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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 1-4304
COMMERCIAL METALS COMPANY
(Exact name of registrant as specified in its Charter)
DELAWARE 75-0725338
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7800 STEMMONS FREEWAY, DALLAS, TEXAS 75247
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (214) 689-4300
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $5 par value New York Stock Exchange
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 IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, 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. [ ]
THE AGGREGATE MARKET VALUE OF THE COMMON STOCK ON NOVEMBER 15, 1996, HELD BY
NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE OF $32.00 PER SHARE
ON NOVEMBER 15, 1996, ON THE NEW YORK STOCK EXCHANGE WAS $483,647,872.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF NOVEMBER 15, 1996: COMMON STOCK, $5.00 PAR -- 15,113,996.
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 SHAREHOLDERS
TO BE HELD JANUARY 23, 1997 -- PART III.
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PART I
ITEM 1. BUSINESS
Commercial Metals Company was incorporated in 1946 in Delaware as a
successor to a secondary metals recycling business in existence since
approximately 1915. The Company maintains executive offices at 7800 Stemmons
Freeway, Dallas, Texas 75247 (telephone 214/689-4300). The terms "Company" or
"registrant" as used herein include Commercial Metals Company and its
consolidated subsidiaries. The Company's fiscal year ends August 31 and all
references to years refer to the fiscal year ended August 31 of that year
unless otherwise noted.
The Company considers its businesses to be organized into three
segments - (i) Manufacturing, (ii) Recycling and (iii) Marketing and Trading.
For several years prior to 1995, the Company considered a much smaller
Financial Services group to be a fourth business segment. During 1995 some of
the activities of this segment were merged into the Marketing and Trading
segment in view of the increased emphasis on supporting the Marketing and
Trading segment's financial functions and cessation of financial services,
including loans, to unrelated third parties. The Company's activities are
primarily concerned with metals related activities. Financial information for
the last three fiscal years concerning the segments is incorporated herein by
reference from "Note 13 Business Segments," of the Notes to Consolidated
Financial Statements at Part II, Item 8.
In November, 1994, the Company acquired Owen Steel Company, Inc. and
affiliated companies (collectively "Owen") headquartered in Columbia, South
Carolina. The Company paid approximately $50 million, one-half in cash and the
balance by issuance of 932,301 shares of the Company's Common Stock to certain
selling shareholders. The Company also provided funds for the retirement of
approximately $32 million of Owen debt at the Closing. The purchase price was
increased by approximately $3.2 million, paid one-half in cash and one-half
with 59,410 shares of the Company's Common Stock in October, 1995, as a result
of a post closing net worth adjustment and may be subject to further
post-closing adjustments (See Item 3. Legal Proceedings). Owen's successor
company, SMI-Owen Steel Company, Inc. and the former Owen affiliates operate as
a part of the Manufacturing Segment's CMC Steel Group.
THE MANUFACTURING SEGMENT
The manufacturing segment is the registrant's dominant and most
rapidly expanding segment in terms of assets employed, capital expenditures,
operating profit and number of employees. It consists of two entities, the CMC
Steel Group and the Howell Metal Company subsidiary, a manufacturer of copper
tubing. The Steel Group is by far the more significant entity in this segment
with subsidiaries operating four steel minimills, nineteen steel fabricating
plants, three steel joist manufacturing facilities, four steel fence post
manufacturing plants, six metals recycling plants, two railcar rebuilding
facilities and twelve warehouse stores which sell supplies and equipment to the
concrete installation and construction trade.
The Company endeavors to operate all four minimills at full capacity
in order to minimize product costs. Increases in capacity and productivity are
continuously emphasized through both operating and capital improvements. The
steel minimill business is capital intensive with substantial capital
expenditures required on a regular basis to remain competitive as a low cost
producer. Over the past three fiscal years, approximately $94 million or 69%
of the Company's total capital expenditures have been for minimill
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projects, not including the Owen acquisition cost. This emphasis on
productivity improvements is reflected in a generally increased number of tons
of steel melted, rolled and shipped from the minimills during each of the last
three years as follows:
1994 1995 (1) 1996
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Tons Melted 1,122,000 1,532,000 1,561,000
Tons Rolled 1,207,000 1,487,000 1,477,000
Tons Shipped 1,247,000 1,531,000 1,730,000
(1) 1995 includes 283,000 tons melted, 213,000 tons rolled and 225,000 tons
shipped following the Owen minimill acquisition in November, 1994.
The Company's largest steel minimill, operated by Structural Metals,
Inc. ("SMI Texas") is located at Seguin, Texas, near San Antonio. SMI Texas
manufactures steel reinforcing bars, angles, rounds, channels, flats, and
special sections used primarily in highways, reinforced concrete structures and
manufacturing. SMI Texas sells primarily to the construction, service center,
energy, petrochemical, and original equipment manufacturing industries. Its
primary markets are located in Texas, Louisiana, Arkansas and Oklahoma although
products are shipped to approximately 30 states and Mexico. In October, 1995,
a fire destroyed key electrical equipment at SMI Texas resulting in an almost
week long shut down of the melt shop and restricted capacity thereafter.
Despite this condition, 764,000 tons were melted during 1996 compared to
778,000 the prior year. A record 700,000 tons were rolled, up 5,000 from 1995.
SMI Steel, Inc. ("SMI Alabama"), a steel minimill in Birmingham,
Alabama, was acquired in 1983. A substantial program to modernize and improve
productivity at SMI Alabama has followed with approximately $111 million of
capital expenditures from acquisition through 1996. Installation and start up
of a new approximately $30 million direct current electric furnace melt shop
was substantially complete by the beginning of 1995. During 1996 the melt shop
recorded record production of 495,000 tons. SMI Alabama manufactures primarily
larger size products than SMI Texas such as mid-size structural including
angles, channels, up to eight inch wide flange beams and special bar quality
rounds and flats and rolled 409,000 tons in 1996. Customers include primarily
service centers as well as the construction, manufacturing, and fabricating
industries in the primary market areas of Alabama, Georgia, Tennessee, North
and South Carolina, and Mississippi.
The steel minimill acquired in the Owen acquisition is located at
Cayce, South Carolina. This mill is now known as SMI Steel South Carolina (SMI
South Carolina). Facilities at SMI South Carolina are similar but on a
generally smaller capacity scale than the SMI Texas and SMI Alabama mills. SMI
South Carolina manufactures primarily steel reinforcing bars with limited but
increasing production of angles, rounds and squares. Its primary market area
includes the Southeast and mid-Atlantic area south through Florida and north
into New England. During 1996 SMI South Carolina melted 302,000 tons and
rolled 243,000 tons.
The SMI Texas, Alabama, and South Carolina mills consist of melt shops
with electric arc furnaces that melt the steel scrap, continuous casting
facilities to shape the molten metal into billets, reheating furnaces, rolling
mills, mechanical cooling beds, finishing facilities and supporting facilities.
The mills utilize both a Company-owned fleet of trucks and private haulers to
transport finished products to customers and Company-owned fabricating shops.
Mill capacity at SMI Texas is approximately 800,000 tons per year.
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SMI Alabama's annual capacity is approximately 500,000 tons and SMI South
Carolina annual capacity is approximately 300,000 tons.
The primary raw material for SMI Texas, Alabama and South Carolina is
secondary (scrap) ferrous metal purchased primarily from suppliers generally
within a 300 mile radius of each mill. A portion of the ferrous raw material,
generally less than half, is supplied from Company owned recycling plants. The
supply of scrap is believed to be adequate to meet future needs but has
historically been subject to significant price fluctuations. All three
minimills also consume large amounts of electricity and natural gas, both of
which are believed to be readily available at competitive prices.
A fourth, much smaller mill has been in operation since 1987 and is
located near Magnolia, Arkansas, ("SMI Arkansas"). No melting facilities are
located at SMI Arkansas since this mill utilizes as its raw material rail
salvaged from abandoned railroads for rerolling and, on occasion, billets from
Company minimills or other suppliers. The rail or billets are heated in a
reheat furnace and processed on a rolling mill and finished at facilities
similar to, but on a smaller scale, the other mills. SMI Arkansas' finished
product is primarily metal fence post stock, small diameter reinforcing bar and
sign posts with some high quality round and flat products being rolled. Fence
post stock is fabricated into metal fence posts at Company owned facilities at
the Magnolia mill site, San Marcos, Texas, Brigham City, Utah, and West
Columbia, South Carolina, which started production during 1996. Because of
this mill's lack of melting capacity, it is dependent on an adequate supply of
competitively priced billets or used rail, the availability of which fluctuates
with the pace of railroad abandonments, rate of rail replacement by railroads
and demand for used rail from domestic and foreign rail rerolling mills.
Capacity at SMI Arkansas is approximately 150,000 tons per year.
The Steel Group's processing facilities are engaged in the fabrication
of reinforcing and structural steel, steel warehousing, joist manufacturing,
fence post manufacturing and railcar repair and rebuilding. Steel fabrication
capacity now exceeds 650,000 tons. Steel for fabrication may be obtained from
unrelated vendors as well as Company owned mills. Fabrication activities are
conducted at various locations in Texas in the cities of Beaumont, Buda (near
Austin), Corpus Christi, Dallas, Houston, San Marcos, Seguin, Victoria, and
Waco, as well as Baton Rouge and Slidell, Louisiana and Magnolia and Hope,
Arkansas. The Owen acquisition added fabrication facilities in Cayce,
Columbia, and Taylors, South Carolina; Whitehouse, Florida; Lawrenceville,
Georgia; Gastonia, North Carolina and Fredericksburg, Virginia. Fabricated
steel products are used primarily in the construction of commercial and
non-commercial buildings, industrial plants, power plants, highways, arenas,
stadiums, and dams. Sales of fabricated steel are generally made in response
to bid solicitation from construction contractors or owners on a competitive
bid basis and less frequently on a negotiated basis. The former Owen
structural steel operations have historically been active in large projects
such as high rise office towers, stadiums, convention centers, hospitals and
other large jobs.
