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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
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM -------- TO --------
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
Rights to Purchase Series A Preferred Stock 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 19, 1999, HELD BY
NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE OF $33.375 PER SHARE
ON NOVEMBER 19, 1999, ON THE NEW YORK STOCK EXCHANGE WAS APPROXIMATELY
$441,840,978. (FOR PURPOSES OF DETERMINATION OF THIS AMOUNT, ONLY DIRECTORS,
EXECUTIVE OFFICERS AND 10% OR GREATER STOCKHOLDERS HAVE BEEN DEEMED AFFILIATES).
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF NOVEMBER 19, 1999: COMMON STOCK, $5.00 PAR -- 14,384,695.
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 27, 2000 -- 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. Commercial Metals maintains executive offices at 7800
Stemmons Freeway, Dallas, Texas 75247, telephone 214/689-4300. The terms
"Commercial Metals," "we," "us," "our," or "Company" as used in this annual
report include Commercial Metals Company and its consolidated subsidiaries. Our
fiscal year ends August 31 and all references to years refer to the fiscal year
ended August 31 of that year unless otherwise noted.
We consider our businesses to be organized into three segments - (i)
manufacturing, (ii) recycling and (iii) marketing and trading. Our 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 12 Business Segments," of the notes to consolidated
financial statements at Part II, Item 8.
THE MANUFACTURING SEGMENT
The manufacturing segment is our 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 fabrication plants, four steel
joist manufacturing facilities, four steel fence post manufacturing plants, a
heat treating plant, eight metals recycling plants, a railcar rebuilding
facility, eighteen concrete related product warehouses, an industrial products
supply facility and a railroad salvage company.
We endeavor to operate all four minimills at full capacity to minimize
product costs. We emphasize increases in capacity, productivity and enhancements
in product mix 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 $212 million, or 64% of our total
capital expenditures, have been for minimill projects. Our historical emphasis
on productivity improvements has been reflected in a generally increasing number
of tons of steel melted, rolled and shipped from the minimills. During 1999,
major capital improvement projects included the completion of the new rolling
mill and ancillary equipment at our South Carolina minimill and a new finishing
line at our Alabama minimill. As a result of construction interference and
equipment start-up related to these projects along with unprecedented levels of
steel imports, minimill production and shipments declined in 1999.
1997 1998 1999
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Tons Melted 1,755,000 1,932,000 1,582,000
Tons Rolled 1,581,000 1,693,000 1,410,000
Tons Shipped 1,926,000 2,008,000 1,685,000
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Our largest steel minimill, is located at Seguin, Texas, near San
Antonio. Our steel minimill in Birmingham, Alabama, was acquired in 1983. Our
South Carolina minimill, located in Cayce, South Carolina, was acquired in
November 1994 as part of the acquisition of Owen Steel Company, Inc. and
affiliates. A fourth, much smaller mill, has been in operation since 1987 and is
located near Magnolia, Arkansas.
The Texas, Alabama and South Carolina mills consist of melt shops with
electric arc furnaces that melt 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 fleet of trucks we own and private haulers to transport
finished products to customers and our fabricating shops. The capacity of our
Texas minimill is approximately 900,000 tons per year melted and 800,000 rolled.
Our Alabama mill's annual capacity is approximately 600,000 tons melted and
575,000 rolled. Our South Carolina mill's annual capacity is approximately
700,000 tons melted, and the new rolling mill which commenced start up in 1999
should increase rolling capacity to approximately 800,000 tons rolled when fully
operational.
Our Texas minimill manufactures steel reinforcing bars, angles, rounds,
channels, flats, and special sections used primarily in highways, reinforced
concrete structures and manufacturing. Our Texas minimill sells primarily to the
construction, service center, energy, petrochemical, and original equipment
manufacturing industries. Its primary markets are located in Texas, Louisiana,
Arkansas, Oklahoma and New Mexico, although products are shipped to
approximately 30 states and Mexico. Our Texas minimill melted 670,000 tons
during 1999, compared to 847,000 tons during the prior year, and rolled 638,000
tons, down 119,000 tons from 1998. The decreases in production and shipments
were caused by competition from imports and transformer failures.
During 1999, work on improvements to the Alabama mill finishing area
included a new cooling bed, straighteners and stackers which were commissioned
in June, 1999. The melt shop at the Alabama mill recorded 1999 production of
428,000 tons, and 292,000 tons were rolled. Our Alabama minimill primarily
manufactures products that are larger in size than our other three minimills,
such as mid-size structural steel products including angles, channels, up to
eight-inch wide flange beams and special bar quality rounds and flats. 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.
Our South Carolina minimill manufactures primarily steel reinforcing
bars with limited but increasing production of angles, rounds, squares, fence
post sections and flats. Its primary market area includes the Southeast and
mid-Atlantic area south through Florida and north into southern New England.
During 1999, our South Carolina minimill melted 484,000 tons and rolled 363,000
tons. The largest single expenditure project in our history, approximately $100
million, replaced our South Carolina facility's existing rolling mill with a new
state-of-the-art rolling mill which was commissioned in April 1999. When fully
operational, the new rolling mill will have a capacity of approximately 800,000
tons and a substantially broader product line than previously rolled.
The primary raw material for our Texas, Alabama and South Carolina
minimills is secondary, or 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 recycling
plants we own. 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.
No melting facilities are located at our Arkansas minimill since this
mill utilizes rail salvaged from abandoned railroads for rerolling and, on
occasion, billets from Company minimills or other suppliers as its raw
materials. 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, than
the other mills. Our Arkansas minimill's finished product is primarily metal
fence post stock, small diameter reinforcing bar and sign posts with
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some high quality bar products being rolled. Fence post stock is fabricated into
studded "T" metal fence posts at our facilities at the Arkansas mill site, San
Marcos, Texas, Brigham City, Utah, and West Columbia, South Carolina. 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 our Arkansas minimill is approximately 150,000 tons rolled per year.
Our steel group's downstream processing facilities engage 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 850,000 tons, with a record 841,000 tons of
fabricated steel shipped in 1999. Steel for fabrication may be obtained from
unrelated vendors as well as our own 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; Baton
Rouge and Slidell, Louisiana; Magnolia and Hope, Arkansas; Brigham City, Utah;
Starke and Whitehouse, Florida; Fallon, Nevada; Cayce, Columbia, and Taylors,
South Carolina; Lawrenceville, Georgia; Gastonia, North Carolina and
Fredericksburg, Virginia. Fabricated steel products are used primarily in the
construction of commercial and non-commercial buildings, including high-rise
office or hotel towers, hospitals, convention centers, 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.
Secondary metals recycling plants in Austin and at our minimills in
Texas and South Carolina, together with five 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. The South Carolina and Texas recycling
facilities each operate automobile shredders.
Our joist manufacturing operation headquartered in Hope, Arkansas,
manufactures steel joists for roof supports using steel obtained primarily from
the steel group's minimills at locations in Hope, Starke, Florida, Cayce, South
Carolina, and Fallon, Nevada. Joist consumers are typically construction
contractors or large chain store owners. Joists are generally made to order and
sales, which may include custom design and fabrication, are primarily obtained
on a competitive bid basis. During 1999, we began production and sales of
castellated and cellular steel beams. These beams, recognizable by their
hexagonal or circular pattern of voids, permit greater design flexibility in
steel construction, especially floor structures. Our facility in Victoria, Texas
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.
We sell concrete related supplies, including the sale or rental of
equipment to the concrete installation trade, at eleven warehouse locations in
Texas, five Louisiana locations, and one location each in Mississippi and
Georgia. The Louisiana and Mississippi locations were acquired during 1999 with
the purchase of the operating assets of Construction Materials, Inc. Two smaller
operations which emphasize a broader industrial product supply are located in
Columbia and Cayce, South Carolina.
Our subsidiary, Allegheny Heat Treating, Inc., of Chicora,
Pennsylvania, which we purchased in January 1997, was the steel group's entry
into the steel heat treating business. Allegheny Heat Treating works closely
with our Alabama minimill and other steel mills that sell specialized
heat-treated steel for customer specific use, primarily in original or special
equipment manufacturing. Our operating capacity in this business is
approximately 30,000 tons per year.
The copper tube minimill operated by our Howell Metal Company
subsidiary is located in New Market, Virginia. It manufactures primarily copper
water tube as well as 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
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east of the Mississippi River. Demand for copper tube is dependent mainly on the
level of new residential construction and renovation. High quality copper scrap
supplemented occasionally by virgin copper ingot is the raw material used in the
melting and casting of billets. Copper 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 our metal recycling yards.
Howell's facilities include melting, casting, piercing, extruding, drawing,
finishing and other departments. Capacity is approximately 55,000,000 pounds per
year. During 1999, Howell began construction of an enlarged facility as part of
a two-year expansion project which, when complete, should increase production
capacity by approximately fifty percent.
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, we do not believe backlog levels are a significant factor in
evaluating most operations. Backlog in our steel group at 1999 year-end was
approximately $287,164,000. Backlog at 1998 year-end was approximately
$300,221,000. Because most of the segment's sales are to consumers located in
the sunbelt where construction activity generally continues throughout the year,
demand for our products is not considered seasonal, although adverse weather can
slow shipments.
THE RECYCLING SEGMENT
Our recycling segment is engaged in processing secondary, or scrap,
metals for further recycling into new metal products. This segment consists of
our thirty three secondary metals processing divisions' recycling plants, which
excludes eight such facilities operated by our steel group as a part of the
manufacturing segment, and three automobile salvage yards located in Florida
purchased in 1998, which constitute the recycling division's entry into the
automobile salvage business.
Our 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 1,439,000 tons of
scrap metal during 1999 and 1,469,000 tons during the prior year. Ferrous metals
comprised the largest tonnage of metals recycled at approximately 1,243,000
tons, which was approximately 38,000 tons less than the prior year. Shipments of
non-ferrous metals, primarily aluminum, copper and stainless steel, were
approximately 196,000 tons, compared to 188,000 in 1998. We also purchased and
sold an additional 123,000 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. Our steel group's eight
metals recycling facilities processed and shipped an additional 485,000 tons of
primarily ferrous scrap metal during 1999.
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 six large shredding machines capable of pulverizing obsolete
automobiles or other ferrous metal scrap. Two additional shredders operated by
the manufacturing segment's recycling facilities are located at or near two
steel minimills in that segment. A typical recycling plant includes several
acres of land used for receiving, sorting, processing and storage of metals.
Several recycling
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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.
Our auto salvage operations in Gainesville, Ocala and Leesburg,
Florida, assist in the supply of crushed auto bodies, an important feed stock
for shredders. These operations purchase wrecked or inoperable motor vehicles at
prices related to estimated recovery value of usable parts prior to ultimate
sale to scrap metal processors.
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 our
recycling plants are coordinated through the recycling segment's office in
Dallas. Export sales are negotiated through our network of foreign offices as
well as the Dallas office.
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 our steel minimills. Some minimills 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, fabricated metals and other industrial 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.
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 City; Englewood Cliffs, New
Jersey; Los Angeles; Hurstville near Sydney, Australia; Singapore; Zug,
Switzerland; Hong Kong, and Surrey, and Sandbach, United Kingdom and Bergisch
Gladbach, Germany. We also maintain representative offices in Moscow, 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 we
market, as well as servicing sources of supply and purchasers. In most
transactions we act as principal and often as a marketing representative. We
utilize agents when appropriate and occasionally act as broker. We participate
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 products has resulted in our emphasis on creative service
functions for both sellers and buyers. Actual physical market pricing and trend
information, as contrasted with sometimes more
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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 we offer. We attempt to
limit 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. We do not, as a
matter of policy, speculate on changes in the markets and hedge only firm
commitments, not anticipated transactions. During the past year, our marketing
and trading segment sold over 1.7 million tons of steel products. The Australian
operations maintain three warehousing facilities for just in time delivery of
steel and industrial products and operate a heat treating facility for special
steel products.
