection losses, is
believed inherent in the Company's accounts receivable.
During the year ended August 31, 2003, the Company acquired $1.5 million in
property, plant and equipment in a noncash transaction after foreclosing on a
delinquent note receivable from a customer.
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 as hedges for accounting purposes only those contracts
which closely match the terms of the under lying transaction. These hedges
resulted in substantially no ineffectiveness in the statements of earnings for
the years ended
54
August 31, 2003, 2002 and 2001. 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 $328 thousand decrease, a $208
thousand decrease and a $452 thousand increase in cost of goods sold for the
years ended August 31, 2003, 2002 and 2001, respectively. All of the instruments
are highly liquid and none are entered into for speculative purposes.
At August 31, 2003 and 2002, derivative assets recorded in other current assets
were $1.8 million and $1.6 million, respectively, and derivative liabilities of
$1.7 million and $1.4 million, respectively, were recorded in other current
liabilities.
See Note 4, Credit Arrangements, regarding the Company's interest rate hedges.
NOTE 6. INCOME TAXES
The provisions for income taxes include the following:
Year ended August 31,
--------------------------------
(in thousands) 2003 2002 2001
- ----------------------------------------------------------
Current:
United States $ (2,220) $ 18,173 $ 13,498
Foreign 1,848 1,532 8
State and local 257 500 1,863
- ----------------------------------------------------------
(115) 20,205 15,369
Deferred 11,605 2,408 (726)
- ----------------------------------------------------------
$ 11,490 $ 22,613 $ 14,643
==========================================================
During 2002, the Company favorably resolved all issues for its federal income
tax returns through 1999. Management reevaluated the tax accruals resulting in a
net decrease of approximately $1,000,000 in 2002.
Taxes of $3,930,000, $11,016,000 and $8,691,000 were paid in 2003, 2002 and
2001, respectively.
Deferred taxes arise from temporary differences between the tax basis of an
asset or liability and its reported amount in the financial statements. The
sources and deferred long-term tax liabilities (assets) associated with these
differences are:
August 31,
----------------------
(in thousands) 2003 2002
- ----------------------------------------------------------------------
Tax on difference between tax
and book depreciation $ 41,657 $ 38,457
U.S. taxes provided on foreign
income and foreign taxes 15,585 11,857
Net operating losses
(less allowances of $1,703 and $780) (837) (561)
Alternative minimum tax credit (1,713) (1,713)
Other accruals (3,662) (9,183)
Other (6,611) (6,044)
- ----------------------------------------------------------------------
Total $ 44,419 $ 32,813
======================================================================
55
Current deferred tax assets of $4.4 million and $12.3 million at August 31, 2003
and 2002, respectively, were included in other assets on the consolidated
balance sheets. These deferred taxes were largely due to different book and tax
treatments of various allowances and accruals. No valuation allowances were
required at August 31, 2003 or 2002 for the current deferred tax assets.
The Company uses substantially the same depreciable lives for tax and book
purposes. Changes in deferred taxes relating to depreciation are mainly
attributable to differences in the basis of underlying assets recorded under the
purchase method of accounting. As noted above, the Company provides United
States taxes on unremitted foreign earnings. Net operating losses consist of
$150 million of state net operating losses that expire during the tax years
ending from 2006 to 2023. These assets will be reduced as tax expense is
recognized in future periods. The $1.7 million alternative minimum tax credit
is available indefinitely. The FSC Repeal and Extraterritorial Income Exclusion
Act of 2000 replaced the Foreign Sales Corporation (FSC) tax benefits with the
"extraterritorial income" exemption (ETI) for fiscal year 2002 and the years
thereafter. The ETI exclusion maintains the same level of tax benefit for
current FSC users.
The Company's effective tax rates were 37.8% for 2003, 35.8% for 2002, and 38.1%
for 2001. Reconciliations of the United States statutory rates to the effective
rates are as follows:
Year ended August 31,
-----------------------
2003 2002 2001
- -------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes .6 1.0 3.1
ETI (.9) (1.2) (1.1)
Other 3.1 1.0 1.1
- -------------------------------------------------
Effective tax rate 37.8% 35.8% 38.1%
=================================================
NOTE 7. CAPITAL STOCK
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. This stock split
was effective June 28, 2002, to shareholders of record on June 7, 2002. On June
28, 2002 the Company issued 16,132,583 additional shares of common stock and
transferred $17,354,000 from paid-in capital and $63,309,000 from retained
earnings to common stock. All applicable share and per share amounts in the
accompanying consolidated financial statements have been restated to reflect
this stock split. Following the stock split, the Company also instituted a
quarterly cash dividend of eight cents per share on the increased number of
shares.
STOCK PURCHASE PLAN Almost all U.S. resident employees with a year of service at
the beginning of each calendar year may participate in the Company's employee
stock purchase plan. The Directors annually establish the purchase discount from
the market price. The discount was 25% for each of the three years ended August
31, 2003, 2002 and 2001. In January 2003, the Company's stockholders approved
an amendment to the 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.
Yearly activity of the stock purchase plan was as follows:
2003 2002 2001
- -----------------------------------------------------------
Shares subscribed 289,210 282,780 347,640
Price per share $ 12.35 $ 12.48 $ 9.48
Shares purchased 223,880 257,860 74,480
Price per share $ 12.48 $ 9.48 $ 11.74
Shares available 1,141,946
56
The Company recorded compensation expense for this plan of $932,000, $815,000
and $291,000 in 2003, 2002 and 2001, respectively.
STOCK OPTION PLANS The 1986 Stock Incentive Plan (1986 Plan) ended November 23,
1996, except for awards outstanding. Under the 1986 Plan, stock options were
awarded to full-time salaried employees. The option price was the fair market
value of the Company's stock at the date of grant, and the options are
exercisable two years from date of grant. The outstanding awards under this Plan
are 100% vested and expire through 2006.
The 1996 Long-Term Incentive Plan (1996 Plan) was approved in December 1996.
Under the 1996 Plan, stock options, stock appreciation rights, and restricted
stock may be awarded to employees. The option price for both the stock options
and the stock rights will not be less than the fair market value of the
Company's stock at the date of grant. The outstanding awards under the 1996 Plan
vest 50% after one year and 50% after two years from date of grant and will
expire seven years after grant. The terms of the 1996 Plan resulted in
additional authorized shares of 62,806 in 2003, 1,073,782 in 2002, and 67,270 in
2001. In addition, the Company's shareholders authorized an additional 1,000,000
shares during 2002.