Safety Railway Service, with locations in Victoria, Texas, and Tulsa,
Oklahoma, repairs, rebuilds and provides custom maintenance with some
manufacturing of railroad freight cars owned by railroad companies and private
industry. That work is obtained primarily on a bid and contract basis and may
include maintenance of the cars. Secondary metals recycling plants in Austin,
Texas, and Cayce, South Carolina, each with two smaller feeder facilities
nearby operate as part of the Steel Group due to the predominance of secondary
ferrous metals sales to the nearby SMI minimills. These recycling plants have
an aggregate capacity of approximately 350,000 tons. The joist manufacturing
facility, SMI Joist Company, headquartered in Hope, Arkansas, manufactures
steel joists and decking for roof supports using steel obtained primarily from
the Steel Group's minimills. SMI Joist expanded operations with the Owen
acquisition, obtaining smaller joist plants in Starke, Florida and Cayce, South
Carolina. Joist consumers
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are construction contractors. Joists are generally made to order and sales,
which may include custom design and fabrication, are primarily obtained on a
competitive bid basis.
The Company sells concrete related supplies including the sale or
rental of equipment to the concrete installation trade at ten warehouse
locations in Texas. This business operates under the Shepler's name. The Owen
acquisition added a similar but smaller operation which emphasizes a broader
industrial product supply in Columbia, South Carolina and a second location
opened in Cayce, South Carolina during 1996.
The copper tube minimill operated by Howell Metal Company is located
in New Market, Virginia. It manufactures copper water, air conditioning and
refrigeration tubing in straight lengths and coils for use in commercial,
industrial and residential construction. Its customers, largely equipment
manufacturers and wholesale plumbing supply firms, are located primarily east
of the Mississippi river. High quality copper scrap supplemented occasionally
by virgin copper ingot, is the raw material used in the melting and casting of
billets. The scrap is readily available subject to rapid price fluctuations
generally related to the price or supply of virgin copper. A small portion of
the scrap is supplied by the Company's metal recycling yards. Howell's
facilities include melting, casting, piercing, extruding, drawing, finishing
and other departments. Capacity is approximately 50,000,000 pounds per year.
Demand for copper tube is dependent mainly on the level of new residential
construction and renovation.
No single customer purchases ten percent or more of the manufacturing
segment's production. The nature of certain stock products sold in the
manufacturing segment are, with the exception of the steel fabrication and
joist jobs, not characteristic of a long lead time order cycle. Orders for
other stock products are generally filled promptly from inventory or near term
production. As a result the Company does not believe backlog levels are a
significant factor in evaluating most operations. Backlog in the CMC Steel
Group at 1996 year-end was approximately $195,779,000. Backlog at 1995
year-end was approximately $229,000,000.
THE RECYCLING SEGMENT
The recycling segment is engaged in processing secondary (scrap)
metals for further recycling into new metal products. This segment consists of
the Company's 31 metal recycling plants (excluding six such facilities operated
by the CMC Steel Group as a part of the manufacturing segment) and Commercial
Metals Railroad Salvage Company which dismantles and recovers steel rail, track
components and other materials from obsolete or abandoned railroads.
The Company's metal recycling plants purchase ferrous and nonferrous
secondary or scrap metals, processed and unprocessed, in a variety of forms.
Sources of metals 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. Numerous small secondary metals
collection firms are also, in the aggregate, major suppliers.
These plants processed and shipped approximately 1,397,000 tons of
scrap metal during 1996. Ferrous metals comprised the largest tonnage of
metals recycled at approximately 1,199,000 tons approximately the same as the
prior year, followed by approximately 199,000 tons compared to 208,000 in 1995,
of non-ferrous metals, primarily aluminum, copper and stainless steel. The
Company also purchased and sold an additional 182,000 tons of metals processed
by other metal recycling facilities. With the exception of precious metals,
practically all metals capable of being recycled are processed by these plants.
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The metal recycling plants generally consist of an office and
warehouse building equipped with specialized equipment for processing both
ferrous and nonferrous metal. Most of the larger plants are equipped with
scales, shears, baling presses, briquetting machines, conveyors and magnetic
separators. Two locations have extensive equipment for mechanically processing
large quantities of insulated wire to segregate metallic content. All ferrous
processing centers are equipped with either presses, shredders or hydraulic
shears, locomotive and crawler cranes and railway tracks to facilitate shipping
and receiving. The segment operates five large shredding machines capable of
pulverizing obsolete automobiles or other ferrous metal scrap. Two additional
shredders are operated by the manufacturing segment. A typical recycling plant
includes several acres of land used for receiving, sorting, processing and
storage of metals. Several recycling plants devote a small portion of their
site or a nearby location for display and sales of metal products considered
reusable for their original purpose.
Recycled metals are sold 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. Sales of material processed through the
Company's recycling plants are coordinated through the recycling segment's
office in Dallas. Export sales are negotiated through the Company's network of
foreign offices as well as the Dallas office.
Railroad materials, primarily steel rail, are obtained by Commercial
Metals Railroad Salvage Company from dismantling work it performs on abandoned
rail lines acquired from railroads. Business is largely dependent on the pace
of railroad abandonments. Used rail may be sold for relaying as usable track,
rerolling, primarily by the Steel Group's SMI Arkansas operation, or melting by
steel mills.
No single source of material or customer of the recycling segment
represents a material part of purchases or revenues. The 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 often have the capability to utilize
primary or "virgin" ingot processed by mining companies interchangeably with
secondary metals. The prices for nonferrous scrap metals are normally closely
related to but generally less than, the prices of the primary or "virgin" metal
producers. Ferrous scrap is the primary raw material for electric arc furnaces
such as those operated by the Company's steel minimills. Relatively high
prices and the need for low residual elements in the melting process have
recently caused some minimills to supplement purchases of scrap metal with
direct reduced iron and pig iron for certain product lines.
THE MARKETING AND TRADING SEGMENT
The marketing and trading segment buys and sells primary and secondary
metals and other commodities and products through a network of trading offices
located around the globe. Steel, nonferrous metals, specialty metals,
chemicals, industrial minerals, ores, concentrates, ferroalloys, and other
basic industrial materials are purchased primarily from producers in domestic
and foreign markets. On occasion these materials are purchased from trading
companies or industrial consumers with surplus supplies. Long-term contracts,
spot market purchases and trading or barter transactions are all utilized to
obtain materials. A large portion of these transactions involve fabricated
semi-finished or finished product.
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Customers for these materials include industrial concerns such as the
steel, nonferrous metals, metal fabrication, chemical, refractory and
transportation sectors. Sales are generally made directly to consumers through
and with coordination of offices in Dallas; New York; Englewood Cliffs, New
Jersey; Los Angeles; Hurstville near Sydney, Australia; Singapore; Zug,
Switzerland; Hong Kong, Tokyo, and Surrey, England. The Company also
maintains representative offices in Bangkok, Sao Paulo, Seoul, and Beijing, as
well as agents in other significant international markets. These offices form
a network for the exchange of information on the materials marketed by the
Company as well as servicing sources of supply and purchasers. In most
transactions the Company acts as principal and often as a marketing
representative. The Company utilizes agents when appropriate and occasionally
acts as broker. The Company participates in transactions in practically all
major markets of the world where trade by American-owned companies is
permitted.
This segment focuses on the marketing of physical products as
contrasted to traders of commodity futures contracts who frequently do not take
delivery of the commodity. Sophisticated global communications and the
development of easily accessible, although not always accurate, quoted market
prices for many commodity related products has resulted in the Company
emphasizing creative service functions for both sellers and buyers. Actual
physical market pricing and trend information, as contrasted with sometimes
more speculative metal exchange 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 are examples of the services offered. The Company
attempts to limit its exposure to price fluctuations by offsetting purchases
with concurrent sales and entering into foreign exchange contracts as hedges of
trade receivables and payables denominated in foreign currencies. The Company
does not, as a matter of policy, speculate on changes in the commodity markets
and hedges only firm commitments not anticipated transactions. During the past
year over 1.4 million tons of steel products were sold by the marketing and
trading segment. The Australian operations just-in-time steel warehousing
business for steel imports continued to expand during 1996.
COMPETITION
The Company's steel manufacturing, steel fabricating, and copper tube
manufacturing businesses compete with regional, national and foreign
manufacturers and fabricators of steel and copper. Price, quality and service
are the primary methods of competition. The Company does not produce a
significant percentage of the total national output of these products compared
with its competitors but is considered a substantial supplier in the markets
near its facilities. The large job structural steel capacity and expertise
obtained in the Owen acquisition should enable the Company to compete
throughout the United States for large structural steel projects.
The Company believes the recycling segment is among the largest
entities recycling nonferrous secondary metals and is also a major regional
processor of ferrous scrap. The secondary metals business is subject to
cyclical fluctuations depending upon the availability and price of unprocessed
scrap metal and the demand in steel and nonferrous metals consuming industries.
All phases of the Company's marketing and trading business are highly
competitive. Many of the marketing and trading segment's products are standard
commodity items. The principal elements of competition are price, quality,
reliability, financial strength, and additional services. This segment
competes
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with other domestic and foreign trading companies, some of which are larger and
may have access to greater financial resources or be able to pursue business
without regard for the laws and regulations governing the conduct of
corporations subject to the jurisdiction of the United States. The Company
also competes with industrial consumers who purchase directly from suppliers
and importers and manufacturers of semi-finished ferrous and nonferrous
products.
ENVIRONMENTAL MATTERS
Compliance with environmental laws and regulations is a significant
factor in the Company's business. The Company is subject to local, state,
federal and supranational environmental laws and regulations concerning, among
other matters, solid waste disposal, air emissions, waste and stormwater
effluent and disposal and employee health. The Company's manufacturing and
recycling operations produce significant amounts of by-products, some of which
are handled as industrial waste or hazardous waste. For example, the electric
arc furnace ("EAF") dust generated by the Company's minimills is classified as
a hazardous waste by the Environmental Protection Agency (EPA) because of lead,
cadmium and chromium content and requires special handling and recycling for
recovery of zinc or disposal. Additionally the Company's scrap metal recycling
facilities operate seven shredders for which the primary feed materials are
automobile hulks and obsolete household appliances. Approximately twenty
percent (20%) of the weight of an automobile hulk consists of material
(shredder fluff) which remains after the segregation of ferrous and saleable
non-ferrous metals. Federal environmental regulations require shredder fluff
to pass a toxic leaching test to avoid classification as a hazardous waste.