COMPETITION
Our 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. We do not produce a significant
percentage of the total national output of most of our products but are
considered a substantial supplier in the markets near our facilities. The large
job structural steel capacity and expertise resulting from our acquisition of
Owen Steel Company, Inc. enables us to compete throughout the United States for
large structural steel projects. We believe that our joist facilities are the
second largest manufacturer of joists in the United States, although
significantly smaller than the largest joist supplier. We believe that we are
the largest manufacturer of steel fence posts in the United States.
We believe the recycling segment is among the larger entities that
recycle nonferrous secondary metals and is also a major regional processor of
ferrous scrap. Active consolidation occurred in the scrap processing industry in
1997 and 1998, with aggressively priced acquisitions of significant operations
by several relatively new industry members. Poor markets for secondary metals
and poor results for many scrap processors commencing in 1998 and continuing in
1999 resulted in an abrupt halt to acquisitions by most of these competitors,
with bankruptcy proceedings by two consolidators and attempts to sell some
recently acquired facilities. 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 our 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, financing alternatives, and additional services. This segment
competes 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. We also compete
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 our business. We are subject to local, state, federal and
supranational environmental laws and regulations concerning, among other
matters, solid waste disposal, air emissions, waste and storm water effluent and
disposal and employee health. Our manufacturing and recycling operations produce
significant amounts of by-products, some of which are handled as industrial
waste or hazardous waste. For example, the electric arc furnace, or EAF dust
generated by our minimills is classified as a hazardous waste by the
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Environmental Protection Agency because of lead, cadmium and chromium content
and requires special handling and recycling for recovery of zinc or disposal.
Additionally, our scrap metal recycling facilities operate eight shredders for
which the primary feed materials are automobile hulks and obsolete household
appliances. Approximately twenty percent of the weight of an automobile hulk
consists of material, known as 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. We endeavor to have hazardous contaminants
removed from the feed material prior to shredding and as a result we believe 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, we may incur additional significant
expenditures. To date, we have not experienced difficulty in contracting for
recycling of EAF dust or disposing of shredder fluff in municipal or private
landfills.
We 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 our
operations. Furthermore, we may be required to pay for a portion of the costs of
clean up or remediation at sites we never owned or on which we never operated if
we are found to have arranged for treatment or disposal of hazardous substances
on the sites. We have been named a potentially responsible party, or PRP, at
several Superfund sites because the EPA contends that we and other PRP scrap
metal suppliers 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. Our position is that an arms length
sale of valuable scrap metal for use as a raw material in a manufacturing
process over which we exercise no control should not, contrary to the 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, we believe the possible liability arising
from the sale of secondary metals may reduce recycling rates for metals and
other recyclable materials in general. In particular, we believe 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 with the same levels of hazardous
substances from liability for sales of those materials to the same manufacturers
for use, often interchangeably with secondary metals, in the same manufacturing
process. We believe 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 our
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 1999, we incurred
environmental costs including disposal, permit, license fees, tests, studies,
remediation, consultant fees and environmental personnel expense of
approximately $8.8 million. In addition, we estimate that approximately $9.8
million of capital expenditures put in service during 1999, primarily a new
baghouse system at our Texas facility melt shop, were for environmental
projects. We believe that our facilities are in material compliance with
currently applicable environmental laws and regulations and do not presently
anticipate material capital expenditures for new environmental control
facilities during 2000.
EMPLOYEES
As of October 1999, we had approximately 7,581 employees. Approximately
6,242 were employed by the manufacturing segment, 989 by the recycling segment,
283 by the marketing and trading segment, 34 in general corporate management and
administration, with 33 employees providing service functions for divisions and
subsidiaries. Production employees at one metals recycling plant are
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represented by a union for collective bargaining. We believe that our labor
relations are generally good to excellent and our work force is highly
motivated.
ITEM 2. PROPERTIES
Our Texas steel minimill is located on approximately 600 acres of land
we own. Facilities including buildings occupying approximately 760,000 square
feet, are used for manufacturing, storage, office and related uses. Our Alabama
steel mill is located on approximately 36 acres, with buildings occupying
approximately 435,000 square feet used for manufacturing, storage, office and
related use. Our South Carolina minimill is located on approximately 82 acres,
with buildings occupying approximately 635,000 square feet. Our Magnolia,
Arkansas facility is located on approximately 124 acres, with buildings
occupying approximately 200,000 square feet. Approximately 30 acres of the
Alabama mill property and all Arkansas and South Carolina mill property are
leased in conjunction with revenue bond financing or property tax incentives and
may be purchased by us at the termination of the leases or earlier for a nominal
sum. The steel fabricating operations, including the fabrication plants, fence
post and joist operations, own approximately 924 acres of land and lease
approximately 10 acres of land at various locations in Texas, Louisiana,
Arkansas, Utah, South Carolina, Florida, Virginia, Georgia, North Carolina and
Nevada. Our Howell Metal subsidiary owns approximately 21 acres of land, with
buildings occupying about 228,000 square feet in New Market, Virginia.
Our recycling plants occupy in the aggregate approximately 450 acres we
own in Austin, Beaumont, Dallas, Galveston, Houston, Lubbock, Midland, Odessa,
Victoria and Vinton, all in Texas; as well as the Jacksonville, Ocala, Leesburg,
Gainesville, Lake City, Orlando, and Tampa, Florida; and Shreveport, Louisiana;
Chattanooga, Tennessee; Springfield and Joplin, Missouri; Burlington, North
Carolina and Frontenac, Kansas plants. It leases the real estate at Clute,
Edinburg, and Laredo,Texas; Ocala, Port Sutton (Tampa) and Casselberry, Florida;
East Ridge, Tennessee. The smaller of two locations at Beaumont and Victoria,
Texas, and Shreveport, Louisiana, are leased. The Fort Worth, Corpus Christi,
and smaller Houston, Texas, Miami, Oklahoma and Independence, Kansas, recycling
plants are partially owned and partially leased. Most small 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 we have had little difficulty in renewing such leases as they
expire. Our minimum annual rental obligation for real estate operating leases in
effect at August 31, 1999, to be paid during fiscal 2000 is approximately
$3,006,000. We also lease a portion of the equipment used in our plants. Our
minimum annual rental obligation for equipment operating leases in effect at
August 31, 1999, to be paid during fiscal 2000, is approximately $3,622,000.
ITEM 3. LEGAL PROCEEDINGS
As of August 31, 1999, we have received notices from the EPA or state
agency with similar responsibility that we and numerous other parties are
considered potentially responsible parties, or PRPs, and may be obligated under
the Comprehensive Environmental Response Compensation and Liability Act of 1980,
or CERCLA, or similar state statute to pay for the cost of remedial
investigation, feasibility studies and ultimately remediation to correct alleged
releases of hazardous substances at approximately thirteen locations. We may
contest our designation as a PRP with regard to several sites, while at other
sites we are participating with other named PRPs in agreements or negotiations
that we expect will result in agreements to remediate the sites. The locations,
none of which involve real estate we ever owned or conducted operations upon,
are commonly referred to by the EPA or state agency as the Peak Oil Site (Tampa,
FL), the NL Industries/Taracorp Site (Granite City, IL), the Sapp Battery Site
(Cottondale,
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Florida), the Interstate Lead Company ("ILCO") Site (Leeds, Alabama), the
Poly-Cycle Industries Site (Techula, Texas), the Jensen Drive Site (Houston,
TX), the SoGreen/Parramore Site (Tifton, GA), the Stoller Site (Jericho, SC),
the RSR Corporation Site (Dallas, TX), the Sandoval Zinc Company Site (Marion
County, IL), the Ross Metals Site (Rossville, TN), the Li Tungsten Site (Glen
Cove, NY) and the NL Industries Site (Pedricktown, NJ. We have periodically
received information requests with regard to other sites which are apparently
under consideration for recommendation under CERCLA or similar state statutes.
We do not know if any demand will ultimately be made against us as a result of
those inquiries.
The EPA has notified us and other alleged PRPs that under Sec. 106 of
CERCLA the PRPs could be subject to a maximum penalty fine of $25,000 per day
and the imposition of treble damages if the PRPs refused to clean up the Peak
Oil, Sapp Battery, NL/Taracorp, SoGreen/Parramore and Stoller sites as ordered
by the EPA. We are presently participating in a PRP organization at the Peak
Oil, Sapp Battery, SoGreen/Parramore and Stoller sites and do not believe that
the EPA will pursue any fine against us so long as we continue to participate in
the PRP groups or have adequate defenses to any attempt by the EPA to impose
fines in these matters.
CMC Oil Company (CMC Oil), a wholly-owned subsidiary which has been
inactive since 1985, is subject to a final judgment resulting from an order
entered in 1993 by the Federal Energy Regulatory Commission (the "FERC Order").
Judgment upholding the FERC Order was entered by Federal District Court in
November 1994 and affirmed by the Court of Appeals in November 1995. The FERC
Order found CMC Oil liable for overcharges constituting violations of crude oil
reseller regulations from December 1977 to January 1979, in joint venture
transactions with RFB Petroleum, Inc. The overcharges total approximately
$1,330,000 plus interest from the transaction dates calculated under the
Department of Energy's interest rate policy to the date of the District Court
judgment with interest thereafter at 6.48% per annum. Although CMC Oil accrued a
liability on its books during 1995, it does not have sufficient assets to
satisfy the judgment. No claim has ever been asserted against Commercial Metals
company arising out of the CMC Oil litigation. Commercial Metals Company will
vigorously contest liability should any such claim be asserted.
While we are 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 our 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 our business or consolidated
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
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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 Commercial Metals' common stock and cash
dividends paid for the past two fiscal years.
Price Range
1999 of Common Stock
Fiscal ---------------------------- Cash
Quarter High Low Dividends
- ------- --------- ---------- ---------
1st $ 28 1/2 $ 21 9/16 13c.
2nd 27 3/4 22 9/16 13c.
3rd 25 7/16 19 11/16 13c.
4th 34 3/16 23 1/2 13c.
Price Range
1998 of Common Stock
Fiscal ---------------------------- Cash
Quarter High Low Dividends
- ------- --------- ---------- ---------
1st $ 33 9/16 $ 30 1/16 13c.
2nd 33 7/8 29 3/8 13c.
3rd 36 30 1/2 13c.
4th 32 11/16 24 1/8 13c.
Since 1982, Commercial Metals' common stock has been listed and traded
on the New York Stock Exchange. Prior and since 1959 Commercial Metals' common
stock was traded on the American Stock Exchange. The number of shareholders of
record of Commercial Metals' common stock at November 15, 1999, was
approximately 2,479.
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ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth a summary of selected consolidated financial
information of Commercial Metals for the periods indicated:
FOR THE YEARS ENDED AUGUST 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Sales 2,251,442 2,367,569 2,258,388 2,322,363 2,116,779
Net Earnings 47,120 42,714 38,605 46,024 38,208
Diluted Earnings 3.22 2.82 2.54 3.01 2.51
Per Share
Total Assets 1,078,988 1,002,617 839,061 766,756 748,103
Stockholders' Equity 418,458 381,389 354,872 335,133 303,164
Long-term Debt 265,590 173,789 185,211 146,506 158,004
Cash Dividend Per Share .52 .52 .52 .48 .48
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Commercial Metals Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED RESULTS
Year ended August 31,
--------------------------------------
(in millions except share data) 1999 1998 1997
- ------------------------------- --------- --------- --------
Net sales $ 2,251 $ 2,368 $ 2,258
Net earnings 47.1 42.7 38.6
Cash flows* 102.9 93.5 83.2
International sales 760 752 739
As % of total 34% 32% 33%
LIFO effect on net earnings 12.6 5.0 (.2)
Per diluted share .86 .33 (.01)
LIFO reserve 3.0 22.5 30.1
% of inventory on LIFO 72% 72% 72%
*before changes in current assets and liabilities
Significant events affecting the Company this year:
1. Best net earnings and earnings per share ever. 2. Record steel fabrication
and copper tube profitability sustained the Manufacturing segment in spite of
significant losses incurred on several large structural fabrication contracts.