In January 2000, the Company's stockholders approved the 1999 Non-Employee
Director Stock Option Plan and authorized 400,000 shares to be made available
for grant. Under this Plan, each outside director of the Company will receive
annually an option to purchase 3,000 shares of the Company's stock. In addition,
any outside director may elect to receive all or part of fees otherwise
payable in the form of a stock option. The price of these options is the fair
market value of the Company's stock at the date of the grant. The options
granted automatically vest 50% after one year and 50% after two years from the
grant date. Options granted in lieu of fees are immediately vested. All options
expire seven years from the date of grant.
57
Combined information for shares subject to options for the three plans is as
follows:
Weighted
Average Price
Exercise Range
Number Price Per Share
- --------------------------------------------------------------------
September 1, 2000
Outstanding 4,350,860 $13.47 $ 6.31-15.97
Exercisable 3,559,810 13.06 6.31-15.44
Granted 803,672 11.71 10.95-13.23
Exercised (320,422) 10.70 6.31-15.44
Forfeited (99,932) 13.82 10.99-15.97
Increase authorized 67,270
- --------------------------------------------------------------------
August 31, 2001
Outstanding 4,734,178 $13.36 $ 9.21-15.97
Exercisable 3,608,052 13.47 9.21-15.97
Granted 805,380 17.28 17.17-21.42
Exercised (2,212,903) 13.13 9.21-15.97
Forfeited (80,920) 14.00 11.76-17.17
Increase authorized 2,073,782
- --------------------------------------------------------------------
August 31, 2002
Outstanding 3,245,735 $14.46 $10.10-21.42
Exercisable 2,111,744 13.94 10.10-18.05
Granted 847,430 14.56 14.54-15.10
Exercised (211,618) 12.39 13.32-19.24
Forfeited (36,629) 14.66 10.10-17.17
Increase authorized 62,806
- --------------------------------------------------------------------
August 31, 2003
Outstanding 3,844,918 $14.60 $10.97-21.42
Exercisable 2,655,803 14.24 10.97-21.42
Available for grant 1,189,924
- --------------------------------------------------------------------
Share information for options at August 31, 2003:
Outstanding Exercisable
- --------------------------------------------------------------------------------
Weighted
Average
Remain- Weighted Weighted
Range of ing Con- Average Average
Exercise Number tractual Exercise Number Exercise
Price Outstanding Life (Yrs) Price Outstanding Price
- --------------------------------------------------------------------------------
$10.97-12.25 692,746 3.7 $ 11.81 692,746 $ 11.81
13.13-15.10 1,954,972 3.7 14.32 1,134,222 14.16
15.44-21.42 1,197,200 4.6 16.65 828,835 16.39
================================================================================
$10.97-21.42 3,844,918 4.0 $ 14.60 2,655,803 $ 14.24
58
PREFERRED STOCK Preferred stock has a par value of $1.00 a share, with 2,000,000
shares authorized. It may be issued in series, and the shares of each series
shall have such rights and preferences as fixed by the Board of Directors when
authorizing the issuance of that particular series. There are no shares of
preferred stock outstanding.
STOCKHOLDER RIGHTS PLAN On July 28, 1999, the Company's Board of Directors
adopted a stockholder rights plan pursuant to which stockholders were granted
preferred stock rights (Rights) to purchase one one-thousandth of a share of the
Company's Series A Preferred Stock for each share of common stock held. In
connection with the adoption of such plan, the Company designated and reserved
100,000 shares of preferred stock as Series A Preferred Stock and declared a
dividend of one Right on each outstanding share of the Company's common stock.
Rights were distributed to stockholders of record as of August 9, 1999.
The Rights are represented by and traded with the Company's common stock. The
Rights do not become exercisable or trade separately from the common stock
unless at least one of the following conditions are met: a public announcement
that a person has acquired 15% or more of the common stock of the Company or a
tender or exchange offer is made for 15% or more of the common stock of the
Company. Should either of these conditions be met and the Rights become
exercisable, each Right will entitle the holder (other than the acquiring person
or group) to buy one one-thousandth of a share of the Series A Preferred Stock
at an exercise price of $150.00. Each fractional share of the Series A Preferred
Stock will essentially be the economic equivalent of one share of common stock.
Under certain circumstances, each Right would entitle its holder to purchase the
Company's stock or shares of the acquirer's stock at a 50% discount. The
Company's Board of Directors may choose to redeem the Rights (before they become
exercisable) at $0.001 per Right. The Rights expire July 28, 2009.
NOTE 8. EMPLOYEES' RETIREMENT PLANS
Substantially all employees in the U.S. are covered by defined contribution
profit sharing and savings plans. These tax qualified plans are maintained and
contributions made in accordance with ERISA. The Company also provides certain
eligible executives benefits pursuant to a non-qualified benefit restoration
plan (BRP Plan) equal to amounts that would have been available under the tax
qualified ERISA plans, but are not available due to limitations of ERISA, tax
laws and regulations. Company contributions, which are discretionary, to all
plans were $12,271,000, $14,685,000, and $10,611,000, for 2003, 2002 and 2001,
respectively.
The deferred compensation liability under the BRP Plan was $18.6 million and
$14.4 million at August 31, 2003 and 2002, respectively, and recorded in other
long-term liabilities. Though under no obligation to fund the plan, the Company
has segregated mutual fund assets in a trust whose current value at August 31,
2003 and 2002 was $14.6 million and $13.2 million, respectively, and recorded in
other long-term assets.
The Company has no significant postretirement obligations. The Company's
historical costs for postemployment benefits have not been significant and are
not expected to be in the future.
59
NOTE 9. COMMITMENTS AND CONTINGENCIES
Minimum lease commitments payable by the Company and its consolidated
subsidiaries for non-cancelable operating leases in effect at August 31, 2003,
are as follows for the fiscal periods specified:
Real
(in thousands) Equipment Estate
- ------------------------------------------------------
2004 $ 4,000 $ 5,318
2005 3,188 4,689
2006 2,290 3,901
2007 1,737 3,328
2008 and thereafter 2,483 9,736
- ------------------------------------------------------
$ 13,698 $ 26,972
======================================================
Total rental expense was $13,428,000, $11,774,000 and $11,483,000 in 2003, 2002
and 2001, respectively.
CONSTRUCTION CONTRACT DISPUTES During 2001, the Company increased its litigation
accrual (included in accrued expenses and other payables) by $8.3 million due to
an adverse judgment from a trial. At August 31, 2002, $9.6 million was accrued
(including interest). The judgment was upheld on appeal and paid in 2003.
In another matter, a subsidiary of the Company, SMI-Owen Steel Company, Inc.