The Company endeavors to have hazardous contaminants removed from the feed
material prior to shredding and as a result the Company believes the shredder
fluff generated is properly not considered a hazardous waste. Should the laws,
regulations or testing methods change with regard to EAF dust processing or
shredder fluff disposal, the Company may incur additional significant
expenditures. To date, the Company has not experienced difficulty in
contracting for recycling of EAF dust or disposing of shredder fluff in
municipal or private landfills.
The Company may also be required from time to time to clean up or take
certain remediation action with regard to sites formerly used in connection
with its operations. Furthermore, the Company may be required to pay for a
portion of the costs of clean up or remediation at sites the Company never
owned or on which it never operated if it is found to have arranged for
treatment or disposal of hazardous substances on the sites. (See Item 3. Legal
Proceedings). The Company has been named a potentially responsible party (PRP)
at several Superfund sites because the EPA contends that the Company and other
PRP scrap dealers are liable for the cleanup of those sites solely as a result
of having sold scrap metal to unrelated manufacturers for recycling as a raw
material in the manufacture of new products. The Company's position is that an
arms length sale of valuable scrap metal for use as a raw material in a
manufacturing process over which the Company exercises no control cannot,
contrary to EPA's assertion, constitute "an arrangement for disposal or
treatment of hazardous substances" within the meaning of federal law. If the
EPA's position is consistently upheld by the courts and no clarification or
amendment of the law is provided by legislative bodies, the Company believes
the possible liability arising from the sale of secondary metals would reduce
recycling rates for metals and other recyclable materials in general. In
particular, the Company believes that sellers of secondary or recycled metals
could be at material disadvantage compared to sellers of "virgin" ingot from
mining operations because the EPA's position apparently excludes suppliers of
virgin metals from liability for sales of those materials to the same
manufacturers for use, often interchangeably, in the same
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manufacturing process. The Company believes this result is contrary to public
policy objectives and federal and state legislation encouraging recycling and
promoting the use of recycled materials.
New federal, state and local laws, regulations and changing
interpretations, together with uncertainty regarding adequate control levels,
testing and sampling procedures, new pollution control technology and cost
benefit analysis based on market conditions are all factors which impact the
Company's future expenditures to comply with environmental requirements. It is
not possible to predict the total amount of capital expenditures or increases
in operating costs or other expenses or whether such costs can be passed on to
customers through product price increases. During 1996, the Company incurred
environmental costs including disposal, permit, license fees, tests, studies,
remediation, consultant fees and environmental personnel expense of
approximately $10.4 million. The Company believes that it is in material
compliance with currently applicable environmental laws and regulations and
does not anticipate material capital expenditures for new environmental control
facilities during 1997.
EMPLOYEES
As of October, 1996, the Company had approximately 6,700 employees.
Approximately 5,360 were employed by the manufacturing segment, 1,030 by the
recycling segment, 250 by the marketing and trading segment, 35 in general
corporate management and administration with 26 employees providing service
functions for divisions and subsidiaries. Production employees at one metals
recycling plant are represented by a union for collective bargaining. The
Company believes that its labor relations are generally good.
ITEM 2. PROPERTIES
The SMI Texas steel minimill is located on approximately 571 acres of
land owned by the Company. Facilities including buildings occupying
approximately 688,000 square feet, are used for manufacturing, storage, office
and related uses. SMI Alabama's steel mill in Birmingham is located on
approximately 35 acres with buildings occupying approximately 435,000 square
feet used for manufacturing, storage, office and related use. The SMI South
Carolina mill in Cayce, South Carolina is located on approximately 112 acres,
all owned, with buildings occupying approximately 350,000 square feet. The SMI
Arkansas facility at Magnolia is located on approximately 104 acres with
buildings occupying approximately 136,000 square feet. Approximately 30 acres
of the Alabama mill property and all Arkansas mill property is leased in
conjunction with revenue bond financing and may be purchased by the Company at
the termination of the leases for a nominal sum. The steel fabricating
operations including the fabrication plants, fence post and joist operations
own approximately 750 acres of land and lease approximately 50 acres of land at
various locations in Texas, Louisiana, Arkansas, Utah, South Carolina, Florida,
Virginia, Georgia and North Carolina. Howell Metal owns approximately 21 acres
of land with buildings occupying about 228,000 square feet in New Market,
Virginia.
The Company's recycling plants occupy in the aggregate approximately
355 acres owned by the Company located at Austin, Beaumont, Dallas, Galveston,
Houston, Lubbock, Odessa, Victoria and Vinton, all in Texas; as well as the
Jacksonville, Lake City, Orlando, and Tampa, Florida; Chattanooga, Tennessee;
Springfield, Missouri; and Burlington, North Carolina plants. It leases the
real estate at Clute, Corpus Christi, Edinburg, Laredo and Midland, Texas;
Ocala, Port Sutton (Tampa) and Casselberry, Florida; Shreveport, Louisiana, and
East Ridge, Tennessee. The smaller of two locations at Beaumont and Victoria,
Texas, are leased. The Fort Worth recycling plant is partially owned and
partially leased. Several small
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feeder yard locations are leased.
The corporate headquarters, all domestic marketing and trading offices
and all foreign offices occupy leased premises.
The leases on the leased properties described above will expire on
various dates within the next ten years. Several of the leases have renewal
options and the Company has had little difficulty in renewing such leases as
they expire. The minimum annual rental obligation of the Company for real
estate operating leases in effect at August 31, 1996, to be paid during fiscal
1997 is approximately $3,380,000. The Company also leases a portion of the
equipment used in its plants. The minimum annual rental obligation of the
Company for equipment operating leases in effect at August 31, 1996, to be paid
during fiscal 1997, is approximately $3,275,000.
ITEM 3. LEGAL PROCEEDINGS
As of August 31, 1996, the Company or its affiliates has received
notices from the United States Environmental Protection Agency (EPA) or state
agency with similar responsibility that the Company and numerous other parties
are considered potentially responsible parties (a PRP) and may be obligated
under the Comprehensive Environmental Response Compensation and Liability Act
of 1980 (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 thirteen locations. The Company is
contesting or intends to contest its designation as a PRP with regard to
several sites, while at other sites the Company is participating with other
named PRPs in agreements or negotiations expected to result in agreements to
remediate the sites. The locations, none of which involve real estate ever
owned or on which operations were conducted by the Company, are commonly
referred to by the EPA or state agency as the Peak Oil Site (Tampa, FL), the
Metcoa Site (Pulaski, PA), the NL Industries/Taracorp Site (Granite City, IL),
the Sapp Battery Site (Cottondale, Florida), the Interstate Lead Company
("ILCO") Site (Leeds, Alabama), the Poly-Cycle Industries Site (Techula,
Texas), the Taylor Road Site (Tampa, Florida), the Jensen Drive Site (Houston,
TX), the Houston Lead Site (Houston, TX), the SoGreen/Parramore Site (Tifton,
GA), the Stoller Site (Jericho, SC), the RSR Corporation Site (Dallas, TX),
and the Sandoval Zinc Company Site (Marion County, IL). The Company has
periodically received information requests with regard to other sites which are
apparently under consideration by the EPA as existing or potential CERCLA
clean-up sites. It is not known if any demand will ultimately be made against
the Company as a result of those inquiries.
The EPA has notified the Company and other alleged PRPs that under
Sec. 106 of CERCLA it could be subject to a maximum penalty fine of $25,000 per
day and the imposition of treble damages if they refused to clean up the Peak
Oil, Metcoa, Sapp Battery, NL/Taracorp, SoGreen/Parramore and Stoller sites as
ordered by the EPA. The Company is presently participating in a PRP
organization at the Peak Oil, Sapp Battery, SoGreen/Parramore and Stoller
sites, although reserving the right to contest its PRP status, and does not
believe that the EPA will pursue any fine against it so long as it continues to
participate in the PRP groups. The Company and approximately 200 other PRPs
recently agreed to a consent decree which, pending court approval, will provide
for remediation of the Metcoa Site with no penalty and estimated cost to the
Company of approximately $115,000. The Company is contesting its designation
as a PRP at NL/Taracorp Site and believes it has adequate defenses to any
attempt by the EPA to impose fines in those matters.
In 1993, the Federal Energy Regulatory Commission entered an Order
(the "FERC Order") affirming in part and reversing in part a 1989 decision and
proposed order of a administrative law judge affirming in
9
11
part, reversing in part and remanding for further consideration a Remedial
order issued in 1986 by the Department of Energy to RFB Petroleum, Inc. (RFB)
and CMC Oil Company (CMC Oil), a wholly-owned subsidiary of Commercial Metals
Company. The FERC Order finds CMC Oil liable for alleged overcharges
constituting violations of crude oil reseller regulations arising from the
purchase and sale of crude oil in alleged joint ventures between CMC Oil and
RFB totaling approximately $1,330,000 plus interest from their occurrence
(December, 1977, to January, 1979) as calculated under the Department of
Energy's interest rate policy. Utilizing that interest calculation, interest
accrued through August, 1996, is estimated to be approximately $6,000,000. CMC
Oil filed a complaint in United States District Court seeking judicial review
to have enforcement of the FERC Order enjoined and the government filed a
counterclaim seeking enforcement. In November, 1994, the District Court
entered a Final Order for restitution by CMC Oil of $1,330,399 plus interest to
date of judgment as provided in the Order and post judgment interest thereafter
at 6.48% per annum. CMC Oil appealed the judgment to the United States Court
of Appeals for the Federal Circuit. In November, 1995, the Court of Appeals
entered Judgment affirming the District Court's decision. That Judgment is now
final and non-appealable. CMC Oil, which has been inactive since 1985,
accrued the liability for the judgment on its books during 1995. CMC Oil does
not have sufficient assets to satisfy the judgment. No claim has been asserted
against Commercial Metals Company in connection with the CMC Oil litigation.
Commercial Metals Company will vigorously contest liability should any such
claim be asserted.