3. Steel mill shipments, prices, and operating profits declined due to
construction interference, imports, and equipment outages. 4. Significant LIFO
income due to substantial decrease in prices. 5. New rolling mill in South
Carolina and finishing end at the Alabama mill were completed. 6. Litigation
settlements received, $5.2 million, after-tax. 7. Continuing poor market
conditions resulted in Recycling segment loss; however, the fourth quarter was
profitable. 8. The Marketing and Trading segment continued profitable
performance.
SEGMENTS
Financial results for the Company's reportable segments have been
prepared using a management approach, which is consistent with the basis and
manner in which management internally disaggregates financial information for
the purposes of assisting in making internal operating decisions. Using this
approach, the Company has three reportable segments: Manufacturing, Recycling,
and Marketing and~Trading. Net sales and operating profit (loss) by business
segment are shown in the following table:
Year ended August 31,
------------------------------------
(in millions) 1999 1998 1997
- -------------- -------- -------- --------
Net sales:
Manufacturing $ 1,206 $ 1,234 $ 1,083
Recycling 302 415 485
Marketing and Trading 802 788 758
Operating profit (loss):
Manufacturing 83.8 74.8 54.8
Recycling (5.0) (1.4) 7.6
Marketing and Trading 22.6 20.6 17.6
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1999 COMPARED TO 1998
[MANUFACTURING] The Manufacturing segment includes the CMC Steel Group and
Howell Metal Company.
Although net sales decreased 2%, operating profit increased 12% for the
year ended August 31, 1999. These were record earnings despite weaker steel mill
prices stemming from low-priced steel imports. Shipments by the four minimills
totaled 1.7 million tons versus 2.0 million tons the prior year. 1999 was
another record year in the downstream steel fabrication businesses with 841,000
tons shipped, a slight increase from fiscal year 1998. Copper tube results were
outstanding as the strong housing market and lower copper scrap prices doubled
operating profit. Copper tube annual shipments were comparable at 51 million
pounds. Lower prices in the Manufacturing segment resulted in pre-tax LIFO
income of $15.9 million, a substantial increase from the $3.2 million reported
in the prior year.
August 31,
---------------
1999 1998
------ ------
Average mill selling price $ 299 $ 322
Average fab selling price 677 660
Average scrap purchase price 76 113
Operating profit for the four steel minimills combined was 13% below
the record year of 1998. Although underlying demand was strong, shipments
declined 16% to 1.7 million tons while production levels were down comparably
because of construction interference caused by the capital projects and the
unprecedented import levels. Conversely, margins were aided by lower scrap
purchase prices. While the average mill selling price was $23 per ton (7%) below
last year, average scrap purchase costs were lower by $37 per ton (33%). The
Company received pre-tax $8.1 million in settlements from graphite electrode
antitrust litigation. Primarily as a result of the decline in shipments,
operating profit at SMI-Arkansas, SMI-Alabama, and SMI-South Carolina decreased
by 20%, 59% and 38%, respectively. In spite of transformer downtime, strong
results continued at SMI-Texas, with a 17% increase in operating profit from the
prior year.
Computer migration costs were $10.9 million compared to $8.6 million in
the prior year.
The Company had a record $142 million in capital spending for fiscal
1999, primarily at the steel minimills. The major capital projects for 1999
were the completion of the new rolling mill and ancillary equipment at SMI-South
Carolina and a new finishing line (replacement of the mill cooling bed,
straighteners and stackers) at SMI-Alabama. Commissioning was in April and June
1999, respectively. The South Carolina project ultimately will more than double
capacity to 800,000 tons, reduce costs and broaden significantly the product
range. The Alabama improvements will improve quality, enhance efficiency, and
extend the product line.
Fiscal year 1999 was another record year in the CMC Steel Group's
downstream fabrication businesses. Net sales increased by 8% from 1998, and
operating profits increased 39%. This strong performance was in spite of $13.1
million in operating losses sustained on some large and complex structural steel
jobs. While fabricated steel shipments totaled 841,000 tons, only marginally
increased from the prior year, the average fab selling price rose $17 per ton
(3%), partially due to product mix. Additionally, a new castellated beam and
cellular beam product line was developed as an adjunct to the steel joist
business.
During the third quarter 1999, the Company acquired substantially all
of the assets of Construction Materials, Inc., headquartered in Baton Rouge,
Louisiana, which complements the Shepler's group concrete-related products
business. The purchase price was not significant to the Company. The operation
has been profitable since acquisition.
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Production increased by 3%, and earnings more than doubled for the
Company's copper tube mill for 1999. Spreads increased by 34% and shipments
increased by 1%, benefiting from lower copper scrap prices. The principal
economic driver remains housing starts and renovation, as residential
construction remained strong during fiscal year 1999. A significant planned
expansion of the plant will increase copper tube output by approximately 50%,
increase automation, reduce finished goods purchases, improve productivity and
increase sales for HVAC applications as well as water tube.
[RECYCLING] The Recycling segment continued to be hampered by difficult market
conditions. The Secondary Metals Processing Division reported an operating loss
of $5.0 million for the fiscal year ended August 31, 1999, compared with an
operating loss of $1.4 million for the prior year. However, the Division was
profitable for the fourth quarter 1999, and cash flows from operations (before
changes in current assets and liabilities) was positive for the year. Together
with very weak market conditions for ferrous and nonferrous scrap, the failed
consolidation of the industry had a major negative influence on profitability in
1999. The poor markets were reflected in a 27% drop in net sales, from $415
million for 1998 to $302 million for 1999. Processing costs also decreased, but
margins fell even further.
The average price of steel scrap fell by $33 per ton to $90, and
ferrous scrap volume was 3% lower. Consequently, ferrous scrap operations were
unprofitable even though costs were reduced. Nonferrous prices, on the other
hand, stabilized in a trading range, shipments increased by 4% and nonferrous
operations were slightly profitable. The Division's regional management
restructuring which occurred in the prior year resulted in lower operating costs
and inventories. Prices have recently increased (especially nonferrous scrap)
after sharp declines over the past 12-18 months.
In fiscal year 1999, a number of operational improvements continued to
be made including installation of a new shear in Houston which started up during
late August 1999.
The total volume of scrap processed in 1999, including the CMC Steel
Group operations, increased 5% to 2.0 million tons.
[MARKETING AND TRADING] The Marketing and Trading segment continued its
remarkable performance in the face of crises in Asia, Russia and Latin America.
Net sales increased by 2% to $802 million, and operating profit was 10% higher
for 1999 than the prior year. Steel prices were substantially lower in 1999 than
the prior year, and gross margins in steel marketing and distribution as well as
steel trading remained tight. Anti-dumping activity and other forms of
protectionism around the world continued to affect the flow of products.
Nevertheless, sales into the United States and Europe increased and compensated
for the decreased sales into Asia. The segment achieved further market
penetration in highly competitive markets for nonferrous metal products and
maintained profitability through product line expansion. Profits were moderately
lower for industrial raw materials and products, but shipments generally were
higher. Participation in the marketing of ferrous raw materials continued to
grow.
During 1999, the segment continued to diversify and build business in
new product and geographic areas, and added key personnel. The Marketing and
Trading segment's international division reaped the rewards from a 1998 joint
venture with a large European mill giving the Company exclusive rights to sell
steel to the German market. Resulting net sales from this endeavor were
significantly more than anticipated. This segment's business encompasses
marketing and distribution including expanded just-in-time services. Regional
trade continued to grow, as well as increased presence in the processing of the
materials and products which are bought and sold.
NEAR-TERM OUTLOOK
Despite the continued high level of low-priced steel imports into the
United States, which will continue to affect prices of mill products, demand for
steel remains strong and manufacturing margins should be good. The new mill in
South Carolina will ultimately double capacity, reduce costs and broaden the
product range. Our new finishing end in Alabama will improve quality, enhance
efficiency and also broaden the product line. Higher sales, production and
shipments are anticipated for the CMC Steel Group for fiscal year 2000. However,
mill profits are likely to be down because of a weaker first half due
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to continued ramping up at South Carolina and Alabama, weaker pricing from a
less favorable product mix and continued high imports. Mill output should
increase as new production lines are added, and the average selling price should
benefit from the broadened product lines. Increased profits in steel fabrication
should result in the second half of the upcoming year from turn arounds at
several operations that performed poorly in fiscal year 1999. Increased
infrastructure spending under The Transportation Equity Act for the 21st Century
(TEA-21) should be very beneficial. The copper tube market remains robust, and
production and shipments should climb. The CMC Steel Group computer migration
project is substantially complete, and costs will decline to maintenance levels.
Both ferrous and nonferrous operations in the Recycling segment should
be profitable in fiscal year 2000. Operating profit for the fourth quarter of
1999 was substantially improved from the corresponding period in 1998. Scrap
prices appear to be relatively firm at prevailing levels, and demand is expected
to increase with both international and domestic consumers of scrap. The Company
is poised to capitalize on better markets and to continue to turn around
underperforming facilities. Recycling should benefit from plant and equipment
improvements made during the past several years including shredders, shears and
balers.
The pickup in global trade, resulting from improving Asian and European
economies, should be positive for the Marketing and Trading segment, in spite of
the decreased supply from a large financially-troubled international supplier.
The Company will continue to diversify and build business in new products and
geographic areas. The segment will build further on strategic alliances among
suppliers and customers.
Overall, the outlook is challenging but positive, with the second half
of fiscal year 2000 expected to be better than the first half.
LONG-TERM OUTLOOK
The Company is well positioned to exploit long-term opportunities. Net
sales and net income should increase substantially at the steel minimills. The
mills are versatile, flexible, highly productive and high quality. Finished
product capacity at the combined mills has increased to 2.3 million tons. Steel
fabrication will continue to be an essential element of the Company's vertical
integration strategy and a growing part of the business. The Company's strong
regional position in the copper tube industry is a solid building block for
further market penetration.
Long-term demand for scrap will continue to grow, and volume will
increase at existing operations. Capital expenditures over the past five years
have enhanced significantly the capability to process high quality scrap in an
efficient manner.
The organizational setup for the Marketing and Trading segment was
revised as of the beginning of fiscal year 2000, including the addition of the
position of president. Among other benefits, the new structure should lead to
more unity and synergies and better risk management while maintaining
entrepreneurial spirit. The segment will continue its evolution toward more
marketing and distribution, while maintaining a strong presence in the trading
side of the business. The Company will also further its efforts on value-added
businesses whereby it will broaden its product range and provide more services
to the customer and the supplier.
The sections regarding segments and near- and long-term outlook contain
forward-looking statements regarding the outlook for the Company's financial
results including product pricing and demand, capacity increases, efficiency
improvements and general market conditions. There is inherent risk and
uncertainty in any forward-looking statements. Variances will occur and
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some could be materially different from management's current opinion.
Developments that could impact the Company's expectations include interest rate
changes, construction activity, unanticipated start-up expenses and delays,
metals pricing, over which the Company exerts little influence, increased
capacity and product availability from competing steel minimills and other steel
suppliers including import quantities and pricing, global factors including
credit availability, currency fluctuations and decisions by governments
impacting the level and pace of overall economic activity.
1998 COMPARED TO 1997
SEGMENTS
[MANUFACTURING] Net sales for the Manufacturing segment increased 14% and
operating profit increased 36%. The CMC Steel Group accounted for these
increases. The Copper Tube Division's annual operating profit was down slightly.
Selling prices were lower at the beginning of 1998 but recovered, and
combined with record shipments produced a 42% increase in annual operating
profit for the CMC Steel Group. Mill tonnage shipped at 2,008,000 was 4% ahead
of last year.