(SMI-Owen) entered into a fixed price contract with the design/builder general
contractor (D/B) to furnish, erect and install structural steel and certain
other materials 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 which named the Company as an insured in lieu of performance
and payment bonds. The Company made a claim against the insurance company for
expenses incurred from the default of a large subcontractor. During 2002, the
Company and the insurance company settled related litigation filed by the
Company, and the Company recovered $15 million which included recovery of a $6.6
million claim receivable, receipt of an additional amount ($7.4 million), the
release of the balance of $1 million of previously escrowed funds and, subject
to certain contingencies, reimbursement of an additional amount (up to $3
million). The $7.4 million in excess of the claim receivable and escrow amount
released was recorded as deferred insurance proceeds (in other long-term
liabilities at August 31, 2002) pending final resolution of the Company's
disputes with the D/B. At August 31, 2002 and 2001, 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. During 2003, SMI-Owen
settled, contingent upon completion and approval by the Bankruptcy Court which
has jurisdiction over one of the parties, all disputes between SMI-Owen, the D/B
and the owner of the Project. SMI-Owen will pay $1.25 million of the $3.5
million settlement payment with $2.25 million to be paid by the insurance
company. Final resolution of this dispute will resolve all material claims
asserted against SMI-Owen arising from the Project. The Company reduced its
accrual for the deferred insurance proceeds by $937,000 at August 31, 2003 to
reflect this settlement. The settlement agreement provides that SMI-Owen
reserves all rights with regards to pending litigation against an insurance
broker for insurance benefits not received by SMI-Owen due to the broker's acts,
errors, omissions and other conduct related to the insurance program for the
Project.
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.
60
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 on earnings for a particular
quarter.
The Company has received notices from the U.S. Environmental Protection Agency
(EPA) or equivalent state agency that it is considered a potentially responsible
party (PRP) at fourteen sites, none owned by the Company, and may be obligated
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 (CERCLA) or similar state statute to conduct remedial investigations,
feasibility studies, remediation and/or removal of alleged releases of hazardous
substances or to reimburse the EPA for such activities. The Company is involved
in litigation or administrative proceedings with regard to several of these
sites in which the Company is contesting, or at the appropriate time may
contest, its liability at the sites. In addition, the Company has received
information requests with regard to other sites which may be under consideration
by the EPA as potential CERCLA sites.
Some of these environmental matters or other proceedings may result in fines,
penalties or judgments being assessed against the Company. While the Company is
unable to estimate precisely the ultimate dollar amount of exposure to loss in
connection with the above-referenced matters, it makes accruals as warranted.
Due to evolving remediation technology, changing regulations, possible
third-party contributions, the inherent shortcomings of the estimation process
and other factors, amounts accrued could vary significantly from amounts paid.
Accordingly, it is not possible to estimate a meaningful range of possible
exposure. It is the opinion of the Company's management that the outcome of
these proceedings, individually or in the aggregate, will not have a material
adverse effect on the results of operations or the financial position of the
Company.
NOTE 10. EARNINGS PER SHARE
In calculating earnings per share, there were no adjustments to net earnings to
arrive at income for any years presented. The stock options granted June 7,
2002, with total outstanding share commitments of 10,000 at year end, are
antidilutive.
August 31,
------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------
Shares outstanding
for basic
earnings per share 28,202,979 27,377,083 26,059,122
Effect of dilutive securities:
Stock options/
purchase plans 402,616 898,208 261,866
- --------------------------------------------------------------------------
Shares outstanding for
diluted earnings
per share 28,605,595 28,275,291 26,320,988
==========================================================================
At August 31, 2003, the Company had authorization to purchase 1,116,152 of its
common shares.
61
NOTE 11. ACCRUED EXPENSES AND OTHER PAYABLES
August 31,
-----------------------
(in thousands) 2003 2002
- -------------------------------------------------------------
Salaries, wages and commissions $ 37,698 $ 31,544
Insurance 13,562 12,987
Employees' retirement plans 11,325 15,086
Advance billings on contracts 10,787 7,855
Taxes other than income taxes 8,699 9,470
Freight 8,228 5,980
Litigation accruals 6,650 16,416
Interest 1,833 1,901
Other 28,189 32,369
- -------------------------------------------------------------
$ 126,971 $ 133,608
=============================================================
NOTE 12. ACQUISITIONS
In January 2003, the Company acquired substantially all of the operating assets
of E.L. Wills, Inc., a rebar fabrication company located in Fresno, California,
specializing in commercial and industrial construction throughout the states of
California and Nevada for $4.2 million cash.
In May, 2003, the Company acquired substantially all of the operating assets of
the Denver, Colorado location of Symons Corporation for $5.6 million cash. This
acquisition expands the Company's concrete form and construction-related product
sales in the western part of the United States.
Effective August 31, 2003, the Company acquired substantially all of the
operating assets of Dunn Del Re Steel, Inc., a rebar fabrication company located
in Chandler, Arizona for $3.6 million cash and the assumption of a $625 thousand
note payable. Its primary market is Arizona, extending also to Utah, New Mexico,
California and Nevada. The purchase price allocation for Dun Del Re Steel has
been prepared on a preliminary basis, and reasonable changes may be made
following valuation by business appraisers of the intangible assets.
Operations of the acquired entities are reflected in the consolidated statement
of earnings from the date of their respective acquisitions. The pro forma impact
on operations, as of the beginning of 2003, of these acquisitions would not have
been materially different from the actual results.
The following is a summary of the allocation of purchase price for these
acquisitions as of the date the assets were acquired (in thousands):
E.L. Dunn
Wills Symons Del Re Total
- ---------------------------------------------------------------------------------------
Inventory $ 1,227 $ 173 $ 575 $ 1,975
Property, plant
and equipment 2,215 55 2,435 4,705
Rental equipment -- 4,400 -- 4,400
Identifiable intangible
assets 705 1,000 1,220 2,925
Note payable -- -- (625) (625)
Other 52 -- (16) 36
- ---------------------------------------------------------------------------------------
Total $ 4,199 $ 5,628 $ 3,589 $ 13,416
=======================================================================================
62
Rental equipment and intangible assets are included in long-term other assets on
the August 31, 2003 consolidated balance sheet. The intangible assets acquired
include trade names, customer lists and backlogs, all of which have finite lives
and are being amortized. The estimated annual amortization of intangibles is not
expected to be material.
In July 2003, the Company's subsidiary, Commercial Metals (International) AG,
entered into a purchase agreement to buy 71.1% of the outstanding shares of Huta
Zawiercie, S.A. in Zawiercie, Poland for approximately $50 million in cash and
$32 million assumed long-term debt. Huta Zawiercie operates a steel minimill
similar to those operated by the Company's steel group. Its annual capacity is
about 1 million tons consisting mainly of rebar and wire rod products. This
transaction is expected to be completed by December 15, 2003.
NOTE 13. BUSINESS SEGMENTS
The Company's reportable segments are based on strategic business areas, which
offer different products and services. These segments have different lines of
management responsibility as each business requires different marketing
strategies and management expertise.