On April 30, 1996, the Company and its subsidiary SMI - Owen Steel
Company, Inc. (SMI-Owen) filed a lawsuit seeking to recover approximately $2.4
million from an escrow fund created with a portion of the purchase price in
connection with the Company's November, 1994, acquisition of Owen Steel
Company, Inc. and affiliates (Owen Steel). The lawsuit seeks recovery of part
of a payment made by SMI-Owen to settle a claim in connection with a steel
supply and erection contract entered into prior to the acquisition by the
predecessor of SMI-Owen. The Company contends the claim was based on events
which occurred prior to the acquisition, and the Company is entitled to
reimbursement from the former Owen Steel stockholders for the claim settlement
under the terms of the escrow agreement. The Complaint alleges breach of
contract, breach of the covenant of good faith and fair dealing and seeks a
declaratory judgment and damages. Dorothy G. Owen, a director of the Company
and former stockholder of Owen Steel is one of four designated representatives
of former Owen Steel stockholders. The four representatives have filed an
Answer and Counterclaim denying the material allegations of the Company,
alleging various defenses and setting forth counterclaims for specific
performance, breach of contract, breach of fiduciary duty, breach of the
covenant of good faith and fair dealing and seeking a declaratory judgment and
unspecified actual and punitive damages. The Company has notified the
representatives of the former Owen Steel stockholders and the escrow agent of
additional claims against the escrow fund totaling approximately $3 million.
Based on responses received to date, the Company believes the representatives
of the former Owen Steel stockholders intend to dispute liability as to most or
all of these claims.
While the Company is unable to estimate the ultimate dollar amount of
exposure to loss in connection with the above-described 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, it is the opinion of the Company's management 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 the business or the consolidated financial position of the Company.
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12
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
The table below summarizes the high and low sales prices reported on
the New York Stock Exchange for the Company's common stock and cash dividends
paid for the past two fiscal years.
Price Range
1996 of Common Stock
Fiscal -------------------- Cash
Quarter High Low Dividends
- -------------------------------------------------------------------------------
1ST $ 28 5/8 $ 23 1/2 12c.
2ND 27 1/4 23 12c.
3RD 32 3/8 26 1/2 12c.
4TH 33 1/4 29 7/8 12c.
Price Range
1995 of Common Stock
Fiscal -------------------- Cash
Quarter High Low Dividends
- --------------------------------------------------------------------------------
1ST $ 29 1/8 $ 24 3/8 12c.
2ND 27 23 3/8 12c.
3RD 27 3/4 24 1/2 12c.
4TH 29 26 1/4 12c.
Since August 3, 1982 the Company's common stock has been listed and
traded on the New York Stock Exchange. Prior to that date and since 1959 the
Company's common stock was traded on the American Stock Exchange. The number
of shareholders of record of the registrant's common stock at November 15,
1996, was approximately 2,542.
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13
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth a summary of selected consolidated
financial information of the Company for the periods indicated:
FOR THE YEARS ENDED AUGUST 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Sales 2,310,213 2,107,426 1,657,810 1,558,349 1,156,203
Net Earnings 46,024 38,208 26,170 21,661 12,510
Net Income Per Share 3.01 2.52 1.75 1.46 .87
Total Assets 766,756 748,103 604,877 541,961 515,738
Stockholders' Equity 335,133 303,164 242,773 235,421 212,104
Long-term Debt 146,506 158,004 72,061 76,737 87,221
Cash Dividend Per Share .48 .48 .46 .39 .39
12
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL
STATEMENTS
CONSOLIDATED RESULTS
(in millions except share data)
Year ended August 31,
- ---------------------------------------------------------------
1996 1995 1994
------------------------------------
Revenues $2,322 $ 2,117 $ 1,666
Net earnings 46.0 38.2 26.2
Cash flow 89.9 76.6 61.7
International sales 892 746 764
As % of total 39% 35% 46%
LIFO effect on net earnings 2.9 (8.4) (6.2)
Per share .19 (.56) (.42)
LIFO reserve 29.8 34.3 21.3
% of inventory on LIFO 79% 86% 78%
Significant events affecting the Company this year:
o Record revenues, earnings, earnings per share and cash flow.
o Steel Group reports record earnings and record tons melted and shipped.
o Secondary Metals has solid year completing the best three year period of
operating profits.
o Marketing and trading operating profit up despite intense competition and
global oversupply.
SEGMENTS
Revenues and operating profit by business segment are shown in the following
table:
(in millions) Year ended August 31,
- --------------------------------------------------------------
1996 1995 1994
----------------------------------
Revenues:
Manufacturing $1,018 $ 913 $ 598
Recycling 464 511 342
Marketing and Trading 890 749 761
Operating profit:
Manufacturing 61.8 54.4 37.7
Recycling 12.1 11.3 5.0
Marketing and Trading 17.7 17.6 15.2
Manufacturing
The Manufacturing segment includes the CMC Steel Group and Howell Metal
Company.
Despite generally weaker pricing, record tonnage levels propelled the
Manufacturing segment to record revenues and operating profit.
Steel Group revenues were $949 million, an increase of 13% over last year.
Operating profit rose 15% to $57.4 million on the strength of an 11% increase
in tonnage shipped. Mill prices declined 3% while average prices for fabricated
material increased modestly.
Steel mill tonnage shipped was 13% higher at a record 1.73 million tons.
Record steel mill tons were melted while rolled tons were comparable to last
year. Despite a fire at SMI-Texas and a weak performance at SMI-South Carolina,
Mill operating profits were in line with last year.
In October 1995 a fire put SMI-Texas' Melt Shop offline for 166 hours.
Notwithstanding operating under less efficient conditions for the remainder of
the year, the Mill had its second best year ever. Included in other revenues is
$1.8 million from an insurance recovery for property damage. Settlement of
business interruption claims did not occur until after fiscal year end.
SMI-Alabama shipped record tonnage and produced record profits. SMI-Arkansas
also achieved a new higher profitability level. SMI-South Carolina cut
inventories in half and restructured its management team, but suffered an
operating loss while our capital investment and employee efficiency programs
were being implemented.
Steel fabrication profits increased 40% as tonnage was up 15% to 650
thousand tons. Both the Steel Group East and West fabrication branches were
profitable.
Operating profit in the Copper Tube Division was down only slightly from
last year. Attractive interest rates continue to drive a strong housing market.
Pricing was unstable as the market was still trying to shake the effect of the
Sumitomo copper scandal.
Recycling
With a continuing strong ferrous market and receding LIFO reserves due to
falling prices and inventory levels, the Recycling segment completed a good
year. Shipments amounted to 1.2 million tons of ferrous scrap and 208 thousand
tons of nonferrous scrap, both comparable with the prior year.
Ferrous scrap has had stable pricing for the last two fiscal years.
Nonferrous scrap prices, particularly copper, have been more volatile. The
Sumitomo copper scandal resulted in a dramatic decline in the price of copper.
Aluminum declined on account of a global buildup in inventories. Rapid
inventory turnover protected the Secondary Metals Recycling Division from the
full effect of falling prices.
Marketing and Trading
Facing difficult global markets, the Marketing and Trading segment still
increased revenues 19% and reported operating profits slightly above last year.
The markets for steel, aluminum and nonferrous products turned down sharply
during the first two quarters. Customers were left with high inventories and
many countries in which the Company operates experienced slower growth. The
highlights for the segment were trading in the Americas and marketing and
distribution in Australia. Imports of semi-fabricated metals, minerals,
chemicals and new steel products sustained earnings. Just-in-Time delivery and
other warehousing programs in Australia provided solid results. The segment was
adversely impacted in the United Kingdom where a sharp market downturn caused
renegotiated or canceled contracts.
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15
OUTLOOK
The positive operating outlook for fiscal 1997 is based on a continuation of
internal improvements in all segments of CMC, although the inventory correction
in steel and metals continues in Europe and the Pacific Rim.
In the United States construction markets are good, capital spending has
softened but remains at a healthy level, and industrial output is steady.
Moderate economic expansion should occur in most of the world, and there are
signs of recovery in Japan and some further improvement in Mexico. European
economies continue to struggle. Another challenge is that it appears new steel
production capacity in Asia has been brought on stream too rapidly.
Over three-quarters of the Company's business is steel related; therefore,
steel markets have a major effect on results, especially those in the U.S. On
balance the Company's key steel markets should be relatively firm. Prices of
nonferrous metals always are volatile and are expected to remain under
pressure. A key will be steel and nonferrous metal consumption in the Pacific
Rim. Ferrous scrap volume and prices should retain their underlying strength on
account of the new electric furnaces requiring scrap. Domestic markets should
continue to be stronger than those abroad.
The Steel Group is undertaking a three year computer technology migration
that will touch every aspect of its business. At its conclusion, the Steel
Group will have state of the art information systems. During fiscal 1997 an
estimated $6.4 million will be incurred as the initial sites are brought
onstream.
1995 COMPARED TO 1994
SEGMENTS
Manufacturing
On November 15, 1994, the Company completed its acquisition of Owen Steel
Company, Inc. and related entities (SMI-Owen) headquartered in Columbia,
SouthCarolina. The purchase price was approximately $50 million (payable
one-half each in cash and common stock), subject to adjustments based upon the
net worth of SMI-Owen and other factors. The Company also retired $32 million
of Owen Steel Company, Inc. debt at closing. The acquisition was accounted for
under the purchase method of accounting.
Propelled by nonresidential private construction and public construction,
particularly highway work, the Manufacturing segment achieved record revenues
and record operating profit.
Steel Group revenues were $840 million, an increase of 54% over last year.
Operating profits increased 47% to $49.9 million with a 29% increase in tonnage
shipped and a 19% increase in average prices. These record results were
realized in spite of startup costs and initial losses at SMI-Owen and a pre-tax
LIFO charge of $4.8 million.
The four mills produced record shipments of 1.5 million tons and operating
profits increased 43%. SMI-Texas had a record year and SMI-Alabama achieved
excellent performance from its new melt shop. SMI-Arkansas also had a good
year. SMI-South Carolina incurred a slight loss before allocation of
intercompany interest.
The steel fabrication companies shipped 564,000 tons representing a 62%
increase. Operating profits rose not-withstanding a combined first year loss at
the SMI-Owen fabricating plants.
Copper Tube Division operating profit increased 18% even though business was
impacted by weaker single family housing construction and some industry
overproduction of copper water tube. Shipments were up 9% approaching 50
million pounds.