The four mills showed a 22% increase in operating profit led by
SMI-Alabama and SMI-Arkansas, each with increases in excess of 24%; particularly
notable was the turnaround in profitability of SMI-South Carolina which was
profitable all fiscal year. Its results were all the more noteworthy as they
were attained in the midst of construction of a new rolling mill. SMI-Texas'
operating profit was 7% ahead of the prior year.
Operating profit in the Company's steel fabrication businesses more
than doubled. Fabricated shipments of 839,000 tons were well ahead of the
previous year of 690,000 tons. SMI Owen Steel, the large structural fabrication
facility in Columbia, South Carolina, had operating profit $4.4 million ahead of
the prior year. A similar gain was accomplished by the combined joist plants. As
of August 31, 1998, the Company ceased operations at its railcar rebuilding
facility in Tulsa, Oklahoma.
CMC Steel Group computer migration project expenses totaled $8.6
million compared with $6 million in 1997. Final pension settlement cost of $3.3
million was incurred as the Company's only major defined benefit plan was
terminated.
The Company spent $120 million for capital improvements for fiscal
1998, primarily at the steel mills. Construction of the new rolling mill and
ancillary equipment at SMI-South Carolina will ultimately double capacity,
reduce costs, and broaden the product line. The finishing upgrade at SMI-Alabama
(replacement of the mill cooling bed, straighteners and stackers) will improve
quality, enhance efficiency and also broaden the product line.
Attractive interest rates continue to strengthen residential
construction markets, maintaining demand for plumbing tube. Margins were weak in
the early months of 1998, but improved to moderate proportions by the fourth
quarter. Copper tube shipments increased 11% over the prior year to 51 million
pounds. Annual production was 4% above 1997's rate.
[RECYCLING] The Asian economic crisis brought the Recycling segment's four-year
period of record operating profits to an abrupt end. Scrap normally exported by
competitors was diverted for domestic consumption. Selling prices were
decimated, falling to their lowest levels in many years. Margins eroded while
total processing costs increased due to acquisitions; however, the new capacity
failed to bring in sufficient margin increases. All of these factors resulted in
a moderate operating loss--the first in six years in this cyclical industry.
For 1998, the average copper and brass scrap price dropped 22%,
aluminum fell 6%, and steel scrap was unchanged; at year end this left prices
20% below the previous year. Ferrous scrap shipped
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increased 11% to 1.28 million tons; however, nonferrous shipments declined 11%
to 188,000 tons, due to a drop in copper and brass shipments. Total volume of
scrap processed, including the CMC Steel Group processing plants, reached
1,948,000 tons.
During 1998 the Company made several small acquisitions within existing
geographic areas, none of which were significant to the overall operations of
the Company.
[MARKETING AND TRADING] Net sales for the Marketing and Trading segment
increased 4%, and operating income rose 17% over the prior year. Purchases from
new sources in the Far East increased significantly while sales were sharply
reduced. Shipments into North America were brisk for most product lines and
business in Europe increased.
Operating profits from steel marketing and distribution increased;
however, profitability in steel trading decreased because of reduced volume and
margins. Nonferrous metal product tonnage increased particularly in
semi-finished aluminum products. Activity for ores, minerals and industrial
materials continued solid; meanwhile, new marketing channels were added.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations (before changes in current assets and
liabilities) for the year ended August 31, 1999, were a record $103 million
compared to $93 million for fiscal year 1998. Also, net cash flows from
operating activities for fiscal 1999 were the highest in the Company's history.
Strong earnings and working capital reduction initiatives generated the cash
flows from operating activities. Accounts receivable and inventories
significantly decreased in the CMC Steel Group as a result of working capital
reduction efforts and from the effect of falling prices. Decreased advances to
suppliers for material purchases in the Marketing and Trading segment resulted
in a net decrease in other assets. This was partially offset on a consolidated
basis by the CMC Steel Group's investments in mill rolls and guides for the new
mill at South Carolina. Also depreciation and amortization expense increased
primarily due to the capital projects at South Carolina and Alabama.
Cash flows from operating activities were invested in new equipment,
primarily in the Manufacturing segment (particularly at the South Carolina and
Alabama mills). Accounts payable increased primarily in the Marketing and
Trading segment due to more shipments in transit at year end and more extended
payment terms from suppliers than in the prior year.
Net working capital was $291 million as of August 31, 1999, compared to
$247 million last year. The current ratio was improved at 1.8 versus 1.6 at the
prior year end.
The Company's sources of short-term funds include a commercial paper
program of $100 million, an increase of $60 million from the prior year. The
Company's commercial paper is rated in the second highest category by Moody's
Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch IBCA,
Inc. (F-2). Formal bank credit lines equal to 100% of the amount of all
commercial paper outstanding are maintained.
The Company filed a shelf registration of $200 million of long- and
medium-term notes, of which $100 million were sold in February 1999. The
proceeds were used to retire short-term borrowings.
The Company's $250 million long-term notes issued in February 1999
($100 million), July 1997 ($50 million) and July 1995 ($100 million) are rated
investment grade by Standard & Poor's Corporation and Fitch IBCA, Inc. (BBB+)
and by Moody's Investors Service (Baa1).
The Company has numerous informal credit facilities available from
domestic and international banks. These credit facilities are priced at bankers'
acceptance rates or on a cost of funds basis.
Management believes it has adequate capital resources available from
internally generated funds and from short-term and long-term capital markets to
meet anticipated working capital needs,
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planned capital expenditures, dividend payments to shareholders, stock
repurchases and to take advantage of new opportunities requiring capital.
Capital investments in property, plant and equipment were a record $142
million in 1999 compared to $120 million the prior year. Capital spending for
fiscal 2000 is projected to be substantially reduced at $76 million. The most
important projects to be undertaken are the expansion of the Howell Metal
Company's copper tube manufacturing facility and growth in steel fabrication.
Total capitalization was $707 million at the end of fiscal 1999, a 23%
increase from the prior year. The ratio of long-term debt to capitalization was
37.5%, up from 30.1% last year due to the issuance of the $100 million long-term
notes. Stockholders' equity was $418 million or $29.05 per share. During the
fiscal year, the Company repurchased 314,400 shares of Company stock at an
average cost of $22.30 per share. The Company has authorized an additional
270,681 shares for repurchase. On August 31, 1999, 1,726,323 treasury shares
were held by the Company. There were 14,406,260 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 eight
decades 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 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 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
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.
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In fiscal 1999, the Company incurred environmental expense of $8.8
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 $9.8 million of its
capital expenditures for fiscal 1999 related to costs directly 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, 1999, $5.3 million remained in accrued expenses
for environmental liabilities.
DIVIDENDS
Quarterly cash dividends have been paid in each of the past 35
consecutive years. The annual dividend in 1999 was 52 cents a share paid at the
rate of 13 cents each quarter.
YEAR 2000
The Company's three operating segments, Manufacturing, Recycling, and
Marketing and Trading (combined with Corporate), have undertaken management
information system initiatives that address a broad spectrum of functionalities
including the Year 2000 issue, the ability of computer software to correctly
interpret dates at the turn of the century. The following is a discussion by
segment of the status of each of these initiatives.
[MANUFACTURING] The CMC Steel Group and the Howell Metal Company have assessed
their key financial and operational systems, and detail plans have been
implemented to address modifications required by December 31, 1999. Since fiscal
year 1995, the CMC Steel Group has been in preparation and implementation of a
Year 2000 compliant enterprise resource planning system. This system covers all
traditional financial systems and, in addition, covers sales, raw material
usage, transportation management, purchasing, maintenance and other functional
areas. Each of the four mills in the CMC Steel Group, SMI-Texas, SMI-Alabama,
SMI-South Carolina, and SMI-Arkansas, have Year 2000 task teams that meet
periodically. As of August 31, 1999, the mills' systems implementation was more
than 90% complete with final completion scheduled by December 31, 1999. As of
August 31, 1999, the mill task teams were well into verifying, validating and
testing these systems as well as coordinating final contingency plans. Non-mill
operations have less formalized structures as the effect is significantly
reduced. As of August 31, 1999, letters of compliance have been received for all
non-mill systems, or upgrades are scheduled for completion by December 1999. All
critical suppliers and vendors for both mill and non-mill operations have
submitted readiness letters or alternatives have been surveyed.
An infrastructure migration completed in July 1998 upgraded all
personal computer hardware and software to common compliant platforms. Systems
in place at the CMC Steel Group scrap yards, a relatively small portion of the
CMC Steel Group, will be upgraded to a current release by December 1999.
[RECYCLING] The Recycling segment has substantially completed a multi-year
transition plan of its systems for Year 2000 compliance in each of the following
categories:
1. Mainframe computer hardware--All current computers have been
certified by the manufacturer as compliant. Outside of Year 2000 issues, some
older machines have been retired and replaced by certified compliant hardware.
2. Workstation hardware--Personal computers have had chip replacements
or been replaced where more cost effective.
3. Business application software--Core applications developed in-house
have had conversion processes completed and are fully compliant. Outside package
software for general ledger and payroll has been upgraded. The fixed asset
package is scheduled to be completed by the end of calendar year 1999.
19
21
4. Systems software--The mainframe replacements discussed in point 1
above have brought all operating systems up to a certified compliant version.
All PC's have had Year 2000 patches installed, where required.
5. User level software and applications--Standard spreadsheet and word
processing software has been upgraded to current versions. There may remain
pockets of applications that will still be discovered during the ordinary course
of business, which will be addressed as uncovered.
6. Communication equipment and software--The segment-wide
communications equipment is now compliant.
7. Non-computer automated systems--This is considered a minor risk and
is 80% completed with 100% completion anticipated by the end of December 1999.
[MARKETING AND TRADING, INCLUDING CORPORATE] The Marketing and Trading segment,
combined with the Corporate functions, represent the most geographically
dispersed operations of the Company. Several systems were in place to address
both financial applications and marketing information needs. Compliance
evaluations begun two years ago indicated that generally the international
divisions were compliant but reaching capacity constraints and that the domestic
operations had sufficient size but were not compliant. Therefore, a joint
program was developed to address both the functional marketing requirements and
the financial systems with the goal to have the entire segment on a common
platform with Corporate.
Separate teams were established for completing the upgrade process for
both marketing and financials. A common PC hardware and software platform has
been established. Financial systems for domestic operations were rolled out,
tested, and online in May 1999. Alternatives for the joint marketing program are
still being researched. In the meantime, the existing trading management system
has been reviewed and issues identified and corrected. All operating systems
will be updated and compliant by December 1999.
[SUMMARY] The area of greatest risk is the readiness of the Company's
suppliers and vendors. Although appropriate inquiries have been made, there will
be a factor of the unknown until January 1, 2000.
The Company has implemented the program described above with the use of
internal personnel and outside consultants. Resources are considered available
and adequate to meet the Company's goals. Where necessary, contingency plans
have been developed to address any anticipated shortfall. Minimal additional
costs will be required to implement the remaining Year 2000 compliance
activities.
20
22
The section titled "Year 2000" contains forward-looking statements
regarding the Company's expectations regarding addressing the Year 2000 computer
problem. These plans among other factors include the timing of implementation
phases, reallocation of in-house resources, use of outside personnel,
third-party hardware and software, and reliance on representations of third
parties. There is inherent risk and uncertainty in any forward-looking
statements. Variances will occur and could be materially different from
management's current "opinion. Developments that could impact the Company's
expectations include the availability of Company personnel, malfunctions of
third-party software and hardware, over which the Company has no control,
availability of outside consultants, and the inability to fully assess the
readiness of key vendors and suppliers.
EURO
Effective January 1, 1999, eleven of the fifteen member countries of
the European Union adopted the euro as their common legal currency and
established fixed conversion rates between their existing sovereign currencies
and the euro. The existing sovereign currencies remain legal tender in the
participating countries during the transition period ending on January 1, 2002.
The Company has adequate information systems for compliance with the
requirements of this new currency. The Company does not anticipate that the
adoption of the Euro will have a material impact on its results of operations,
financial position or liquidity.