The Company has three reportable segments consisting of manufacturing,
recycling, and marketing and distribution. Manufacturing consists of the CMC
steel group's minimills, steel and joist fabrication operations, fence post
manufacturing plants, heat treating, railcar rebuilding and construction-related
products, as well as Howell Metal Company's copper tube manufacturing facility.
The manufacturing segment's business operates primarily in the southern and
western United States. Recycling consists of the Secondary Metals Processing
Division's scrap processing and sales operations primarily in Texas, Florida and
the southern United States. Marketing and distribution includes both domestic
and international operations for the sales, distribution and processing of both
ferrous and nonferrous metals and other industrial products. The segment's
activities consist only of physical transactions and not speculation.
The Company uses adjusted operating profit to measure segment performance.
Intersegment sales are generally priced at prevailing market prices. Certain
corporate administrative expenses are allocated to segments based upon the
nature of the expense. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies.
The following presents information regarding the Company's domestic operations
and operations outside of the United States:
External Net Sales for the
Year ended August 31,
------------------------------------
(in thousands) 2003 2002 2001
- -----------------------------------------------------------
United States $1,689,645 $1,708,863 $1,714,898
Non United States 1,186,240 771,078 755,235
- -----------------------------------------------------------
Total $2,875,885 $2,479,941 $2,470,133
===========================================================
Long-Lived Assets
as of August 31,
------------------------------------
(in thousands) 2003 2002 2001
- -----------------------------------------------------------
United States $ 409,298 $ 421,332 $ 449,121
Non United States 21,691 14,492 9,812
- -----------------------------------------------------------
Total $ 430,989 $ 435,824 $ 458,933
===========================================================
63
Summarized data for the Company's international operations located outside of
the United States (principally in Europe, Australia and the Far East) are as
follows:
Year ended August 31,
------------------------------------
(in thousands) 2003 2002 2001
- ---------------------------------------------------------------------
Net sales - unaffiliated
customers $ 626,257 $ 378,745 $ 266,609
- ---------------------------------------------------------------------
Total assets 186,322 124,870 83,743
- ---------------------------------------------------------------------
The following is a summary of certain financial information by reportable
segment:
Adjustments
Marketing and
2003 (dollars in thousands) Manufacturing Recycling and Distribution Corporate Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------
Net sales - unaffiliated customers $ 1,336,095 $ 409,554 $ 1,129,777 $ 459 $ -- $ 2,875,885
Intersegment sales 3,420 31,890 19,920 -- (55,230) --
- ---------------------------------------------------------------------------------------------------------------------------
Net sales 1,339,515 441,444 1,149,697 459 (55,230) 2,875,885
===========================================================================================================================
Adjusted operating profit (loss) 20,365 15,206 21,784 (11,039) -- 46,316
===========================================================================================================================
Interest expense* 3,376 844 1,214 10,158 (254) 15,338
===========================================================================================================================
Capital expenditures 43,452 5,765 3,560 2,428 -- 55,205
===========================================================================================================================
Depreciation and amortization 50,227 7,936 2,134 906 -- 61,203
===========================================================================================================================
Total assets 738,944 106,749 342,752 86,961 -- 1,275,406
===========================================================================================================================
2002 (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Net sales - unaffiliated customers $ 1,362,308 $ 354,387 $ 762,584 $ 662 $ -- $ 2,479,941
Intersegment sales 3,587 23,667 14,428 -- (41,682) --
- ---------------------------------------------------------------------------------------------------------------------------
Net sales 1,365,895 378,054 777,012 662 (41,682) 2,479,941
===========================================================================================================================
Adjusted operating profit (loss) 71,447 5,098 14,196 (8,102) -- 82,639
===========================================================================================================================
Interest expense* 3,949 1,011 1,050 13,145 (447) 18,708
===========================================================================================================================
Capital expenditures 39,046 4,723 9,323 965 -- 54,057
===========================================================================================================================
Depreciation and amortization 49,538 9,650 1,609 782 -- 61,579
===========================================================================================================================
Total assets 720,450 98,847 262,111 148,668 -- 1,230,076
===========================================================================================================================
2001 (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Net sales - unaffiliated customers $ 1,344,483 $ 371,298 $ 752,723 $ 1,629 $ -- $ 2,470,133
Intersegment sales 5,375 22,539 18,433 -- (46,347) --
- ---------------------------------------------------------------------------------------------------------------------------
Net sales 1,349,858 393,837 771,156 1,629 (46,347) 2,470,133
===========================================================================================================================
Adjusted operating profit (loss) 56,700 (2,324) 7,833 4,790 -- 66,999
===========================================================================================================================
Interest expense* 10,585 2,165 1,332 14,637 (1,111) 27,608
===========================================================================================================================
Capital expenditures 45,979 5,587 1,208 248 -- 53,022
===========================================================================================================================
Depreciation and amortization 54,402 11,005 1,124 741 -- 67,272
===========================================================================================================================
Total assets 739,625 93,268 188,405 60,648 -- 1,081,946
===========================================================================================================================
* Includes intercompany interest in the segments.
64
The following table provides a reconciliation of the non-GAAP measure, adjusted
operating profit (loss) to net earnings (loss).