Recycling
The Recycling segment (excludes six recycling plants in the CMCSteel Group),
buoyed by a resounding second quarter, reported a 127% increase in operating
profit compared to last year. At mid-year many product prices were at their
highest levels since the robust period of the late 1980's. The second half of
the year saw price declines but demand for steel scrap, copper, brass and
aluminum remained strong with the usual volatility. The overall rise in prices
resulted in a pre-tax LIFO charge of $3.8 million.
Ferrous shipments were about 1.2 million tons, an increase of 10% over the
previous year. Nonferrous tonnage processed and shipped was 208,000 tons, up
32%. Good export demand augmented the domestic markets.
In August 1995, the Company acquired the operating assets of a small
secondary metals operation in South Texas with two locations in Corpus Christi
and one in Laredo. The
14
16
1995 COMPARED TO 1994 (CONTINUED):
Corpus Christi equipment was combined with the Company's location in Corpus
Christi and the Company continued operations at the Laredo location. The
acquisition was not significant to the consolidated Company.
Marketing and Trading
Operating profit (excluding financial services income) increased 8% on constant
revenue with the prior year. Demand for nonferrous semis, primary metals,
secondary metals and industrial raw materials remained strong, offsetting lower
steel sales volume mainly due to the continued weak Chinese import market.
Inter-Asia trading was active including exports from China. The weak U.S.
dollar and strengthening local demand made sourcing in parts of Europe
difficult and caused an increase in local general and administrative expenses.
The segment had a pre-tax LIFO charge of $3.0 million. The operations of
Enterprise Metal Corporation were consolidated into Commonwealth Metal
Corporation.
Financial Services
During 1995 the Financial Services segment was merged with the Marketing and
Trading segment in recognition of its greater emphasis on supporting internal
Treasury activities instead of third party lending.
Corporate
Interest expense increased from$9.3 million in 1994 to $15.2 million in 1995.
The principal cause was increased borrowing related to the financing of the
Owen Steel Company acquisition.
As more fully discussed under Contingencies, CMCOil Company, a subsidiary of
the Company, incurred a litigation accrual in connection with alleged
overcharges for crude oil sales dating back to the 1970's.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations (before changes in operating assets and liabilities)
for fiscal 1996 was an all time high for the Company. Record Company earnings
and depreciation expense generated the cash flow.
Cash flow from operating activities was used to fund increases in accounts
receivable primarily in the Marketing and Trading segment. Cash flow was
provided by a decrease in inventories in all segments. Strong cash flow at year
end enabled the Company to retire all short-term borrowings.
The Company settled contingencies related to the net worth purchase price
calculation of Owen Steel Company, Inc. during fiscal 1996. The net worth
adjustment resulted in the Company paying the former shareholders $3.2 million,
half in cash and half in the Company's common stock.
Net working capital was $275 million as of August 31,1996 compared to $266
million last year. The current ratio was maintained at 2.0.
The Company's sources of short-term funds include a commercial paper program
of $40 million. The Company's commercial paper is rated in the second highest
category by both Standard & Poor's Corporation (A-2) and Fitch Investors
Service, Inc. (F-2). Formal bank credit lines equal to 100% of the amount of
all commercial paper outstanding were renegotiated during the year. The new
revolving credit agreement is less restrictive than the former covenants.
The Company's $100 million long-term notes issued in July 1995 are rated
investment grade by Standard & Poor's Corporation and Fitch Investors Service,
Inc. (BBB+) and by Moody's Investors Service (Baa2). As part of that issue, the
Company has a shelf registration on file with the Securities and Exchange
Commission for an additional $50 million of notes.
The Company has numerous informal credit facilities available from domestic
and international banks. These credit facilities are priced at banker's
acceptance rates or on a cost of funds basis.
Management believes it has adequate capital resources available from
internally generated funds, treasury shares and from short-term and long-term
capital markets to meet anticipated working capital needs, planned capital
expenditures, dividend payments to shareholders and to take advantage of new
opportunities requiring capital.
Capital investments in property, plant and equipment were $48 million in
1996 compared to $39 million the prior year. Capital spending for fiscal 1997
is projected at $70 million of which $48 million will be invested in steel
manufacturing, $1 million in copper tube, $15 million in recycling, and $6
million in marketing and trading. These expenditures are expected to be funded
from internally generated funds.
Total capitalization was $503 million at the end of fiscal 1996. The ratio
of long-term debt to capitalization was 29%, down from 33% last year.
Stockholders' equity was $335 million or $22.20 per share. The Board of
Directors has authorized the repurchase of the Company's common stock and at
15
17
August 31,1996, 710,074 shares remain authorized. During the fiscal year, the
Company repurchased 557,600 shares of Company stock at an average cost of
$24.15 per share. On August 31,1996, 1,037,000 treasury shares were held by the
Company. There were 15.1 million shares outstanding at year end.
CONTINGENCIES
In the ordinary course of conducting its business the Company becomes involved
in litigation, administrative proceedings and governmental investigations,
including environmental matters.
The Company's origin and one of its core businesses for over three quarters
of a century has been metals recycling. In the present era of conservation of
natural resources and ecological concerns, the Company has a continuing
commitment to sound ecological and business conduct. Certain governmental
regulations regarding environmental concerns, however well intentioned, are
presently at odds with goals of greater recycling and expose the Company and
the industry to potentially significant risks. Such exposures are causing the
industry to shrink, leaving fewer but more well financed operators as survivors
to face the challenge.
The Company believes that materials that are recycled are commodities that
are neither discarded nor disposed. They are diverted by recyclers 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.
Environmental agencies at various federal and state levels would 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.
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 13 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
investigation, 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 PRP designation. 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 which, from
time to time, may have a material impact on earnings and cash flows for a
particular quarter. 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. 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 business or
consolidated financial position of the Company.
In fiscal 1996, the Company incurred environmental expense of $10.4 million.
This included the cost to staff environmental personnel at various divisions,
permit and license fees, accruals and payments for studies, tests, assessment,
remediation, consultant fees, baghouse dust removal and various other expenses.
The Company estimates that approximately $1.8 million of its capital
expenditures for fiscal 1996 related to costs associated with environmental
compliance. The nature and timing of these environmental costs is such that it
is not practical for the Company to estimate their magnitude in future periods.
At August 31,1996 $8.4 million remained in accrued expenses for environmental
liabilities.
The November 22,1994 Final Order of the United States District Court for the
Southern District of Texas against CMC Oil Company, a subsidiary of the
Company, is now a final, non-appealable order. The judgment and interest have
been accrued in the financial statements of CMC Oil Company. CMC Oil (the
subsidiary) does not have sufficient assets to satisfy the judgment. No claim
has been asserted against Commercial Metals Company (the parent) in connection
with this litigation. Commercial Metals Company will vigorously contest
liability should any such claim be asserted.
DIVIDENDS
Quarterly cash dividends have been paid in each of the past 32 consecutive
years. The annual dividend in 1996 was 48 cents a share paid at the rate of 12
cents each quarter. On September 16,1996 the Board of Directors increased the
Company's regular quarterly cash dividend 8% to 13 cents per share.
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18
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTAL DATA
(in thousands, except share data)
Year ended August 31,
- -----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------
Revenues:
Net sales $2,310,213 $2,107,426 $1,657,810
Other revenues 12,150 9,353 8,424
- -----------------------------------------------------------------------------------------
2,322,363 2,116,779 1,666,234
Costs and expenses:
Cost of goods sold 2,068,534 1,892,540 1,504,566
Selling, general and administrative expenses 151,171 133,058 103,547
Interest expense 15,822 15,246 9,271
Employees' pension and profit sharing plans 13,915 11,277 7,943
Litigation accrual -- 6,650 --
- -----------------------------------------------------------------------------------------
2,249,442 2,058,771 1,625,327
- -----------------------------------------------------------------------------------------
Earnings before income taxes 72,921 58,008 40,907
Income taxes 26,897 19,800 14,737
- -----------------------------------------------------------------------------------------
Net earnings $ 46,024 $ 38,208 $ 26,170
=========================================================================================
Net earnings per share $ 3.01 $ 2.52 $ 1.75
=========================================================================================
See notes to consolidated financial statements.
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19
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
August 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995
-------------------------
ASSETS
Current assets:
Cash $ 24,260 $ 21,018
Accounts receivable (less allowance for collection losses of $5,501 and $4,743) 294,611 268,657
Inventories 186,201 208,114
Other 34,411 36,316
- --------------------------------------------------------------------------------------------------------------
Total current assets 539,483 534,105
Other assets 4,563 4,259
Property, plant and equipment:
Land 17,272 16,629
Buildings 45,902 40,178
Equipment 407,286 372,644
Leasehold improvements 19,761 16,972
Construction in process 16,748 10,282
- --------------------------------------------------------------------------------------------------------------
506,969 456,705
Less accumulated depreciation and amortization (284,259) (246,966)
- --------------------------------------------------------------------------------------------------------------
222,710 209,739
-------------------------
$ 766,756 $ 748,103
==============================================================================================================
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20
August 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ -- $ --
Notes payable -- --
Accounts payable 116,971 113,095
Other payables and accrued expenses 128,879 137,933
Income taxes payable 6,729 3,246
Current maturities of long-term debt 11,494 14,108
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 264,073 268,382
Deferred income taxes 21,044 18,553
Long-term debt 146,506 158,004
Commitments and contingencies
Stockholders' equity:
Capital stock:
Preferred stock -- --
Common stock, par value $5.00 per share: authorized 40,000,000 shares;
issued 16,132,583 shares; outstanding 15,095,964 and 15,369,592 shares 80,663 80,663
Additional paid-in capital 13,193 11,946
Retained earnings 262,772 223,994
- --------------------------------------------------------------------------------------------------------------
356,628 316,603
Less treasury stock 1,036,619 and 762,991 shares at cost (21,495) (13,439)
- --------------------------------------------------------------------------------------------------------------
335,133 303,164
--------------------------
$ 766,756 $ 748,103
==============================================================================================================
See notes to consolidated financial statements
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21
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
August 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 46,024 $ 38,208 $ 26,170
Adjustments to earnings not requiring cash:
Depreciation and amortization 41,599 38,134 30,143
Provision for losses on receivables 2,535 1,084 1,258
Deferred income taxes (6) (524) 4,304
Other (258) (268) (209)
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Operations Before Changes in
Operating Assets and Liabilities 89,894 76,634 61,666
Changes in operating assets and liabilities net of effect of Owen
acquisition:
Decrease (increase) in accounts receivable (29,063) 6,652 (65,906)
Decrease (increase) in financial services loans and advances -- 19,560 16,208
Decrease (increase) in inventories 21,913 (39,804) 2,853
Decrease (increase) in other assets 1,601 (5,635) (9,014)
Increase (decrease) in accounts payable,
accrued expenses, and income taxes 2,253 15,472 4,998
- --------------------------------------------------------------------------------------------------------------
Net Cash Flows From Operating Activities 86,598 72,879 10,805
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Owen net of cash acquired (2,799) (24,769) --
Temporary investments -- 19,174 9,485
Purchases of property, plant and equipment (47,982) (39,311) (48,152)
Sales of property, plant and equipment 1,805 993 733
- --------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (48,976) (43,913) (37,934)
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper - net change -- (20,000) 20,000
Notes payable - net change -- (21,000) 21,000
Financial services notes payable (5,189) (45,723) 9,909
New long-term debt -- 160,000 --
Refinance long-term debt of acquisition -- (32,000) --
Payments on long-term debt (14,112) (64,801) (4,648)
Stock issued under stock option, purchase, and bonus plans 5,225 2,337 4,347
Tax benefits related to stock option plan 407 1,355 661
Treasury stock acquired (13,465) -- (17,120)
Dividends paid (7,246) (7,211) (6,705)
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (34,380) (27,043) 27,444
Increase in Cash and Cash Equivalents 3,242 1,923 315
Cash and Cash Equivalents at Beginning of Year 21,018 19,095 18,780
- --------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 24,260 $ 21,018 $ 19,095
==============================================================================================================
See notes to consolidated financial statements.