21
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK
[APPROACH TO MINIMIZING MARKET RISK] The Company's product lines and its
worldwide operations expose it to risks associated with fluctuations, sometimes
volatile, in exchange and interest rates and commodity prices. It employs
various strategies to mitigate the effects of this volatility. None of the
instruments used are entered into for trading purposes or speculation; all are
effected as hedges of underlying physical transactions. The accompanying
information mandated by the Securities and Exchange Commission should be read in
conjunction with footnotes 1 and 4 to the annual financial statements.
[FOREIGN EXCHANGE] The Company 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. No single currency poses a primary risk to the Company; fluctuations
that cause temporary disruptions in one market segment tend to open
opportunities in other segments. As a matter of Company policy, foreign exchange
contracts are used to hedge only firm commitments, not anticipated transactions.
Certain information in the accompanying chart assumes that the foreign exchange
contracts were settled at August 31, 1999; this would defeat their purpose as
hedges on transactions that will not occur for some period after year end. Due
to customary weight and quality settlements on physical transactions, small
gains and losses do occur upon close of the foreign exchange contracts.
[INTEREST RATES] Substantially all of the Company's short- and long-term debt
is denominated in United States dollars. The Company's financial results as
affected by interest rates are most vulnerable to swings in short-term
commercial borrowing rates. At August 31, 1999, approximately $7 million
Australian dollars notional amount of debt was covered by an interest rate swap.
The swap is variable to fixed, terminating June 2, 2003, intending to match
physical asset lives with debt provisions in one foreign subsidiary. The
variable rate at year end was 5.2% and the fixed rate 5.5%. At August 31, 1999,
it had a fair value of $115,000.
[COMMODITY PRICES] Pricing of certain firm sales and purchase commitments is
fixed to forward metal commodity exchange quotes. The Company enters into metal
commodity contracts for copper, aluminum, and zinc as hedges of gross margins on
these commitments. Of these, copper is the most predominant. The hedges are
closed when the underlying sales and purchase commitments are priced, and gain
or loss is recognized when the sale or purchase is recorded. In general the
Company is most affected in periods of declining commodity prices as spreads
narrow and sources withhold recycled metals from the market. The settlement
values expressed in the accompanying chart as of August 31, 1999, should be read
with caution as the offsetting physical transactions for which the commodity
futures are effective as hedges are not quantified. Physical transaction
quantities will not match exactly with standard commodity lot sizes, leading to
small gains and losses at settlement.
The following table provides certain information regarding the financial
instruments discussed above.
22
24
FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS AS OF AUGUST 31, 1999:
Range of U.S. $
Amount Currency Hedge Rates Equivalent
------------- ------------------ ------------------ -----------------
8,376,000 German mark 1.6137-1.8740 $ 4,748,000
12,915,000 ECU .92907-.95822 13,636,000
5,500,000 Swiss franc 1.385-1.5395 3,684,000
3,350,000 Singapore dollar 1.68-1.6977 1,987,000
6,013,000 British pound .61816-.63088 9,641,000
49,305,000 Australian dollar 1.5041-1.5713 31,784,000
1,850,000 Norwegian krone 7.4914-7.5642 246,000
39,000 Netherlands gilder 2.1164 18,000
- -------------- ------------------ ------------------ --------------
65,744,000
Revaluation as of August 31, 1999, at quoted market 65,388,000
--------------
Settlement gain $ 356,000
o All foreign currency exchange contracts mature within one year.
o Foreign currency exchange contracts effective as hedges have no book
carrying value until maturity; they are considered reductions in otherwise
available bank credit lines.
AS OF AUGUST 31, 1998:
Revaluation at quoted market $ 57,398,000
Settlement gain $ 1,332,000
METAL COMMODITY CONTRACT COMMITMENTS AS OF AUGUST 31, 1999:
Range of Total Contract
Long/ # of Standard Total Hedge Rates Value at
Terminal Exchange Metal Short Lots Lot Size Weight Per MT Inception
- ---------------- -------------- ------------- ------------- ------------- ------------- -------------- --------------
London Metal
Exchange (LME) Copper Long 61 25 MT 1525 MT $ 1422-1757 $ 2,369,000
Zinc Long 23 25 MT 575 MT 995-1151 605,000
Aluminum Long 4 25 MT 100 MT 1375 138,000
Aluminum Short 2 25 MT 50 MT 1478 74,000
New York Mercantile Per 100/wt.
Exchange Copper Long 125 25,000 lbs. 3.1 MM lbs. 64.65-81.00 2,346,000
Commodities Division
(Comex) Copper Short 251 25,000 lbs. 6.3 MM lbs. 75.05-79.30 4,857,000
- ---------------- -------------- ------------- ------------- ------------- ------------- -------------- --------------
10,389,000
Revaluation as of August 31, 1999, at quoted market 10,101,000
-------------
Settlement gain $ 288,000
o Eighteen lots mature after one year
o MT = Metric Tons
o MM = Millions
o Metal commodity contracts effective as hedges have no book carrying value
until maturity; a two million dollar letter of credit stands as margin
requirement for Comex transactions.
AS OF AUGUST 31, 1998:
Revaluation at quoted market $ 3,577,000
Settlement (loss) $ (610,000)
23
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended August 31,
--------------------------------------------
(in thousands, except share data) 1999 1998 1997
- ---------------------------------- ---------- ---------- ----------
Net sales $2,251,442 $2,367,569 $2,258,388
Costs and expenses:
Cost of goods sold 1,948,596 2,083,036 2,004,155
Selling, general and administrative expenses 192,233 178,961 164,173
Interest expense 19,650 18,055 14,637
Employees' retirement plans 15,933 19,448 14,468
---------- ---------- ----------
2,176,412 2,299,500 2,197,433
---------- ---------- ----------
Earnings before income taxes 75,030 68,069 60,955
Income taxes 27,910 25,355 22,350
---------- ---------- ----------
Net earnings $ 47,120 $ 42,714 $ 38,605
========== ========== ==========
Basic earnings per share $ 3.25 $ 2.88 $ 2.59
========== ========== ==========
Diluted earnings per share $ 3.22 $ 2.82 $ 2.54
========== ========== ==========
See notes to consolidated financial statements.
24
26
Commercial Metals Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
August 31,
------------------------------
(in thousands, except share data) 1999 1998
- ---------------------------------- ----------- -----------
ASSETS
Current assets:
Cash $ 44,665 $ 30,985
Accounts receivable (less allowance for collection
losses of $7,714 and $8,120) 304,318 318,655
Inventories 249,688 257,231
Other 63,666 66,629
----------- -----------
Total current assets 662,337 673,500
Property, plant and equipment:
Land 25,927 24,967
Buildings 87,796 67,505
Equipment 635,054 499,899
Leasehold improvements 30,119 26,084
Construction in process 25,351 61,946
----------- -----------
804,247 680,401
Less accumulated depreciation and amortization (401,975) (361,939)
----------- -----------
402,272 318,462
Other assets 14,379 10,655
----------- -----------
$ 1,078,988 $ 1,002,617
=========== ===========
See notes to consolidated financial statements.
25
27
August 31,
------------------------------
(in thousands, except share data) 1999 1998
- ---------------------------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 10,000 $ 40,000
Notes payable 4,382 60,809
Accounts payable 191,508 163,507
Other payables and accrued expenses 153,889 143,394
Income taxes payable 2,025 6,870
Current maturities of long-term debt 9,873 11,483
----------- -----------
Total current liabilities 371,677 426,063
Deferred income taxes 23,263 21,376
Long-term debt 265,590 173,789
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 14,406,260 and 14,569,611 shares 80,663 80,663
Additional paid-in capital 14,131 14,285
Accumulated other comprehensive loss (774) (1,596)
Retained earnings 368,177 328,597
----------- -----------
462,197 421,949
Less treasury stock 1,726,323 and 1,562,972 shares at cost (43,739) (40,560)
----------- -----------
418,458 381,389
----------- -----------
$ 1,078,988 $ 1,002,617
=========== ===========
See notes to consolidated financial statements.
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28
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
August 31,
---------------------------------------
(in thousands) 1999 1998 1997
- --------------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 47,120 $ 42,714 $ 38,605
Adjustments to earnings not requiring cash:
Depreciation and amortization 52,054 47,460 43,720
Provision for losses on receivables 1,877 2,898 1,433
Deferred income taxes 1,887 542 (210)
Other (68) (164) (353)
--------- --------- ---------
Cash Flows from Operations Before Changes in
Current Assets and Liabilities 102,870 93,450 83,195
Changes in Current Assets and Liabilities:
Decrease (increase) in accounts receivable 12,460 (33,104) 3,443
Decrease (increase) in inventories 7,543 (36,587) (34,443)
Decrease (increase) in other assets 1,009 (30,457) (9,449)
Increase in accounts payable,
accrued expenses, and income taxes 34,412 47,129 14,063
--------- --------- ---------
Net Cash Flows from Operating Activities 158,294 40,431 56,809
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (141,752) (119,915) (70,955)
Sales of property, plant and equipment 4,247 1,418 3,037
--------- --------- ---------
Net Cash Used by Investing Activities (137,505) (118,497) (67,918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper--net change (30,000) 40,000 --
Notes payable--net change (56,427) 60,809 --
New long-term debt 100,000 -- 50,000
Payments on long-term debt (9,809) (11,441) (11,287)
Stock issued under stock option,
purchase, and bonus plans 3,273 8,239 5,989
Tax benefits related to stock option plan 406 895 649
Treasury stock acquired (7,012) (14,732) (17,727)
Dividends paid (7,540) (7,717) (7,777)
--------- --------- ---------
Net Cash (Used) Provided by Financing Activities (7,109) 76,053 19,847
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 13,680 (2,013) 8,738
Cash and Cash Equivalents at Beginning of Year 30,985 32,998 24,260
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 44,665 $ 30,985 $ 32,998
========= ========= =========
See notes to consolidated financial statements.
27
29
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Accumulated Treasury Stock
------------ Additional Other Comp- --------------
Number of Paid-In rehensive Retained Number of
(in thousands, except share data) Shares Amount Capital Loss Earnings Shares Amount Total
- --------------------------------- --------- --------- ---------- ------------ --------- --------- --------- ---------
Balance, September 1, 1996 16,132,583 $ 80,663 $ 13,193 $ 262,772 (1,036,619) $ (21,495) $ 335,133
Comprehensive Income:
Net earnings 38,605 38,605
Cash dividends--$.52 per share (7,777) (7,777)
Treasury stock acquired (628,993) (17,727) (17,727)
Stock issued under stock option,
purchase and bonus plans (215) 293,959 6,204 5,989
Tax benefits related to stock
option plan 649 649
---------- --------- --------- --------- --------- ---------- --------- ---------
Balance, August 31, 1997 16,132,583 80,663 13,627 293,600 (1,371,653) (33,018) 354,872
---------- --------- --------- --------- --------- ---------- --------- ---------
Comprehensive Income:
Net earnings 42,714 42,714
Other comprehensive loss -
Foreign currency translation
adjustment, net of taxes
of $859 $ (1,596) (1,596)
---------- --------- --------- --------- --------- ---------- --------- ---------
Comprehensive income 41,118
Cash dividends--$.52 per share (7,717) (7,717)
Treasury stock acquired (496,000) (14,732) (14,732)
Stock received from
escrow upon settlement
of Owen lawsuit (47,316) (1,286) (1,286)
Stock issued under stock option,
purchase and bonus plans (237) 351,997 8,476 8,239
Tax benefits related to stock
option plan 895 895
---------- --------- --------- --------- --------- ---------- --------- ---------
Balance, August 31, 1998 16,132,583 80,663 14,285 (1,596) 328,597 (1,562,972) (40,560) 381,389
---------- --------- --------- --------- --------- ---------- --------- ---------
Comprehensive Income:
Net earnings 47,120 47,120
Other comprehensive income-
Foreign currency translation
adjustment, net of taxes
of $442 822 822
---------- --------- --------- --------- --------- ---------- --------- ---------
Comprehensive income 47,942
Cash dividends--$.52 per share (7,540) (7,540)
Treasury stock acquired (314,400) (7,012) (7,012)
Stock issued under stock option,
purchase and bonus plans (560) 151,049 3,833 3,273
Tax benefits related to stock
option plan 406 406
---------- --------- --------- --------- --------- ---------- --------- ---------
Balance, August 31, 1999 16,132,583 $ 80,663 $ 14,131 $ (774) $ 368,177 (1,726,323) $ (43,739) $ 418,458
========== ========= ========= ========= ========= ========== ========= =========
See notes to consolidated financial statements.