ADJUSTED OPERATING PROFIT RECONCILIATION
Marketing and Corporate and
(in millions) Manufacturing Recycling Distribution Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------
Year ended August 31, 2003:
Net earnings (loss) $ 13,557 $ 10,006 $ 15,529 $ (20,188) $ 18,904
Income taxes 6,477 5,104 4,753 (4,844) 11,490
Interest expense 130 5 1,313 13,890 15,338
Discounts on sales of accounts receivable 201 91 189 103 584
- ---------------------------------------------------------------------------------------------------------------------
Adjusted operating profit (loss) $ 20,365 $ 15,206 $ 21,784 $ (11,039) $ 46,316
=====================================================================================================================
Year ended August 31, 2002:
Net earnings (loss) $ 45,026 $ 3,741 $ 8,085 $ (16,327) $ 40,525
Income taxes 25,739 1,187 3,769 (8,082) 22,613
Interest expense 291 4 2,039 16,374 18,708
Discounts on sales of accounts receivable 391 166 303 (67) 793
- ---------------------------------------------------------------------------------------------------------------------
Adjusted operating profit (loss) $ 71,447 $ 5,098 $ 14,196 $ (8,102) $ 82,639
=====================================================================================================================
Year ended August 31, 2001:
Net earnings (loss) $ 34,826 $ (1,579) $ 3,612 $ (13,087) $ 23,772
Income taxes 21,150 (903) 2,139 (7,743) 14,643
Interest expense 357 12 1,798 25,441 27,608
Discounts on sales of accounts receivable 367 146 284 179 976
- ---------------------------------------------------------------------------------------------------------------------
Adjusted operating profit (loss) $ 56,700 $ (2,324) $ 7,833 $ 4,790 $ 66,999
=====================================================================================================================
65
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 2003, 2002 and 2001 are as
follows (in thousands except per share data):
Three Months Ended 2003
---------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
- --------------------------------------------------------------------
Net sales $ 636,179 $ 660,816 $ 774,151 $ 804,739
Gross profit 61,060 67,919 74,419 85,641
Net earnings 2,205 2,933 3,022 10,744
Basic EPS 0.08 0.10 0.11 0.38
Diluted EPS 0.08 0.10 0.11 0.38
Three Months Ended 2002
---------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
- --------------------------------------------------------------------
Net sales $ 572,168 $ 574,325 $ 651,604 $ 681,844
Gross profit 78,095 74,880 92,120 72,319
Net earnings 8,482 6,572 16,433 9,038
Basic EPS 0.32 0.24 0.59 0.32
Diluted EPS 0.32 0.24 0.56 0.31
Three Months Ended 2001
---------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
- --------------------------------------------------------------------
Net sales $ 601,926 $ 584,188 $ 629,435 $ 654,584
Gross profit 70,844 58,253 82,893 85,330
Net earnings (loss) (2,421) 1,590 10,569 14,034
Basic EPS (loss) (0.09) 0.06 0.41 0.54
Diluted EPS (loss) (0.09) 0.06 0.40 0.53
The quantities and costs used in calculating cost of goods sold on a quarterly
basis include estimates of the annual LIFO effect. The actual effect cannot be
known until the year end physical inventory is completed and quantity and price
indices are developed. The quarterly cost of goods sold above includes such
estimates. The final determination of inventory quantities and prices resulted
in $857 thousand after-tax expense in the fourth quarter 2003. Fourth quarter
2002 net earnings decreased $1.1 million after the final determination of
quantities and prices was made. Fourth quarter 2001 net earnings were not
significantly impacted.
In recording accruals for workers' compensation expense, management relies on
prior years' experience and information from third party administrators in
making estimates. Results at the end of fiscal year 2002 and 2001 indicated a
decline in the number of claims resulting in a $1.0 million and $2.1 million
reduction, respectively, in the accrual during the fourth quarters.
During the third quarter of fiscal 2003, a subsidiary of the Company was
notified that a customer, now in bankruptcy proceedings, alleged 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
had accrued $1 million as of May 31, 2003 relating to this matter. During the
three months ended August 31, 2003, this dispute was settled subject to
Bankruptcy Court approval for $118 thousand.
Following a revised Court ruling, the Company reduced its litigation accrual by
$2.5 million during the fourth quarter 2001.
66
NOTE 15. SUBSEQUENT EVENTS
In November 2003, the Company repurchased $89 million of its 7.20% notes due in
2005. As a result of this debt repurchase, the Company will record a pre-tax
charge of approximately $2.8 million.
Also, in November 2003, the Company issued $200 million of fixed rate notes due
in November 2013. The interest rate is 5.625%. Interest is payable semiannually.
The Company had entered into an interest rate lock, resulting in an effective
rate of 5.644%.
67
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Commercial Metals Company
Dallas, Texas
We have audited the consolidated balance sheets of Commercial Metals Company and
subsidiaries at August 31, 2003 and 2002, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended August 31, 2003. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Commercial Metals Company and
subsidiaries at August 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
November 5, 2003 (November 13, 2003, as to Note 15)
68
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules
13a-15(e) and 15d-15(e) 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 the end of the period covered by this annual
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.
No change to our internal control over financial reporting occurred
during our last fiscal quarter of 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Some of the information required in response to this item with regard
to directors is incorporated by reference into this annual report from our
definitive proxy statement for the annual meeting of stockholders to be held
January 22, 2004, which will be filed no later than 120 days after the close of
our fiscal year. The following is a listing of employees we believe to be our
"Executive Officers" as of November 17, 2003, as defined under Rule 3b-7 of the
Securities Exchange Act of 1934:
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE
- -------------------- ------------------------------------------ --- -------------
Louis A. Federle Treasurer 55 1979
Harry J. Heinkele Vice President and Secondary Metals 71 1981
Processing Division - President
A. Leo Howell Vice President and 82 1977
Howell Metal Company - President, Director
Binh K. Huynh Vice President and 52 2002
CMC Steel Group - Executive Vice President
William B. Larson Vice President and 50 1995
Chief Financial Officer
Murray R. McClean Vice President and Marketing and 55 1995
Distribution Segment - President
69
Malinda G. Passmore Controller 44 1999
Stanley A. Rabin Chairman of the Board, 65 1974
President and Chief Executive
Officer, Director
Russell B. Rinn Vice President and 46 2002
CMC Steel Group - West President
Clyde P. Selig Vice President and 71 1981
CMC Steel Group - President
and Chief Executive Officer, Director
Jeffrey H. Selig Vice President and 48 2002
CMC Steel Group - East President
David M. Sudbury Vice President, Secretary and 58 1976
General Counsel
Our board of directors, or a subsidiary, usually employs the executive
officers at its first meeting after our annual stockholders meeting. Our
executive officers continue to serve for terms set from time to time by the
board of directors in its discretion.
We have employed all of our executive officers in the positions
indicated above or in positions of similar responsibility for more than five
years, except for Ms. Passmore. We employed Ms. Passmore in April 1999 as
Controller. From January 1998 until April 1999, she was President and CEO of
System Health Providers, Inc., and its Chief Financial Officer from January 1997
until January 1998. Prior to 1997, Ms. Passmore was a consultant and employed as
Executive Director of Financial Services and Controller with Kaiser Foundation
Health Plan of Texas from 1991 to September 1996. Mr. Federle became our
Treasurer in April 1999. Mr. Federle has been employed with us since 1977 and
our Assistant Treasurer since 1979. In June 1991, we employed Mr. Larson as our
Assistant Controller. In March 1995, we named Mr. Larson as our Controller, and
in April 1999, he was elected Vice President and Chief Financial Officer. As of
September 1, 1999, we elected Mr. McClean to the newly created position of
President of the Marketing and Distribution Segment. Mr. McClean has been
employed with us since 1985 and President of the International Division of the
Marketing and Distribution segment since 1993. In March 1999, Mr. Rabin was
elected to the additional position of Chairman of the Board. In June 2002, Clyde
P. Selig was named Chief Executive Officer of the CMC Steel Group in addition to
his existing duties as CMC Steel Group President. Jeffrey H. Selig is Clyde P.
Selig's nephew. There are no other family relationships among our officers or
among the executive officers and directors.
We have adopted a Financial Code of Ethics that applies to our Chief Executive
Officer, Chief Financial Officer, Corporate Controller and any of our other
officers that may function as a Chief Accounting Officer. We hereby undertake to
provide to any person without charge, upon request, a copy of our Financial Code
of Ethics. Requests may be directed to Commercial Metals Company, 6565 N.