20
22
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common stock Treasury stock
------------------------- Additional ---------------------------
Number of paid-in Retained Number of
shares Amount capital earnings shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 1, 1993 12,100,064 $ 60,500 $ 3,919 $ 189,865 (1,039,451) $ (18,863)
Net earnings 26,170
Cash dividends - $.46 per share (6,705)
Stock split, four-for-three 4,032,519 20,163 (3,830) (16,333) (346,318) --
Treasury stock acquired (748,100) (17,120)
Stock issued under stock option, purchase
and bonus plans 269 276,293 4,077
Tax benefits related to stock option plan 661
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1994 16,132,583 80,663 1,019 192,997 (1,857,576) (31,906)
Net earnings 38,208
Cash dividends - $.48 per share (7,211)
Treasury stock acquired -- --
Treasury stock issued for
acquisition of Owen 8,710 932,301 16,345
Stock issued under stock option, purchase
and bonus plans 862 162,284 2,122
Tax benefits related to stock option plan 1,355
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1995 16,132,583 80,663 11,946 223,994 (762,991) (13,439)
Net earnings 46,024
Cash dividends - $.48 per share (7,246)
Treasury stock acquired (557,600) (13,465)
Additional treasury stock issued
for Owen acquisition 552 37,196 472
Stock issued under stock option, purchase
and bonus plans 288 246,776 4,937
Tax benefits related to stock option plan 407
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1996 16,132,583 $ 80,663 $ 13,193 $ 262,772 (1,036,619) $ (21,495)
===================================================================================================================================
See notes to consolidated financial statements
21
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, AUGUST 31, 1996
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
Southwest. Through its global marketing offices, the Company trades primary and
secondary metals and other commodities worldwide. As more fully discussed in
footnote 13, the Manufacturing segment is the most dominant in terms of capital
assets and operating profit.
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany transactions and balances are
eliminated in consolidation.
Revenue Recognition
Sales are recognized when title to inventory passes to the customer based on
customary industry practice.
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.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and is depreciated at annual
rates based upon the estimated useful lives of the assets using substantially
the straight-line method. 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.
Startup Costs
Startup costs associated with the acquisition and expansion of manufacturing
and recycling facilities are expensed as incurred.
Income Taxes
Deferred income taxes are provided for temporary differences between financial
and tax reporting. The principal differences are described in footnote 6.
Benefits from tax credits are reflected currently in earnings.
Foreign Currency
The functional and the reporting currency of a majority of the Company's
international subsidiaries is the United States dollar. There are no
significant translation adjustments to be reported as a separate component of
stockholders' equity.
Gain or loss on foreign currency exchange contracts designated as hedges is
deferred and recognized upon settlement of the related trade receivable or
payable.
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.
Cash Flows
For purposes of the statements of cash flows, the Company considers investments
that are short-term (generally with original maturities of three months or
less) and highly liquid to be cash equivalents. Temporary investments include
highly liquid instruments with longer original maturity dates.
Cash and cash equivalents and temporary investments at August 31 were as
follows (in thousands):
1996 1995 1994
- -----------------------------------------------------------------
Cash and cash equivalents $ 24,260 $ 21,018 $ 19,095
Temporary investments
(at lower of cost or market) -- -- 19,174
- -----------------------------------------------------------------
$ 24,260 $ 21,018 $ 38,269
=================================================================
The Company will adopt Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" during fiscal 1997. Presently there are no known asset
impairments and management, therefore, believes the statement should not have
any significant impact.
Reclassifications
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform to the classifications used in the current year.
2. ACQUISITION
After the November 15, 1994 acquisition of Owen Steel Company, Inc. and
affiliates (Owen), the Company settled contingencies related to the net worth
purchase price calculation and certain uncollected accounts receivable of Owen
during fiscal 1996. The net worth adjustment resulted in the company paying the
former shareholders $3.2 million, half in cash and half in the Company's #
common stock, as a purchase price adjustment. The Company assigned certain
uncollected accounts receivable to the former shareholders and was reimbursed
$1.1 million. Under the acquisition agreement, the Company has until November
15, 1996 to present certain claims against the portion of the purchase price
remaining in escrow which was approximately $4.4 million at August 31, 1996.
On April 30, 1996 the Company filed suit against the four representatives
(one of whom is a current director of the Company) of the former Owen
stockholders. The lawsuit alleges failure to release from escrow, funds for
claims totaling approximately $2.4 million paid subsequent to acquisition on
exposures that existed at the acquisition date. The stockholder representatives
have filed a response and counterclaims.
22
24
3. INVENTORIES
Before reduction of LIFO reserves of $29,844,000 and $34,255,000 at August 31,
1996 and 1995, respectively, inventories valued under the first-in, first-out
method approximated replacement cost.
At August 31, 1996 and 1995, 79% and 86%, respectively, of total inventories
were valued at LIFO. The remainder of inventories, valued at FIFO, consist
mainly of material dedicated to international business.
4. CREDIT ARRANGEMENTS
Periodically, the Company is active in the commercial paper market with a
program which permits borrowings up to $40,000,000. It is the Company's policy
to maintain formal bank credit lines equal to 100% of the amount of all
commercial paper outstanding.
The Company has numerous informal credit facilities available from domestic
and international banks. These credit facilities are priced at banker's
acceptance rates or on a cost of funds basis. No compensating balances or
commitment fees are required under these credit facilities.
On July 26, 1995 the Company sold $100 million of investment grade,
unsecured notes with a coupon rate of 7.20% in its initial entry into the
long-term public debt market. After netting the proceeds of an interest rate
hedge closed simultaneously with the pricing of the bonds, the effective
interest rate is 7.04%. The shelf registration filed for the $100 million of
notes also makes available an additional $50 million of securities which may be
issued in the form of medium term notes.
On August 15, 1996, the Company arranged a 5 year, $40 million unsecured
revolving credit loan facility with a group of four banks. The agreement
provides for borrowing in United States dollars indexed to the reference rate
or to the offshore dollar interbank market rate. A commitment fee of .1125% per
annum is payable on the credit line. No compensating balances are required.
Long-term debt and amounts due within one year as of August 31, 1996, are as
follows (in thousands):
Long-term Current
debt maturities Total
- ------------------------------------------------------------------
7.20% notes due 2005 $100,000 $ -- $100,000
8.49% notes due 2001 35,714 7,143 42,857
8.75% note due 1999 10,713 4,286 14,999
Other 79 65 144
- ------------------------------------------------------------------
$146,506 $ 11,494 $158,000
==================================================================
All interest is payable semiannually. The 7.20% notes are due in July 2005. The
8.49% notes provide for annual principal repayments beginning on December 1,
1995; all other notes are payable semiannually.
Certain of the note agreements include various covenants. The most
restrictive of these requires maintenance of consolidated net current assets of
$75,000,000 and net worth (as defined) of $150,000,000. At August 31, 1996,
approximately $177,000,000 of retained earnings was available for cash
dividends under these covenants.
The aggregate amounts of all long-term debt maturities for the five years
following August 31, 1996 are (in thousands): 1997 - $11,494; 1998 - $11,480;
1999 - $11,457; 2000 - $9,284; 2001 - $7,143.
Interest expense is comprised of the following (in thousands):
Year ended August 31,
- ---------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------
Long-term debt $ 11,903 $ 9,105 $ 5,521
Financial services debt -- 1,364 1,953
Commercial paper 360 516 321
Notes payable 3,559 4,261 1,476
- ---------------------------------------------------------------------
$ 15,822 $ 15,246 $ 9,271
=====================================================================
Interest of $320,000, $149,000 and $1,176,000 was capitalized in the cost of
property, plant and equipment constructed in 1996, 1995 and 1994, respectively.
Interest of $16,467,000, $12,641,000, and $10,453,000 was paid in 1996, 1995
and 1994, respectively.
5. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISK
Management believes that the historical financial statement presentation is the
most useful for displaying the Company's financial position. However, 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. Because of this management believes
that this information may be of limited usefulness in understanding the Company
and minimal value in making comparisons between companies.
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:
o Cash and temporary investments
o Commercial paper
o Notes payable
23
25
The Company's long-term debt is both publicly and privately held. Fair value
was determined for private debt by discounting future cash flows at current
market yields and for public debt at indicated market values.