28
30
Commercial Metals Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[NATURE OF OPERATIONS] The Company manufactures, recycles and markets steel
and metal products and related materials. Its manufacturing and recycling
facilities and primary markets are located in the Sunbelt from the mid-Atlantic
area through the West. Through its global marketing offices, the Company trades
primary and secondary metals and other industrial products worldwide. As more
fully discussed in footnote 12, 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] Generally, sales are recognized when title passes to the
customer based on customary industry practice. Certain revenues related to the
steel fabrication operations are recognized on the percentage of completion
method. Due to uncertainties inherent in the estimation process, it is at least
reasonably possible that completion costs for certain projects will be further
revised in the near-term.
[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.
[ASSETS HELD FOR SALE] Included within other assets is equipment which is no
longer used for Manufacturing operations and is being held for sale. The assets
are recorded at management's best estimate of the amounts expected to be
realized upon sale. The amounts the Company will ultimately realize could differ
substantially from management's estimates.
[START-UP COSTS] Start-up 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 5. Benefits from tax credits are reflected currently in earnings.
[FOREIGN CURRENCY] The functional currency of the Company's international
subsidiaries in Australia, the United Kingdom, and Germany is the local
currency. The remaining international subsidiaries' functional currency is the
United States dollar. Translation adjustments are reported as a component of
accumulated other comprehensive income.
Gain or loss on foreign currency exchange contracts designated as hedges is
deferred and recognized upon settlement of the related trade receivable or
payable.
29
31
[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.
[RECLASSIFICATIONS] Certain reclassifications have been made in the 1998 and
1997 financial statements to conform to the classifications used in the current
year.
[ACCOUNTING STANDARDS] The Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, "Reporting Comprehensive Income", effective September
1, 1998. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, adoption had no impact on the
Company's net income or stockholders' equity. Statement 130 requires foreign
currency translation adjustments to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
Effective for the year ended August 31, 1999, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which changed the method for determining and reporting certain financial
information at segment levels. Prior year segment disclosures have been modified
to reflect these new requirements.
The Company will adopt the American Institute of Certified Public
Accountants' (AICPA) Accounting Standards Executive Committee Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," on September 1, 1999. This SOP requires that
entities capitalize certain internal-use software costs once specific criteria
are met. Management does not anticipate this SOP will have a significant impact
on the Company's consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is effective for the Company's year ending August 31, 2001. This statement
requires all derivatives to be recognized as either assets or liabilities in the
balance sheet, measured at fair value. Gains or losses resulting from changes in
the values of these derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of this statement on the consolidated financial
statements.
NOTE 2. INVENTORIES
Before reduction of LIFO reserves of $2,993,000 and $22,459,000 at August
31, 1999 and 1998, respectively, inventories valued under the first-in,
first-out method approximated replacement cost.
At both August 31, 1999 and 1998, 72% of total inventories were valued at
LIFO. The remainder of inventories, valued at FIFO, consisted mainly of material
dedicated to international business.
30
32
NOTE 3. CREDIT ARRANGEMENTS
The Company is active in the commercial paper market with a program that
permits borrowings up to $100,000,000. 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 bankers'
acceptance rates or on a cost of funds basis. No compensating balances or
commitment fees are required under these credit facilities.
The Company filed a shelf registration for $200 million of long- and
medium-term notes, of which $100 million of investment grade, unsecured notes
were sold in February 1999 with a coupon rate of 6.75%, and an effective rate of
6.76% due in February 2009. The proceeds from the notes were used to retire
short-term borrowings. The remaining $100 million securities included in the
shelf registration can be issued over the next two years.
The Company's $100 million investment grade, unsecured notes due in 2005
have a coupon rate of 7.20%, which, after netting the proceeds of an interest
rate hedge, results in an effective interest rate of 7.04%.
On August 15, 1996, the Company arranged a five-year, $40 million unsecured
revolving credit loan facility with a group of four banks. On October 29, 1998,
an additional five year $60 million facility was finalized with three banks. The
agreements provide for borrowing in United States dollars indexed to the
reference rate or to the offshore dollar interbank market rate. Commitment fees
of .1125% and .1800% per annum are payable on the 1996 and 1998 credit lines,
respectively. No compensating balances are required.
Long-term debt and amounts due within one year as of August 31, 1999, are as
follows:
Long-Term Current
(in thousands) Debt Maturities Total
- -------------- ---------- ---------- ----------
6.75% notes due 2009 $ 100,000 $ -- $ 100,000
7.20% notes due 2005 100,000 -- 100,000
6.80% notes due 2007 50,000 -- 50,000
8.49% notes due 2001 14,285 7,143 21,428
8.75% note due 1999 -- 2,141 2,141
Other 1,305 589 1,894
---------- ---------- ----------
$ 265,590 $ 9,873 $ 275,463
========== ========== ==========
All interest is payable semiannually. The 6.75% notes are due in February
2009; the 7.20% notes are due in July 2005; the 6.80% notes in August 2007. The
8.49% notes provide for annual principal repayments beginning on December 1,
1995; other notes are payable semiannually or annually.
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, 1999,
approximately $229,000,000 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, 1999 are (in thousands): 2000-$9,873; 2001-$7,729;
2002-$7,764; 2003-$4; 2004 and thereafter-$250,093.
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33
Interest expense is comprised of the following:
Year ended August 31,
------------------------------
(in thousands) 1999 1998 1997
- -------------- -------- -------- --------
Long-term debt $12,013 $11,568 $10,894
Commercial paper 2,257 1,547 731
Notes payable 5,380 4,940 3,012
------- ------- -------
$19,650 $18,055 $14,637
======= ======= =======
Interest of $4,547,000, $2,290,000, and $804,000 was capitalized in
the cost of property, plant and equipment constructed in 1999, 1998 and 1997,
respectively. Interest of $24,334,000, $20,691,000, and $15,578,000 was paid
in 1999, 1998, and 1997, respectively.
NOTE 4. 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 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
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) 1999 1998
- -------------- -------- --------
Long-Term Debt:
Carrying amount $275,463 $185,272
Estimated fair value $264,715 $186,796
======== ========
The fair value of all outstanding letters of credit is not meaningful.
In 1998, the Company entered into an interest rate swap (variable to
fixed) effective as a hedge for certain debt outstanding of its Australian
subsidiary. The instrument's notional amount is seven million Australian
dollars and terminates June 2, 2003. The variable rate at year end was 5.2% and
the fixed rate 5.5%. At August 31, 1999, it had a fair value of $115,000.
The Company does not have significant off-balance-sheet risk from
financial instruments. It enters into foreign exchange and commodity contracts
as hedges when trade receivables and payables are denominated in currencies
other than the functional currency. Effects of changes in currency rates are
therefore minimized. The notional amount of foreign currency exchange contracts
outstanding at year
32
34
end was $65,744,000. The fair value of these contracts effective as hedges if
settled at August 31, 1999 would result in a gain of $356,000. As a matter of
Company policy, foreign exchange contracts are used to hedge only firm
commitments, not anticipated transactions. The Company does not hold financial
instruments for trading purposes.
Pricing of certain firm sales and purchase commitments is fixed to
forward metal commodity exchange quotes. The Company enters into metal commodity
contracts (predominantly copper) as hedges of gross margins on these
commitments. The hedges are closed when the underlying sales and purchase
commitments are priced, and gain or loss is recognized when the sale or purchase
is recorded. The notional amount of forward commodity contracts outstanding at
year-end was $10,388,000. The fair value of these contracts effective as hedges
if settled at August 31, 1999 would result in a gain of $288,000.
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.
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.
NOTE 5. INCOME TAXES
The provisions for income taxes include the following:
Year ended August 31,
------------------------------
(in thousands) 1999 1998 1997
- -------------- -------- -------- --------
Current:
United States $22,443 $21,651 $19,986
Foreign 672 782 680
State and local 2,689 2,558 2,065
------- ------- -------
25,804 24,991 22,731
------- ------- -------
Deferred 2,106 364 (381)
------- ------- -------
$27,910 $25,355 $22,350
======= ======= =======
Taxes of $32,515,000, $21,444,000 and $25,506,000 were paid in 1999,
1998 and 1997, respectively.
33
35
Deferred taxes arise from temporary differences between the tax basis
of an asset or liability and its reported amount in the financial statements.
The sources and deferred tax liabilities (assets) associated with these
differences are:
August 31,
------------------
(in thousands) 1999 1998
- -------------- -------- --------
Tax on difference between tax
and book depreciation $23,388 $19,165
U.S. taxes provided on foreign
income and foreign taxes 11,497 11,595
Net operating losses (2,671) (2,660)
Alternative minimum tax credit (1,713) (1,713)
Other accruals (2,878) (2,030)
Other (4,360) (2,981)
------- --------
Total $23,263 $ 21,376
======= ========
The Company uses substantially the same depreciable lives for tax and
book purposes. Changes in deferred taxes relating to depreciation are mainly
attributable to differences in the basis of underlying assets recorded under
the purchase method of accounting. As noted above, the Company provides United
States taxes on unremitted foreign earnings. Net operating losses consist of
$4.5 million of federal net operating losses that are due to expire in 2009 and
$51 million of state net operating losses that expire during the tax years
ending from 2006 to 2019. These assets will be reduced as tax expense is
recognized in future periods. The $1.7 million alternative minimum tax credit
is available indefinitely.
The Company's effective tax rates were 37.2% for both 1999 and 1998,
and 36.7% in 1997. Reconciliations of the United States statutory rates to the
effective rates are as follows:
Year ended August 31,
------------------------------
1999 1998 1997
-------- -------- --------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes 2.3 2.6 2.2
Other (.1) (.4) (.5)
------- ------- -------
Effective tax rate 37.2% 37.2% 36.7%
======= ======= =======
NOTE 6. 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:
1999 1998 1997
-------- -------- ---------
Shares subscribed 187,460 161,130 165,300
Price per share $ 19.50 $ 24.59 $ 23.80
Shares purchased 39,810 138,640 152,260
Price per share $ 24.59 $ 23.80 $ 17.80
Shares available 455,161
The Company recognized compensation expense for this plan of $326,000,
$1,053,000 and $906,000 in 1999, 1998 and 1997, respectively.
34
36
[STOCK OPTION PLANS] The 1986 Stock Incentive Plan (1986 Plan) terminated
November 23, 1996, except as to awards outstanding. Under the 1986 Plan, stock
options were awarded to full-time salaried employees. The option price was the
fair market value of the Company's stock at the date of grant, and the options
are exercisable two years from date of grant.
The 1996 Long-Term Incentive Plan (1996 Plan) was approved in December
1996. Under the 1996 Plan, stock options, stock appreciation rights, and
restricted stock may be awarded to employees. The option price for both the
stock options and the stock rights will not be less than the fair market value
of the Company's stock at the date of grant. Vesting periods are variable but
no award may be exercised after ten years. The outstanding awards under the
1996 Plan vest 50% after one year and 50% after two years from date of grant
and will expire seven years after grant. In 1999, the shareholders of the
Company authorized an amendment to the 1996 Plan resulting in additional
authorized shares of 743,994.