MacArthur Blvd., Suite 800, Irving, Texas 75039, Attention: Corporate Secretary,
or by calling(214)689-4300.
ITEM 11. EXECUTIVE COMPENSATION
Information required in response to this Item 11 is incorporated by
reference into this annual report from our definitive proxy statement for the
annual meeting of stockholders to be held January 22, 2004. We will file our
definitive proxy statement no later than 120 days after the close of our fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
70
The information required in response to this Item 12 is incorporated by
reference into this annual report from our definitive proxy statement for the
annual meeting of stockholders to be held January 22, 2004. We will file our
definitive proxy statement no later than 120 days after the close of our fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, information required in response to this Item
13 is incorporated by reference into this annual report from our definitive
proxy statement for the annual meeting of stockholders to be held January 22,
2004. We will file our definitive proxy statement no later than 120 days after
the close of our fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in response to this Item 14 is incorporated by
reference into this annual report from our definitive proxy statement for the
annual meeting of stockholders to be held January 22, 2004. We will file our
definitive proxy statement no later than 120 days after the close of our fiscal
year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. All financial statements are included at Item 8 above.
2. Commercial Metals Company and Subsidiaries Consolidated Financial
Statement Schedule
Independent Auditors' Report as to Schedule Valuation and qualifying
accounts (Schedule VIII)
All other schedules have been omitted because they are not applicable,
are not required, or the required information is shown in the financial
statements or notes thereto.
3. The following is a list of the Exhibits required to be filed by Item
601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3(i) Restated Certificate of Incorporation
(Filed as Exhibit 3(i) to Commercial
Metals' Form 10-K/A for the fiscal year
ended August 31, 2002 and incorporated
herein by reference).
3(i)a Certificate of Amendment of Restated
Certificate of Incorporation dated
February 1, 1994 (Filed as Exhibit 3(i)a
to Commercial Metals' Form 10-K/A for the
fiscal year ended August 31, 2002 and
incorporated herein by reference).
71
3(i)b Certificate of Amendment of Restated
Certificate of Incorporation dated
February 17, 1995 (Filed as Exhibit 3(i)b
to Commercial Metals' Form 10-K/A for the
fiscal year ended August 31, 2002 and
incorporated herein by reference).
3(i)c Certificate of Designation, Preferences
and Rights of Series A Preferred Stock
(Filed as Exhibit 2 to Commercial Metals'
Form 8-A filed August 3, 1999 and
incorporated herein by reference).
3(ii) By-Laws (Filed as Exhibit 3(ii) to
Commercial Metals' Form 10-K/A for the
fiscal year ended August 31, 2002 and
incorporated herein by reference).
4(i)a Indenture between Commercial Metals and
Chase Manhattan Bank dated as of July 31,
1995 (Filed as Exhibit 4.1 to Commercial
Metals' Registration Statement No.
33-60809 on July 18, 1995 and
incorporated herein by reference).
4(i)b Rights Agreement dated July 28, 1999 by
and between Commercial Metals and
ChaseMellon Shareholder Services, LLC, as
Rights Agent (Filed as Exhibit 1 to
Commercial Metals' Form 8-A filed August
3, 1999 and incorporated herein by
reference).
4(i)c Form of Note for Commercial Metals' 7.20%
Senior Notes due 2005 (Filed as Exhibit
4(i)c to Commercial Metals' Form 10-K/A
for the fiscal year ended August 31, 2002
and incorporated herein by reference).
4(i)d Form of Note for Commercial Metals' 6.80%
Senior Notes due 2007 (Filed as Exhibit
4(i)d to Commercial Metals' Form 10-K/A
for the fiscal year ended August 31, 2002
and incorporated herein by reference).
4(i)e Officers' Certificate, dated August 4,
1997, pursuant to the Indenture dated as
of July 31, 1995, relating to the 6.80%
Senior Notes due 2007 (Filed as Exhibit
4(i)e to Commercial Metals' Form 10-K/A
for the fiscal year ended August 31, 2002
and incorporated herein by reference).
4(i)f Form of Note for Commercial Metals' 6.75%
Senior Notes due 2009 (Filed as Exhibit
4(i)f to Commercial Metals' Form 10-K/A
for the fiscal year ended August 31, 2002
and incorporated herein by reference).
72
4(i)g Officers' Certificate, dated February 23,
1999, pursuant to the Indenture dated as
of July 31, 1995, relating to the 6.75%
Senior Notes due 2009 (Filed as Exhibit
4(i)g to Commercial Metals' Form 10-K/A
for the fiscal year ended August 31, 2002
and incorporated herein by reference).
4(i)h** Exchange and Registration Rights
Agreement, dated November 13, 2003, by
and among Goldman, Sachs & Co., Banc of
America Securities LLC, Tokyo-Mitsubishi
International plc, ABN AMRO Incorporated
and Commercial Metals (Filed herewith).
4(i)i** Supplemental Indenture, dated as of
November 12, 2003, to Indenture dated as
of July 31, 1995, by and between
Commercial Metals and JPMorgan Chase Bank
(Filed herewith).
10(i)a Purchase and Sale Agreement dated June
20, 2001, between various entities listed
on Schedule 1 as Originators and CMC
Receivables, Inc. (Filed as Exhibit
(10)(a) to Commercial Metals' Form 10-Q
for the period ended May 31, 2001, and
incorporated herein by reference).
10(i)b Receivables Purchase Agreement dated June
20, 2001, among CMC Receivables, Inc., as
Seller, Three Rivers Funding Corporation,
as Buyer, and Commercial Metals Company
as Servicer (Filed as Exhibit (10)(b) to
Commercial Metals' Form 10-Q for the
period ended May 31, 2001, and
incorporated herein by reference).
10(i)c** Purchase Agreement, dated November 7,
2003, by and among Goldman, Sachs & Co.,
Banc of America Securities LLC,
Tokyo-Mitsubishi International plc, ABN
AMRO Incorporated and Commercial Metals
(Filed herewith).
10(i)d $129,500,000 Amended and Restated 364-Day
Revolving Credit Agreement dated as of
August 8, 2002 which terminated August 8,
2003 (Filed as Exhibit 10(i)d to
Commercial Metals' Form 10-K for the
fiscal year ended August 31, 2002, and
incorporated herein by reference).
73
10(i)e** $275,000,000 3 Year Credit Agreement,
dated August 8, 2003, by and among
Commercial Metals, Bank of America, N.A.,
The Bank of Tokyo-Mitsubishi, Ltd., ABN
AMRO Bank N.V., Mellon Bank, N.A., BNP
Paribas, Banc of America Securities LLC
and the other lending parties listed
therein (Filed herewith).