(in thousands)
- --------------------------------------------------------------------
Long-Term Debt 1996 1995
- --------------------------------------------------------------------
Carrying Amount $ 158,000 $ 172,112
Estimated Fair Value $ 159,162 $ 174,950
====================================================================
The notional amount of foreign currency exchange contracts outstanding at year
end was $50,389,000. The fair value of these contracts effective as hedges is
not significant. The fair value of all outstanding letters of credit is not
meaningful.
The Company does not have significant off-balance-sheet risk from financial
instruments. It enters into foreign exchange contracts as hedges of trade
receivables and payables denominated in currencies other than the functional
currency. Effects of changes in currency rates are therefore minimized. As a
matter of Company policy, foreign exchange contracts are used only to hedge
firm commitments, not anticipated transactions.
The Company maintains both corporate and divisional credit departments.
Limits are set for customers and countries. Letters of credit issued or
confirmed through sound financial institutions are obtained to further ensure
prompt payment in accordance with terms of sale; generally, collateral is not
required. At August 31, 1996, $34,719,000 of bankers acceptances were included
in accounts receivable.
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.
6. INCOME TAXES
The provisions for income taxes include the following (in thousands):
Year ended August 31,
- -----------------------------------------------------------------
1996 1995 1994
------------------------------------
Current:
United States $ 22,356 $ 17,816 $ 8,165
Foreign 1,364 615 402
State and local 2,880 1,893 1,866
- -----------------------------------------------------------------
26,600 20,324 10,433
Deferred 297 (524) 4,304
- -----------------------------------------------------------------
$ 26,897 $ 19,800 $ 14,737
=================================================================
Taxes of $16,537,000, $21,000,000 and $14,736,000 were paid in 1996, 1995 and
1994, 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 tax effects of these differences are (in thousands):
August 31,
- -----------------------------------------------------------------
1996 1995
-------------------------
U.S. taxes provided on foreign income
and foreign taxes $ 11,670 $ 11,532
Tax on difference between tax
and book depreciation 20,071 17,260
Net operating losses (6,692) (6,692)
Alternative minimum tax credit (1,713) (1,713)
Other accruals (1,917) (1,606)
Other (375) (228)
- -----------------------------------------------------------------
Total $ 21,044 $ 18,553
=================================================================
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. Such earnings have been reinvested
in the foreign operations except for dividends of $6,062,000.
The Company's effective tax rates were 36.9% in 1996, 34.1% in 1995, and 36%
in 1994. Reconciliations of the United States statutory rates to the effective
rates are as follows:
Year ended August 31,
- -------------------------------------------------------------------
1996 1995 1994
-------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Tax credits (.5) (.5) (.5)
State and local taxes 2.6 2.1 2.9
Other (.2) (2.5) (1.4)
- -------------------------------------------------------------------
Effective tax rate 36.9% 34.1% 36.0%
===================================================================
During 1995, the Company resolved all issues for its returns through 1992. The
settlement amount was negligible and as a result the Company credited income
tax expense $1,350,000 during 1995. This is reflected in Other in the table
above. The Company acquired Owen Steel Company,Inc. and sub-
24
26
sidiaries in a tax free merger transaction during 1995. As a result of
this transaction, there are $19 million of net operating losses and $1.7
million of alternative minimum tax credits that were recorded as deferred tax
assets under purchase accounting. These assets will be reduced as tax expense
is recognized in future periods. The net operating losses consist of $4 million
and $15 million that are due to expire in 2008 and 2009, respectively. The $1.7
million alternative minimum tax credit is available indefinitely.
7. CAPITAL STOCK
Stock Purchase Plan
Substantially all employees may participate in the Company's employee stock
purchase plan. The Directors have authorized the annual purchase of up to 200
shares at a discount of 25% from the stock's price. Annual activity of the
stock purchase plan was as follows:
1996 1995 1994
- -------------------------------------------------------------------
Shares available 276,061
Shares subscribed 158,490
Price per share $17.80
Shares purchased 138,180 107,110 122,607
Price per share $18.41 $19.94 $14.06
Stock Option Plans
The 1986 Stock Incentive Plan (Incentive Plan) was approved in November 1986 by
the Board of Directors. Under the Incentive Plan, stock options and stock
appreciation rights may be awarded to full-time salaried employees, including
directors, of the Company. 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, and the options are exercisable two years from date of
grant. The Incentive Plan also provides for issuance of common stock to
eligible employees as performance awards for achievement of specified
objectives. The Incentive Plan will terminate November 23, 1996, except as to
awards outstanding. Annual activity of the Incentive Plan is as follows:
1996 1995 1994
- ---------------------------------------------------------------------
Shares available 274,903
Shares outstanding 1,714,495
Price per share $8.72 - 27.61
Shares exercisable 1,003,670
Shares granted 435,050 293,000 287,369
Price per share $26.25 - 27.31 $24.50 $27.61
Shares exercised 119,362 126,843 160,497
Average price per share $17.92 $16.61 $13.72
Shares forfeited 31,490 8,646 12,319
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.
8. EMPLOYEES' PENSION AND PROFIT SHARING PLANS
Substantially all employees of the Company and its subsidiaries are covered by
profit sharing or savings plans. Company contributions, which are
discretionary, to all plans were $13,394,000, $10,801,000, and $6,999,000, for
1996, 1995 and 1994, respectively.
One subsidiary maintains a defined benefit pension plan that covers
substantially all its employees. Benefits are based on an employee's average
monthly earnings and years of service. The contribution required for 1996 is
not significant. Financial statement pension expense and related balance sheet
and funded status are not significant.
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS/POSTEMPLOYMENT BENEFITS
The Company has no significant postretirement obligations other than pensions
(see footnote 8). The Company's historical costs for postemployment benefits
have not been significant and are not expected to be in the future.
10. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments payable by the Company and its consolidated
subsidiaries for noncancelable operating leases in effect at August 31, 1996,
are as follows for the fiscal periods specified (in thousands):
Real
Equipment Estate
- --------------------------------------------------------------------
1997 $ 3,275 $ 3,380
1998 2,366 2,500
1999 2,079 2,162
2000 1,491 2,005
2001 and thereafter 702 2,118
- --------------------------------------------------------------------
$ 9,913 $ 12,165
====================================================================
Total rental expense was $7,834,000, $7,953,000 and $6,086,000 in 1996, 1995
and 1994, respectively.
In the ordinary course of conducting its business, the Company becomes
involved in litigation, administrative proceedings and governmental
investigations, including environmental matters.
25
27
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 thirteen 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 PRP designation. 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 which, from
time to time, may have a material impact on earnings for a particular quarter.
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 business or
consolidated financial position of the Company.
The November 22, 1994 Final Order of the United States District Court for
the Southern District of Texas against CMC Oil Company, a subsidiary of the
Company, is now a final, non-appealable order. The judgment and interest have
been accrued in the financial statements of CMC Oil Company. CMC Oil (the
subsidiary) does not have sufficient assets to satisfy the judgment. No claim
has been asserted against Commercial Metals Company (the parent) in connection
with this litigation.
11. EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number of
shares of common stock and common stock equivalents outstanding during the
year. The shares used in the calculation of earnings per share were 15,306,413,
15,151,072 and 14,956,479 in 1996, 1995 and 1994, respectively.
12. OTHER PAYABLES AND ACCRUED EXPENSES
(in thousands) August 31,
- --------------------------------------------------------------------
1996 1995
----------------------------
Salaries, wages and commissions $ 29,570 $ 30,213
Advance billings on contracts 8,801 13,590
Pension and profit sharing 13,747 9,758
Insurance 8,864 9,193
Accrual for contract losses 1,406 8,066
Environmental 8,434 7,634
Litigation accrual 6,650 6,650
Freight 4,263 5,625
Taxes other than income taxes 5,518 5,335
Interest 3,543 3,592
Other accrued expenses 38,083 38,277
- --------------------------------------------------------------------
$128,879 $137,933
====================================================================
13. BUSINESS SEGMENTS
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 (in thousands):
Year ended August 31,
- ----------------------------------------------------------------------------
1996 1995 1994
--------------------------------------
Revenues-unaffiliated customers $ 505,255 $ 376,332 $ 478,012
============================================================================
Operating profit $ 6,731 $ 10,051 $ 8,683
============================================================================
Identifiable assets $ 108,492 $ 88,711 $ 139,668
============================================================================
Export sales from the Company's United States operations are as follows (in
thousands):
Year ended August 31,
- -----------------------------------------------------------------------
1996 1995 1994
----------------------------------------
>S>
Far East $ 60,008 $ 42,439 $ 36,686
Canada and Mexico 40,565 42,698 34,621
Other 3,414 6,074 6,660
- -----------------------------------------------------------------------
Total $ 103,987 $ 91,211 $ 77,967
=======================================================================
The Company operates in three business segments, as indicated below. During
1995 the Financial Services segment was discontinued and its assets were merged
with the Marketing and Trading segment. Intersegment sales generally are priced
at prevailing market prices. Certain corporate administrative expenses are
allocated to segments based upon the nature of the expense.
26
28
13. BUSINESS SEGMENTS (CONTINUED):
Adjustments
Marketing Financial and
1996 (in thousands) Manufacturing Recycling and Trading Services Corporate eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues - unaffiliated customers $ 1,008,231 $ 443,825 $ 869,646 $ 661 $ -- $ 2,322,363
Intersegment revenues 9,625 20,348 20,394 (50,367)
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,017,856 464,173 890,040 661 (50,367) 2,322,363
====================================================================================================================================
Operating profit (loss) 61,818 12,091 17,680 (2,846) 88,743
Interest expense (15,822)
Earnings before income taxes 72,921
====================================================================================================================================
Depreciation and amortization 31,319 9,410 614 256 41,599
====================================================================================================================================
Capital expenditures 37,315 8,727 1,611 329 47,982
====================================================================================================================================
Identifiable assets $ 457,939 $ 91,885 $ 195,042 $ 21,890 $ -- $ 766,756
====================================================================================================================================
1995 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues - unaffiliated customers $ 900,922 $ 483,428 $ 732,419 $ 10 $ -- $ 2,116,779
Intersegment revenues 11,817 27,707 16,806 (56,330)
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 912,739 511,135 749,225 10 (56,330) 2,116,779
====================================================================================================================================
Operating profit (loss) 54,417 11,337 17,621 (10,121) 73,254
Interest expense (15,246)
Earnings before income taxes 58,008
====================================================================================================================================
Depreciation and amortization 28,847 8,524 635 128 38,134
====================================================================================================================================
Capital expenditures 24,689 14,103 431 88 39,311
====================================================================================================================================
Identifiable assets $ 452,145 $ 111,119 $ 165,692 $ 19,147 $ -- $ 748,103
====================================================================================================================================
1994 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues - unaffiliated customers $ 592,958 $ 319,468 $ 751,027 $ 2,747 $ 34 $ -- $ 1,666,234
Intersegment revenues 5,317 22,782 6,895 (34,994)
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 598,275 342,250 757,922 2,747 34 (34,994) 1,666,234
====================================================================================================================================
Operating profit (loss) 37,670 4,998 13,507 1,731* (9,681) 48,225
Interest expense (7,318)*
Earnings before income taxes 40,907
====================================================================================================================================
Depreciation and amortization 22,382 7,003 655 103 30,143
====================================================================================================================================
Capital expenditures 37,203 10,181 519 249 48,152
====================================================================================================================================
Identifiable assets $ 281,471 $ 97,924 $ 154,102 $ 62,003 $ 9,377 $ -- $ 604,877
====================================================================================================================================
*Interest expense of the Financial Services segment has been included in
operating profit in the amount of $1,953 in 1994.