Combined share information for the two plans is as follows:
Weighted
Average Price
Exercise Range
Number Price Per Share
----------- ---------- -----------
September 1, 1996
Outstanding 1,714,495 $ 22.58 $ 8.72-27.61
Granted 390,251 28.00 28.00
Exercised (161,879) 18.60 8.72-27.61
Forfeited (23,559) 26.46 18.42-28.00
Exercisable 1,108,337 21.32 8.72-27.61
---------- --------- ------------
August 31, 1997
Outstanding 1,919,308 $ 23.99 $ 8.72-28.00
Granted 364,841 29.81 29.81
Exercised (229,277) 19.05 8.72-28.00
Forfeited (9,859) 27.35 8.72-29.81
Exercisable 1,454,626 24.14 12.61-28.00
---------- --------- ------------
August 31, 1998
Outstanding 2,045,013 $ 25.56 $12.61-29.81
Granted 7,000 24.01 21.94-26.69
Exercised (118,587) 18.44 12.61-29.81
Forfeited (22,665) 28.59 13.64-29.81
Exercisable 1,712,318 25.56 12.61-29.81
Increased Authorized 743,994
---------- --------- ------------
August 31, 1999
Outstanding 1,910,761 $ 25.96 $12.61-29.81
Authorized
Shares Remaining 762,058
---------- --------- ------------
Share information for options at August 31, 1999:
Outstanding Exercisable
---------------------------------------- ----------------------------------
Weighted
Average
Remain- Weighted Weighted
Range of ing Con- Average Average
Exercise Number tractual Exercise Number Exercise
Price Outstanding Life (Yrs) Price Outstanding Price
- ------------ ----------- ---------- -------- ----------- -----------
$12.61-18.42 178,380 2.3 $17.15 178,380 $17.15
$20.20-24.50 406,678 4.5 $22.53 402,730 $22.54
$26.25-29.81 1,325,703 5.5 $28.20 1,131,208 $27.97
- ------------ --------- ----- ------ --------- ------
$12.61-29.81 1,910,761 5.0 $25.96 1,712,318 $25.56
35
37
The Company has maintained its historical method for accounting for
stock options, which recognizes no compensation expense for fixed options
granted at current market values. Generally accepted accounting principles
require disclosure of an estimate of the weighted-average grant date fair value
of options granted during the year and pro forma disclosures of the effect on
earnings if compensation expense had been recorded.
The Black-Scholes option pricing model used requires the following
weighted-average assumptions:
1999 1998 1997
------ ------ -------
Risk-free interest rate 4.80% 5.44% 6.22%
Expected life 4.15 years 4.60 years 4.85 years
Expected volatility .214 .170 .160
Expected dividend yield 1.7% 1.8% 1.7%
Management believes that the resulting answer has narrow reliability
as characteristics of the Company's options such as nontransferability,
forfeiture provisions, and long lives are inconsistent with the option model's
basic purpose of valuing traded options. For purposes of pro forma earnings
disclosures, the assumed compensation expense is amortized over the option's
vesting period. The 1999 pro forma information includes options granted in
1997, 1998, and 1999. The 1998 pro forma information includes options granted
in 1997 and 1998.
1999 1998 1997
------ ------ ------
Net Earnings (in thousands)
As reported $47,120 $42,714 $38,605
Pro Forma 45,598 41,120 37,584
Net Earnings per share
As reported $ 3.22 $ 2.82 $ 2.54
Pro Forma $ 3.12 2.72 2.47
The weighted-average fair value of options granted in 1999, 1998 and
1997 was $5.07, $6.06 and $6.27, respectively.
[PREFERRED STOCK] Preferred stock has a par value of $1.00 a share, with
2,000,000 shares authorized. It may be issued in series, and the shares of each
series shall have such rights and preferences as fixed by the Board of Directors
when authorizing the issuance of that particular series. There are no shares of
preferred stock outstanding.
[STOCKHOLDER RIGHTS PLAN] On July 28, 1999, the Company's Board of Directors
adopted a stockholder rights plan pursuant to which stockholders were granted
preferred stock rights (Rights) to purchase one one-thousandth of a share of the
Company's Series A Preferred Stock for each share of common stock held. In
connection with the adoption of such plan, the Company designated and reserved
100,000 shares of preferred stock as Series A Preferred Stock and declared a
dividend of one Right on each outstanding share of the Company's common stock.
Rights were distributed to stockholders of record as of August 9, 1999.
The Rights are represented by and traded with the Company's common
stock. The Rights do not become exercisable or trade separately from the common
stock unless at least one of the following conditions are met: a public
announcement that a person has acquired 15% or more of the common stock of the
Company, or a tender or exchange offer is made for 15% or more of the common
stock of the Company. Should either of these conditions be met and the Rights
become exercisable, each Right will entitle the holder (other than the acquiring
person or
36
38
group) to buy one one-thousandth of a share of the Series A Preferred Stock at
an exercise price of $150.00. Each fractional share of the Series A Preferred
Stock will essentially be the economic equivalent of one share of common stock.
Under certain circumstances, each Right would entitle its holder to purchase the
Company's stock or shares of the acquirer's stock at a 50% discount. The
Company's Board of Directors may choose to redeem the Rights (before they become
exercisable) at $0.001 per Right. The Rights expire July 28, 2009.
NOTE 7. EMPLOYEES' PENSION AND PROFIT SHARING PLANS
Substantially all employees of the Company and its subsidiaries are
covered by defined contribution profit sharing and savings plans. Company
contributions, which are discretionary, to all plans were $15,933,000,
$19,448,000, and $14,468,000, for 1999, 1998 and 1997, respectively.
During 1998 the Company settled its only remaining defined benefit
plan, which it had terminated in 1997. Included in 1998 is pension expense of
$3,310,000, substantially all of which was a settlement liability.
NOTE 8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS/POSTEMPLOYMENT BENEFITS
The Company has no significant postretirement obligations. The
Company's historical costs for postemployment benefits have not been significant
and are not expected to be in the future.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments payable by the Company and its consolidated
subsidiaries for noncancelable operating leases in effect at August 31, 1999,
are as follows for the fiscal periods specified:
Real
(in thousands) Equipment Estate
- -------------- --------- ----------
2000 $ 3,622 $ 3,006
2001 3,235 1,985
2002 2,517 1,064
2003 1,464 740
2004 and thereafter 368 1,707
-------- --------
$ 11,206 $ 8,502
======== ========
Total rental expense was $9,100,000, $9,634,000 and $8,621,000 in
1999, 1998 and 1997, respectively.
In the ordinary course of conducting its business, the Company becomes
involved in litigation, administrative proceedings and governmental
investigations, including environmental matters. Management believes that
adequate provision has been made in the financial statements for the potential
impact of these issues, and that the outcomes will not significantly impact the
results of operations or the financial position of the Company although they
may have a material impact on earnings for a particular quarter.
37
39
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. 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.
NOTE 10. EARNINGS PER SHARE
There were no adjustments to net earnings to arrive at income for any
years presented. The stock options granted June 11, 1998, with total outstanding
share commitments of 351,002 at year end, are antidilutive.
August 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Shares outstanding for 14,510,882 14,829,515 14,910,771
basic earnings per share
Effect of dilutive securities:
Stock options/
purchase plans 115,658 291,271 308,956
---------- ---------- ----------
Shares outstanding for
dilutive earnings
per share 14,626,540 15,120,786 15,219,727
38
40
NOTE 11. OTHER PAYABLES AND
ACCRUED EXPENSES
August 31,
------------------
(in thousands) 1999 1998
- -------------- -------- --------
Salaries, wages and commissions $ 29,240 $ 32,685
Employees' retirement plans 27,588 21,882
Advance billings on contracts 15,130 15,585
Insurance 10,755 11,202
Accrual for contract losses 7,132 2,379
Environmental 5,339 5,718
Litigation accrual 6,650 6,650
Freight 6,381 4,936
Taxes other than income taxes 7,704 7,558
Interest 3,412 3,348
Other accrued expenses 34,558 31,451
-------- --------
$153,889 $143,394
======== ========
NOTE 12. BUSINESS SEGMENTS
The Company's reportable segments are based on strategic business
areas, which offer different products and services. These segments have
different lines of management responsibility as each business requires
different marketing strategies and management expertise.
The Company has three reportable segments consisting of Manufacturing,
Recycling, and Marketing and Trading. Manufacturing consists of the CMC~Steel
Group's minimills, steel and joist fabrication operations, fence post
manufacturing plants, heat treating, railcar rebuilding and concrete-related
products, as well as the Howell Metal Company's copper tube manufacturing
facility. The Manufacturing segment's business operates primarily in the
southern United States. Recycling consists of the Secondary Metals Processing
Division's scrap processing and sales operations primarily in Texas, Florida
and the southern United States. Marketing and Trading includes both domestic
and international operations for the sales and distribution of both ferrous and
nonferrous metals and other industrial products. The segment's activities
consist only of physical transactions and not speculation.
The company uses operating profit and profit before tax to measure
segment performance. Intersegment sales are generally priced at prevailing
market prices. Certain corporate administrative expenses are allocated to
segments based upon the nature of the expense. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies.