10(iii)a* Employment Agreement of Murray R. McClean
as amended through October 2, 2002 (Filed
as Exhibit (10)(iii) to Commercial
Metals' Form 10-K for the fiscal year
ended August 31, 2000, and incorporated
herein by reference).
10(iii)b* Amendment to Employment Agreement of
Murray R. McClean dated March 28, 2001,
(Filed as Exhibit (10)(iii)b to
Commercial Metals' Form 10-K for the
fiscal year ended August 31, 2001, and
incorporated herein by reference).
10(iii)c* Key Employee Long-Term Performance Plan
description (Filed as Exhibit (10)(iii)c
to Commercial Metals' Form 10-K for the
fiscal year ended August 31, 2001, and
incorporated hereby by reference).
10(iii)d* Key Employee Annual Incentive Plan
description (Filed as Exhibit (10)(iii)d
to Commercial Metals' Form 10-K for the
fiscal year ended August 31, 2001, and
incorporated hereby by reference).
10(iii)e* Employment and Consulting Agreement of
Marvin Selig dated as of June 7, 2002
(Filed as Exhibit 10(iii)e to Commercial
Metals' Form 10-K for the fiscal year
ended August 31, 2002, and incorporated
herein by reference).
10(iii)f* 1999 Non-Employee Director Stock Option
Plan (Filed as Exhibit 10(iii)f to
Commercial Metals' Form 10-K/A for the
fiscal year ended August 31, 2002 and
incorporated herein by reference).
12 Statement re computation of earnings to
fixed charges (Filed herewith).
21 Subsidiaries of Registrant (Filed
herewith).
23 Independent Auditors' consent to
incorporation by reference of report
dated November 24, 2003, accompanying
the consolidated financial statements of
Commercial Metals Company and
subsidiaries for the year ended August
31, 2003, into previously filed
Registration Statements No. 033-61073,
No. 033-61075, No. 333-27967 and No.
333-42648 on Form S-8 and Registration
Statements No. 33-60809 and No. 333-61379
on Form S-3 (Filed herewith).
74
31a Certification of Stanley A. Rabin,
Chairman of the Board, President and
Chief Executive Officer of Commercial
Metals Company, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed
herewith).
31b Certification of William B. Larson, Vice
President and Chief Financial Officer of
Commercial Metals Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
32a Certification of Stanley A. Rabin,
Chairman of the Board, President and
Chief Executive Officer of Commercial
Metals Company, pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (filed
herewith).
32b Certification of William B. Larson, Vice
President and Chief Financial Officer of
Commercial Metals Company, pursuant to 18
U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
- ------------
* Denotes management contract or compensatory plan.
** Does not contain Schedules or exhibits. A copy of any such Schedules or
exhibits will be furnished to the Securities and Exchange Commission upon
request.
(b)We filed a Form 8-K on July 23, 2003, under Item 5, announcing our entry
into a definitive agreement for the purchase of a controlling interest in Huta
Zawiercie S.A., of Zawiercie, Poland.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMMERCIAL METALS COMPANY
/s/ Stanley A. Rabin
----------------------------------------
By: Stanley A. Rabin
Chairman of the Board, President and
Chief Executive Officer
Date: November 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Stanley A. Rabin /s/ Moses Feldman
- -------------------------------------------- -------------------------------------------
Stanley A. Rabin, November 24, 2003 Moses Feldman, November 24, 2003
Chairman of the Board, President Director
and Chief Executive Officer
/s/ A. Leo Howell /s/ Ralph E. Loewenberg
- -------------------------------------------- -------------------------------------------
A. Leo Howell, November 24, 2003 Ralph E. Loewenberg, November 24, 2003
Director Director
/s/ Anthony A. Massaro /s/ Robert D. Neary
- -------------------------------------------- -------------------------------------------
Anthony A. Massaro, November 24, 2003 Robert D. Neary, November 24, 2003
Director Director
/s/ Dorothy G. Owen /s/ Clyde P. Selig
- -------------------------------------------- -------------------------------------------
Dorothy G. Owen, November 24, 2003 Clyde P. Selig, November 24, 2003
Director Director
/s/ Robert R. Womack /s/ William B. Larson
- -------------------------------------------- -------------------------------------------
Robert R. Womack, November 24, 2003 William B. Larson, November 24, 2003
Director Vice President and Chief Financial Officer
/s/ Malinda G. Passmore
- --------------------------------------------
Malinda G. Passmore, November 24, 2003
Controller
76
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Commercial Metals Company
Dallas, Texas
We have audited the consolidated financial statements of Commercial Metals
Company and subsidiaries as of August 31, 2003 and 2002, and for each of the
three years in the period ended August 31, 2003, and have issued our report
thereon dated November 5, 2003 (November 13, 2003 as to Note 15); such financial
statements and report are included in Item 8 herein. Our audits also included
the consolidated financial statement schedule of Commercial Metals Company
listed in Item 15. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
November 5, 2003 (November 13, 2003 as to Note 15)
SCHEDULE VIII
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
---------------
VALUATION AND QUALIFYING ACCOUNTS
---------------
YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
---------------
(In thousands)
Allowance for collection losses deducted from accounts receivable:
BALANCE, CHARGED TO CHARGED TO DEDUCTIONS
BEGINNING PROFIT AND LOSS OTHER ACCOUNTS FROM RESERVES BALANCE END
YEAR OF YEAR OR INCOME (A) (B) OF YEAR
- ---- --------- --------------- -------------- --------------- -----------
2001 7,868 4,371 264 4,545 7,958
2002 7,958 3,985 591 3,657 8,877
2003 8,877 5,162 578 5,342 9,275
(A) Recoveries of accounts written off and acquired allowance.
(B) Write-off of uncollectible accounts.
78
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3(i) Restated Certificate of Incorporation (Filed as
Exhibit 3(i) to Commercial Metals' Form 10-K/A for
the fiscal year ended August 31, 2002 and
incorporated herein by reference).
3(i)a Certificate of Amendment of Restated Certificate of
Incorporation dated February 1, 1994 (Filed as
Exhibit 3(i)a to Commercial Metals' Form 10-K/A for
the fiscal year ended August 31, 2002 and
incorporated herein by reference).
3(i)b Certificate of Amendment of Restated Certificate of
Incorporation dated February 17, 1995 (Filed as
Exhibit 3(i)b to Commercial Metals' Form 10-K/A for
the fiscal year ended August 31, 2002 and
incorporated herein by reference).
3(i)c Certificate of Designation, Preferences and Rights
of Series A Preferred Stock (Filed as Exhibit 2 to
Commercial Metals' Form 8-A filed August 3, 1999
and incorporated herein by reference).