27
29
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996, 1995 and 1994 are as follows (in
thousands except per share data):
Three Months Ended 1996
- ----------------------------------------------------------------------
Nov. 30 Feb. 29 May 31 Aug. 31
- ----------------------------------------------------------------------
Net sales $ 588,238 $ 514,855 $ 634,569 $ 572,551
Gross profit 57,956 57,628 61,663 64,432
Net earnings 10,832 10,010 12,012 13,170
Net earnings per share .70 .67 .79 .86
Three Months Ended 1995
- ----------------------------------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
- ----------------------------------------------------------------------
Net sales $ 411,434 $ 530,907 $ 572,520 $ 592,565
Gross profit 45,751 58,204 60,370 50,561
Net earnings 6,372 10,277 11,371 10,188
Net earnings per share .44 .67 .73 .66
Three Months Ended 1994
- ----------------------------------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
- ----------------------------------------------------------------------
Net sales $ 380,016 $ 389,913 $ 440,649 $ 447,232
Gross profit 36,606 32,830 40,916 42,892
Net earnings 5,723 4,272 7,145 9,030
Net earnings per share .38 .28 .48 .63
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. Fourth quarter 1995 and 1994 net earnings decreased $5,195,000 and
$3,084,000, respectively, after the final determination of quantities and
prices was made.
As discussed in footnote 6, there are credits to income tax expense of
$1,350,000 ($1,000,000 in the first quarter and $350,000 in the fourth quarter)
in 1995 resulting from the favorable resolution of tax issues with the Internal
Revenue Service for years audited.
As discussed in footnote 10, CMC Oil Company recorded a nonrecurring net
charge of $4.1 million in the first quarter of 1995 as a litigation accrual.
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, 1996 and 1995 and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended August 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Dallas, Texas
October 16, 1996
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No event reportable herein took place.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required in response to this Item with
regard to directors is incorporated herein by reference from the registrant's
Definitive Proxy Statement for the annual meeting of shareholders to be held
January 23, 1997, which will be filed no later than 120 days after the close of
the Registrant's fiscal year. The following is a listing of employees believed
to be considered "Executive Officers" of the registrant as defined under Rule
3b-7 as of August 31, 1996:
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE
- ---- ------------------------ --- -------------
Lawrence A. Engels Vice President, Treasurer and 63 1977
Chief Financial Officer
Hugh M. Ghormley Executive Vice President 67 1981
CMC Steel Group
Harry J. Heinkele President, Secondary Metals 64 1981
Processing Division
A. Leo Howell Vice President; President and 75 1977
Treasurer - Howell Metal Company;
Director and Chairman of the
Executive Committee
William B. Larson Controller 43 1995
Murray R. McClean Vice President and 48 1995
President, International Division
Stanley A. Rabin President and Chief Executive 58 1974
Officer; Director
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Bert Romberg Senior Vice President 66 1968
Marvin Selig President, CMC Steel Group; 73 1968
Director
Clyde P. Selig Executive Vice President, 64 1981
CMC Steel Group
David M. Sudbury Vice President, Secretary and 51 1976
General Counsel
The Executive Officers are employed by the Board of Directors of the
registrant or the respective subsidiary usually at its first meeting after the
registrant's Annual Shareholders Meeting and continue to serve for terms set
from time to time by the registrant's Board of Directors in its discretion.
All of the Executive Officers of the Company have served in the
positions indicated above or in positions of similar responsibility for more
than five years except for Messrs. Larson and McClean. Mr. Larson was employed
by the Company in June, 1991 as Assistant Controller and was named Controller
in March 1995. For five years prior to June, 1991, he had been employed by
and was a partner when he left Deloitte & Touche LLP. Mr. McClean has been
employed by the Company's subsidiary CMC (Australia) Pty. Limited since 1984.
In September, 1993, he assumed the function of President of the International
Division of the Company. Director and Executive Officer Marvin Selig is the
brother of Executive Officer Clyde P. Selig. There are no other family
relationships among the officers of the registrant or among the Executive
Officers and Directors.
ITEM 11. EXECUTIVE COMPENSATION
Information required in response to this Item is incorporated herein
by reference from the Registrant's Definitive Proxy Statement for the annual
meeting of shareholders to be held January 23, 1997, which will be filed no
later than 120 days after the close of the Registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated
herein by reference from the Registrant's Definitive Proxy Statement for the
annual meeting of shareholders to be held January 23, 1997, which will be filed
no later than 120 days after the close of the Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, information required in response to this
Item is incorporated herein by reference from the Registrant's Definitive Proxy
Statement for the annual meeting of shareholders to be held
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January 23, 1997, which will be filed no later than 120 days after the close of
the Registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
2. Commercial Metals Company and Subsidiaries Consolidated Financial Statement
Schedules
Independent Auditors' Report as to Schedules
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 and Index required to be filed by
Item 601 of Regulation S-K:
(3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i)
to the Company's Form 10-K for the fiscal year ended
August 31, 1993 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 the Company's
Form 10-K for the fiscal year ended August 31, 1995, 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 the Company's
Form 10-K for the fiscal year ended August 31, 1995, and
incorporated herein by reference).
(3)(ii) By-Laws (Filed as Exhibit (3)(ii) to the Company's
Form 10-K for the fiscal year ended August 31, 1993
and incorporated hereby by reference).
(4) Indenture between the Company and Chase Manhattan Bank
dated as of July 31, 1995 (Filed as Exhibit 4.1 to the Company's
Registration Statement No. 33-60809 on July 18, 1995 and
incorporated herein by reference).
(11) Calculation of primary and fully diluted earnings per share . . . . . . . . . . . . . . . . E1
(21) Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E2
(23) Independent Auditors' consent to incorporation by reference into
previously filed Registration Statements No. 033-61073 and No. 033-61075 on
Form S-8 of report dated October 16, 1996 accompanying the
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consolidated financial statements of Commercial Metals Company and Subsidiaries
for the year ended August 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E3
(27) Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E4
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter covered by this report.
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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
President and
Chief Executive Officer
Date: November 26, 1996
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/ Albert A. Eisenstat /s/ Charles B. Peterson
- -------------------------------------- --------------------------------------
Albert A. Eisenstat, November 26, 1996 Charles B. Peterson, November 26, 1996
Director Director
/s/ Moses Feldman /s/ Stanley A. Rabin
- -------------------------------------- --------------------------------------
Moses Feldman, November 26, 1996 Stanley A. Rabin, November 26, 1996
Director President, Chief Executive Officer
and Director
/s/ Laurence E. Hirsch
- -------------------------------------- /s/ Marvin Selig
Laurence E. Hirsch, November 26, 1996 --------------------------------------
Director Marvin Selig, November 26, 1996
President - Steel Group
/s/ A. Leo Howell and Director
- --------------------------------------
A. Leo Howell, November 26, 1996 /s/ Lawrence A. Engels
Vice President and Director --------------------------------------
Lawrence A. Engels, November 26, 1996
/s/ Walter F. Kammann Vice President and
- -------------------------------------- Chief Financial Officer
Walter F. Kammann, November 26, 1996
Director /s/ William B. Larson
--------------------------------------
/s/ Ralph E. Loewenberg William B. Larson November 26, 1996
- -------------------------------------- Controller
Ralph E. Loewenberg, November 26, 1996
Director
/s/ Dorothy G. Owen
- --------------------------------------
Dorothy G. Owen, November 26, 1996
Director
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Commercial Metals Company
Dallas, Texas
We have audited the consolidated financial statements of Commercial Metals
Company as of August 31, 1996 and 1995, and for each of the three years in the
period ended August 31, 1996, and have issued our report thereon dated October
16, 1996; such financial statements and report are included in your 1996 Annual
Report to Stockholders which is included herein. Our audits also included the
consolidated financial statement schedule of Commercial Metals Company listed
in Item 14. 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 consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Deloitte & Touche LLP
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 16, 1996
36
SCHEDULE VIII
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
( In thousands )
Allowance for collection
losses deducted from notes
and accounts receivable:
Charged to Charged Deductions
Balance, profit and to other from Balance
beginning loss or accounts reserves end
Year of year income ( A ) ( B ) of year
- -------- ---------- ---------- ---------- ---------- --------
1994 3,217 1,258 275 1,222 3,528
1995* 3,724 1,084 611 676 4,743
1996 4,743 2,535 269 2,046 5,501
* Includes opening balance of $196 from the acquisition
of the Owen Companies in November 1994.
( A ) Recoveries of accounts written off.
( B ) Write-off of uncollectible accounts.
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
11 Calculation of primary and fully diluted earnings per share . . . E1
21 Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . . E2
23 Independent Auditors' consent to incorporation by reference
into previously filed Registration Statements No. 033-61073
and No. 033-61075 on Form S-8 of report dated
October 16, 1996 accompanying the consolidated financial
statements of Commercial Metals Company and Subsidiaries
for the year ended August 31, 1996 . . . . . . . . . . . . . . . . E3
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . E4