The following presents information regarding the Company's domestic and
operations outside of the United States:
External Revenues for the
Year ended August 31,
-----------------------------------
(in thousands) 1999 1998 1997
- ------------- ----------- ---------- ----------
United States $1,491,371 $1,615,893 $1,519,538
Non United States 760,071 751,676 738,850
---------- ---------- ----------
Total $2,251,442 $2,367,569 $2,258,388
========== ========== ==========
Long-Lived Assets
as of August 31,
-----------------------------------
(in thousands) 1999 1998 1997
- ------------- ----------- ---------- ----------
United States $409,886 $322,620 $246,560
Non United States 6,765 6,497 7,225
-------- -------- --------
Total $416,651 $329,117 $253,785
======== ======== ========
39
41
Summarized data for the Company's international operations located outside of
the United States (principally in Europe, Australia and the Far East) are as
follows:
Year ended August 31,
------------------------------
(in thousands) 1999 1998 1997
- -------------- -------- -------- --------
Revenues-unaffiliated
customers $306,279 $330,772 $358,483
======== ======== ========
Operating profit $ 5,521 $ 4,491 $ 3,469
======== ======== ========
Total assets $101,434 $107,422 $ 95,358
======== ======== ========
The following is a summary of certain financial information by reportable
segment:
Adjustments
Marketing and
1999 (in thousands) Manufacturing Recycling and Trading Corporate Eliminations Consolidated
- ------------------- ------------- --------- ----------- --------- ------------ ------------
Net sales-unaffiliated
customers $1,202,057 $ 283,635 $ 765,673 $ 77 $ -- $2,251,442
Intersegment sales 3,948 18,300 35,941 -- (58,189) --
---------- ---------- ---------- ---------- ---------- ----------
Net sales 1,206,005 301,935 801,614 77 (58,189) 2,251,442
========== ========== ========== ========== ========== ==========
Operating profit (loss) 83,796 (5,024) 22,606 (6,698) 94,680
========== ========== ========== ========== ========== ==========
Profit (loss) before income taxes 83,710 (5,074) 19,956 (23,562) 75,030
========== ========== ========== ========== ========== ==========
Interest expense 4,068 2,373 2,115 15,641 (4,547) 19,650
========== ========== ========== ========== ========== ==========
Capital expenditures 130,098 6,468 1,291 3,895 141,752
========== ========== ========== ========== ========== ==========
Depreciation and amortization 38,841 11,767 1,050 396 52,054
========== ========== ========== ========== ========== ==========
Total assets $ 683,561 $ 114,807 $ 242,547 $ 38,073 $ -- $1,078,988
========== ========== ========== ========== ========== ==========
1998 (in thousands)
- -------------------
Net sales-unaffiliated
customers $1,229,016 $ 386,002 $ 752,501 $ 50 $ -- $2,367,569
Intersegment sales 4,925 28,884 35,991 (69,800)
---------- ---------- ---------- ---------- ---------- ----------
Net sales 1,233,941 414,886 788,492 50 (69,800) 2,367,569
========== ========== ========== ========== ========== ==========
Operating profit (loss) 74,766 (1,354) 20,582 (7,870) 86,124
========== ========== ========== ========== ========== ==========
Profit (loss) before income taxes 74,753 (1,358) 17,660 (22,986) 68,069
========== ========== ========== ========== ========== ==========
Interest expense 5,375 1,614 1,688 11,668 (2,290) 18,055
========== ========== ========== ========== ========== ==========
Capital expenditures 90,036 27,391 1,360 1,128 119,915
========== ========== ========== ========== ========== ==========
Depreciation and amortization 35,364 10,925 939 232 47,460
========== ========== ========== ========== ========== ==========
Total assets $ 622,694 $ 118,905 $ 236,968 $ 24,050 $ -- $1,002,617
========== ========== ========== ========== ========== ==========
1997 (in thousands)
- -------------------
Net sales-unaffiliated
customers $1,077,296 $ 453,436 $ 727,532 $ 124 $ -- $2,258,388
Intersegment sales 5,703 31,182 30,672 (67,557)
---------- ---------- ---------- ---------- ---------- ----------
Net sales 1,082,999 484,618 758,204 124 (67,557) 2,258,388
========== ========== ========== ========== ========== ==========
Operating profit (loss) 54,782 7,615 17,636 (4,441) 75,592
========== ========== ========== ========== ========== ==========
Profit (loss) before income taxes 54,770 7,608 15,947 (17,370) 60,955
========== ========== ========== ========== ========== ==========
Interest expense 4,378 1,880 516 8,667 (804) 14,637
========== ========== ========== ========== ========== ==========
Capital expenditures 50,773 15,885 4,023 274 70,955
========== ========== ========== ========== ========== ==========
Depreciation and amortization 32,915 9,926 669 210 43,720
========== ========== ========== ========== ========== ==========
Total assets $ 510,951 $ 112,875 $ 192,224 $ 23,011 $ -- $ 839,061
========== ========== ========== ========== ========== ==========
40
42
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1999, 1998 and 1997 are as follows (in
thousands except per share data):
Three Months Ended 1999
----------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
---------- --------- --------- ---------
Net sales $549,376 $550,537 $582,154 $569,375
Gross profit 74,120 70,163 76,139 82,424
Net earnings 11,011 8,386 11,002 16,721
EPS basic .76 .57 .76 1.16
EPS diluted .75 .57 .76 1.15
Three Months Ended 1998
----------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
---------- --------- --------- ---------
Net sales $550,501 $568,178 $606,099 $642,791
Gross profit 63,801 66,284 73,836 80,375
Net earnings 8,053 8,348 11,391 14,922
EPS basic .55 .57 .77 1.01
EPS diluted .54 .56 .75 1.00
Three Months Ended 1997
----------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
---------- --------- --------- ---------
Net sales $530,961 $525,755 $589,646 $612,026
Gross profit 61,654 58,411 66,009 68,159
Net earnings 9,177 7,201 9,510 12,717
EPS basic .61 .48 .64 .87
EPS diluted .60 .47 .63 .85
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 1999 net earnings increased $5,986,000
after the final determination of quantities and prices was made.
During 1999, the Company received $8.1 million in settlements for
antitrust litigation included in net sales, of which $3.0 million was received
in the fourth quarter.
41
43
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, 1999 and 1998 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended August 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended August 31, 1999, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE, LLP
Dallas, Texas
October 13, 1999
42
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No reportable event took place.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Some of the information required in response to this item with regard
to directors is incorporated by reference into this annual report from
Commercial Metals' definitive proxy statement for the annual meeting of
shareholders to be held January 27, 2000, which will be filed no later than 120
days after the close of Commercial Metals' fiscal year. The following is a
listing of employees believed to be considered "Executive Officers" of
Commercial Metals as of August 31, 1999, as defined under Rule 3b-7:
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE
- ---- ------------------------ --- -------------
Louis A. Federle Treasurer 50 1979
Hugh M. Ghormley Vice President and 70 1981
CMC Steel Group - President
Fabrication Plants
Harry J. Heinkele Vice President and Secondary Metals 67 1981
Processing Division - President
A. Leo Howell Vice President and 78 1977
Howell Metal Company - President;
Director and Chairman of the
Executive Committee
William B. Larson Vice President and 46 1995
Chief Financial Officer
Murray R. McClean Vice President and Marketing and 51 1995
Trading Segment - President
Malinda G. Passmore Controller 40 1999
Stanley A. Rabin Chairman of the Board, 61 1974
President and Chief Executive
Officer; Director
43
45
Bert Romberg Senior Vice President 69 1968
Marvin Selig CMC Steel Group - Chairman 76 1968
and Chief Executive Officer; Director
Clyde P. Selig Vice President and 67 1981
CMC Steel Group - President
and Chief Operating Officer
David M. Sudbury Vice President, Secretary and 54 1976
General Counsel
The executive officers are employed by the board of directors of
Commercial Metals or a subsidiary, usually at its first meeting after Commercial
Metals' annual stockholders meeting, and continue to serve for terms set from
time to time by the board of directors in its discretion.
All of the executive officers of Commercial Metals have been employed
by Commercial Metals in the positions indicated above or in positions of similar
responsibility for more than five years, except for Ms. Passmore. Ms. Passmore
was employed in April 1999 as Controller, having formerly been President and CEO
of System Health Providers, Inc. since January 1998, and Chief Financial Officer
from January 1997, until January 1998. Prior to 1997, Ms. Passmore was a
consultant and employed as Executive Director of Financial Services and
Controller with Kaiser Foundation Health Plan of Texas from 1991 to September
1996. Mr. Federle was named Treasurer in April 1999, having been employed since
1977 and Assistant Treasurer since 1979. Mr. Larson was employed in June 1991 as
Assistant Controller, named Controller in March 1995, and elected Vice President
and Chief Financial Officer in April 1999. Mr. McClean was elected to the newly
created position of President of the Marketing and Trading Segment as of
September 1, 1999, having been employed since 1985 and President of the
International Division of that segment since 1995. Mr. Rabin was elected to the
additional position of Chairman of the Board in March 1999. Marvin Selig is the
brother of 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 by
reference into this annual report from Commercial Metals' definitive proxy
statement for the annual meeting of shareholders to be held January 27, 2000,
which will be filed no later than 120 days after the close of Commercial Metals'
fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by
reference from Commercial Metals' definitive proxy statement for the annual
meeting of shareholders to be held January 27, 2000, which will be filed no
later than 120 days after the close of Commercial Metals' fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, information required in response to this item
is incorporated by reference into this annual report from Commercial Metals'
definitive proxy statement for the annual meeting of shareholders to be held
January 27, 2000, which will be filed no later than 120 days after the close of
Commercial Metals' fiscal year.
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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:
1. All financial statements are included at Item 8 above.
2. Commercial Metals Company and Subsidiaries Consolidated Financial
Statement Schedule
Independent Auditors' Report as to Schedule
Valuation and qualifying accounts (Schedule VIII)
All other schedules have been omitted because they are not applicable,
are not required, or the required information is shown in the financial
statements or notes thereto.
3. The following is a list of the Exhibits 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)(i)c- Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (Filed as Exhibit 2 to the Company's Form 8-A
filed August 3, 1999 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)(i)a- Indenture between Commercial Metals and Chase Manhattan Bank
dated as of July 31, 1995 (Filed as Exhibit 4.1 to Commercial
Metals' Registration Statement No. 33-60809 on July 18, 1995 and
incorporated herein by reference).
(4)(i)b- Rights Agreement dated July 28, 1999 by and between the Company
and ChaseMellon Shareholder Services, LLC, as Rights Agent (Filed
as Exhibit 1 to the Company's Form 8-A filed August 3, 1999 and
incorporated herein by reference).
(21) Subsidiaries of Registrant..................................................................E1
(23) Independent Auditors' consent to incorporation by reference of
report dated October 13, 1999 accompanying the consolidated
financial statements of Commercial Metals Company and
subsidiaries
45
47
for the year ended August 31, 1999 into previously
filed Registration Statements No. 033-61073, No. 033-61075, and
333-27967 on Form S-8 and Registration Statements No. 33-60809
and 333-61379 on Form S-3...................................................................E2
(27) Financial Data Schedule.....................................................................E3
(b) Reports on Form 8-K.
On August 3, 1999 a Form 8-K was filed to report under Item 5. Other
Events, the July 28, 1999 adoption of a shareholder rights plan.
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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
Chairman of the Board, President
and Chief Executive Officer
Date: November 22, 1999
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 22, 1999 Charles B. Peterson, November 22, 1999
Director Director
/s/ Moses Feldman /s/ Stanley A Rabin
- ----------------------------------------- -----------------------------------------
Moses Feldman, November 22, 1999 Stanley A. Rabin, November 22, 1999
Director Chairman of the Board, President,
And Chief Executive Officer
/s/ A. Leo Howell
- ---------------------------------------- /s/ Marvin Selig
A. Leo Howell, November 22, 1999 -----------------------------------------
Vice President and Director Marvin Selig, November 22, 1999
Chairman and Chief Executive Officer
/s/ Walter F. Kammann CMC Steel Group and Director
- --------------------------------------
Walter F. Kammann, November 22, 1999 /s/ Robert R. Womack
Director -----------------------------------------
Robert R. Womack, November 22, 1999
/s/ Ralph E. Loewenberg Director
- --------------------------------------
Ralph E. Loewenberg, November 22, 1999
Director
/s/ Anthony A. Massaro /s/ William B. Larson
- ----------------------------------------- -----------------------------------------
Anthony A. Massaro, November 22, 1999 William B. Larson, November 22, 1999
Director Vice President and
Chief Financial Officer
/s/ Dorothy G. Owen
- ---------------------------------------- /s/ Malinda G. Passmore
Dorothy G. Owen, November 22, 1999 -----------------------------------------
Director Malinda G. Passmore, November 22, 1999
Controller
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INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders of
Commercial Metals Company
Dallas, Texas
We have audited the consolidated financial statements of Commercial Metals
Company and subsidiaries as of August 31, 1999 and 1998, and for each of the
three years in the period ended August 31, 1999, and have issued our report
thereon dated October 13, 1999; such financial statements and report are
included in Item 8 herein. Our audits also included the consolidated financial
statement schedule of Commercial Metals Company listed in Item 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 financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 13, 1999
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SCHEDULE VIII
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
(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
---- ---------- --------- -------- ---------- -------
1997 5,501 1,433 354 1,172 6,116
1998 6,116 2,898 261 1,155 8,120
1999 8,120 1,877 332 2,615 7,714
(A) Recoveries of accounts written off.
(B) Write-off of uncollectible accounts.
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
(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)(i)c Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (Filed as Exhibit 2 to the Company's Form 8-A
filed August 3, 1999 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)(i)a Indenture between Commercial Metals and Chase Manhattan Bank
dated as of July 31, 1995 (Filed as Exhibit 4.1 to Commercial
Metals' Registration Statement No. 33-60809 on July 18, 1995 and
incorporated herein by reference).
(4)(i)b Rights Agreement dated July 28, 1999 by and between the Company
and ChaseMellon Shareholder Services, LLC, as Rights Agent (Filed
as Exhibit 1 to the Company's Form 8-A filed August 3, 1999 and
incorporated herein by reference).
(21) Subsidiaries of Registrant..................................................................E1
(23) Independent Auditors' consent to incorporation by reference of
report dated October 13, 1999 accompanying the consolidated
financial statements of Commercial Metals Company and
subsidiaries
52
for the year ended August 31, 1999 into previously
filed Registration Statements No. 033-61073, No. 033-61075, and
333-27967 on Form S-8 and Registration Statements No. 33-60809
and 333-61379 on Form S-3...................................................................E2
(27) Financial Data Schedule.....................................................................E3