3(ii) By-Laws (Filed as Exhibit 3(ii) to Commercial
Metals' Form 10-K/A for the fiscal year ended
August 31, 2002 and incorporated herein by
reference).
4(i)a Indenture between Commercial Metals and Chase
Manhattan Bank dated as of July 31, 1995 (Filed as
Exhibit 4.1 to Commercial Metals' Registration
Statement No. 33-60809 on July 18, 1995 and
incorporated herein by reference).
4(i)b Rights Agreement dated July 28, 1999 by and between
Commercial Metals and ChaseMellon Shareholder
Services, LLC, as Rights Agent (Filed as Exhibit 1
to Commercial Metals' Form 8-A filed August 3, 1999
and incorporated herein by reference).
4(i)c Form of Note for Commercial Metals' 7.20% Senior
Notes due 2005 (Filed as Exhibit 4(i)c to
Commercial Metals' Form 10-K/A for the fiscal year
ended August 31, 2002 and incorporated herein by
reference).
79
4(i)d Form of Note for Commercial Metals' 6.80% Senior
Notes due 2007 (Filed as Exhibit 4(i)d to
Commercial Metals' Form 10-K/A for the fiscal year
ended August 31, 2002 and incorporated herein by
reference).
4(i)e Officers' Certificate, dated August 4, 1997,
pursuant to the Indenture dated as of July 31,
1995, relating to the 6.80% Senior Notes due 2007
(Filed as Exhibit 4(i)e to Commercial Metals' Form
10-K/A for the fiscal year ended August 31, 2002
and incorporated herein by reference).
4(i)f Form of Note for Commercial Metals' 6.75% Senior
Notes due 2009 (Filed as Exhibit 4(i)f to
Commercial Metals' Form 10-K/A for the fiscal year
ended August 31, 2002 and incorporated herein by
reference).
4(i)g Officers' Certificate, dated February 23, 1999,
pursuant to the Indenture dated as of July 31,
1995, relating to the 6.75% Senior Notes due 2009
(Filed as Exhibit 4(i)g to Commercial Metals' Form
10-K/A for the fiscal year ended August 31, 2002
and incorporated herein by reference).
4(i)h** Exchange and Registration Rights Agreement, dated
November 13, 2003, by and among Goldman, Sachs &
Co., Banc of America Securities LLC,
Tokyo-Mitsubishi International plc, ABN AMRO
Incorporated and Commercial Metals (Filed
herewith).
4(i)i** Supplemental Indenture, dated as of November 12,
2003, to Indenture dated as of July 31, 1995, by
and between Commercial Metals and JPMorgan Chase
Bank (Filed herewith).
10(i)a Purchase and Sale Agreement dated June 20, 2001,
between various entities listed on Schedule 1 as
Originators and CMC Receivables, Inc. (Filed as
Exhibit (10)(a) to Commercial Metals' Form 10-Q for
the period ended May 31, 2001, and incorporated
herein by reference).
10(i)b Receivables Purchase Agreement dated June 20, 2001,
among CMC Receivables, Inc., as Seller, Three
Rivers Funding Corporation, as Buyer, and
Commercial Metals Company as Servicer (Filed as
Exhibit (10)(b) to Commercial Metals' Form 10-Q for
the period ended May 31, 2001, and incorporated
herein by reference).
80
10(i)c** Purchase Agreement, dated November 7, 2003, by and
among Goldman, Sachs & Co., Banc of America
Securities LLC, Tokyo-Mitsubishi International plc,
ABN AMRO Incorporated and Commercial Metals (Filed
herewith).
10(i)d $129,500,000 Amended and Restated 364-Day Revolving
Credit Agreement dated as of August 8, 2002 (Filed
as Exhibit 10(i)d to Commercial Metals' Form 10-K
for the fiscal year ended August 31, 2002, and
incorporated herein by reference).
10(i)e** $275,000,000 3 Year Credit Agreement, dated August
8, 2003, by and among Commercial Metals, Bank of
America, N.A., The Bank of Tokyo-Mitsubishi, Ltd.,
ABN AMRO Bank N.V., Mellon Bank, N.A., BNP Paribas,
Banc of America Securities LLC and the other
lending parties listed therein (Filed herewith).
10(iii)a* Employment Agreement of Murray R. McClean as
amended through October 2, 2002 (Filed as Exhibit
(10)(iii) to Commercial Metals' Form 10-K for the
fiscal year ended August 31, 2000, and incorporated
herein by reference).
10(iii)b* Amendment to Employment Agreement of Murray R.
McClean dated March 28, 2001, (Filed as Exhibit
(10)(iii)b to Commercial Metals' Form 10-K for the
fiscal year ended August 31, 2001, and incorporated
herein by reference).
10(iii)c* Key Employee Long-Term Performance Plan description
(Filed as Exhibit (10)(iii)c to Commercial Metals'
Form 10-K for the fiscal year ended August 31,
2001, and incorporated hereby by reference).
10(iii)d* Key Employee Annual Incentive Plan description
(Filed as Exhibit (10)(iii)d to Commercial Metals'
Form 10-K for the fiscal year ended August 31,
2001, and incorporated hereby by reference).
81
10(iii)e* Employment and Consulting Agreement of Marvin Selig
dated as of June 7, 2002 (Filed as Exhibit 10(iii)e
to Commercial Metals' Form 10-K for the fiscal year
ended August 31, 2002, and incorporated herein by
reference).
10(iii)f* 1999 Non-Employee Director Stock Option Plan (Filed
as Exhibit 10(iii)f to Commercial Metals' Form
10-K/A for the fiscal year ended August 31, 2002
and incorporated herein by reference).
12 Statement re computation of earnings to fixed
charges (Filed herewith).
21 Subsidiaries of Registrant (Filed herewith).
23 Independent Auditors' consent to incorporation by
reference of report dated November 24, 2003,
accompanying the consolidated financial statements
of Commercial Metals Company and subsidiaries for
the year ended August 31, 2003, into previously
filed Registration Statements No. 033-61073, No.
033-61075, No. 333-27967 and No. 333-42648 on Form
S-8 and Registration Statements No. 33-60809 and
No. 333-61379 on Form S-3 (Filed herewith).
31a Certification of Stanley A. Rabin, Chairman of the
Board, President and Chief Executive Officer of
Commercial Metals Company, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).
31b Certification of William B. Larson, Vice President
and Chief Financial Officer of Commercial Metals
Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32a Certification of Stanley A. Rabin, Chairman of the
Board, President and Chief Executive Officer of
Commercial Metals Company, pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32b Certification of William B. Larson, Vice President
and Chief Financial Officer of Commercial Metals
Company, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
- ------------
* Denotes management contract or compensatory plan.
** Does not contain Schedules or exhibits. A copy of any such Schedules or
exhibits will be furnished to the Securities and Exchange Commission upon
request.
82