FORM 10-Q/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For Quarter ended May 31, 2003
Commission File Number 1-4304
COMMERCIAL METALS COMPANY
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(Exact Name of registrant as specified in its charter)
Delaware 75-0725338
------------------------------- ----------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
6565 N. MacArthur Blvd.
Irving, Texas 75039
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(Address of principal executive offices)
(Zip Code)
(214) 689-4300
----------------------------------------------------
(Registrant's telephone number, including area code)
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Former name, former address and former fiscal year,
If changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No
X
--- ---
As of June 30, 2003 there were 27,950,196 shares of the Company's common stock
issued and outstanding excluding 4,314,970 shares held in the Company's
treasury.
EXPLANATORY NOTE
This Amendment No. 1 to Commercial Metals Company's quarterly report on Form
10-Q for the quarter ended May 31, 2003 is being filed to include certain
reclassifications for improved disclosures on the Consolidated Balance Sheets
and the Consolidated Statements of Cash Flows. We have also revised the language
in Note C, Sales of Accounts Receivable, expanded disclosures related to
accounting policies and made various other modifications, corrections and
clarifications, including the reconciliation of non-GAAP financial measures that
is now required by Regulation G.
1
ITEM 1 - FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
( In thousands except share data)
May 31, August 31,
2003* 2002
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $56,097 $124,397
Accounts receivable (less allowance for
collection losses of $8,657 and $8,877) 369,719 350,885
Inventories 295,098 268,040
Other 55,569 50,930
----------- -----------
TOTAL CURRENT ASSETS 776,483 794,252
PROPERTY, PLANT AND EQUIPMENT:
Land 33,030 29,099
Buildings 124,584 119,592
Equipment 743,330 727,650
Leasehold improvements 37,673 34,637
Construction in process 15,886 10,801
----------- -----------
954,503 921,779
Less accumulated depreciation
and amortization (582,490) (543,624)
----------- -----------
372,013 378,155
OTHER ASSETS 61,394 57,669
----------- -----------
$1,209,890 $1,230,076
=========== ===========
* As restated, see Note L.
See notes to condensed consolidated financial statements.
2
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands except share data)
May 31, August 31,
2003* 2002
----------- -----------
CURRENT LIABILITIES:
Short-term borrowings $ -- $ --
Accounts payable 270,892 275,232
Accrued expenses and other payables 114,415 133,608
Income taxes payable 5,262 5,676
Current maturities of long-term debt 567 631
----------- -----------
TOTAL CURRENT LIABILITIES 391,136 415,147
DEFERRED INCOME TAXES 34,995 32,813
OTHER LONG-TERM LIABILITIES 29,027 24,841
LONG-TERM DEBT 257,633 255,969
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock:
Preferred stock -- --
Common stock, par value $5.00 per share:
Authorized 40,000,000 shares; issued
32,265,166 shares;
outstanding 27,868,176 and 28,518,453
shares 161,326 161,326
Additional paid-in capital 760 170
Accumulated other comprehensive income (loss) 2,887 (1,458)
Retained earnings 393,362 392,004
----------- -----------
558,335 552,042
Less treasury stock,
4,396,990 and 3,746,713 shares at cost (61,236) (50,736)
----------- -----------
497,099 501,306
----------- -----------
$ 1,209,890 $ 1,230,076
=========== ===========
* As restated, see Note L.
See notes to condensed consolidated financial statements.
3
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except share data)
(Unaudited)
Three months ended Nine months ended
May 31, May 31,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET SALES $ 774,148 $ 651,600 $ 2,071,135 $ 1,798,085
COSTS AND EXPENSES:
Cost of goods sold 699,732 559,484 1,867,747 1,553,002
Selling, general and administrative expenses 61,442 58,133 168,485 169,838
Employees' retirement plans 3,123 4,509 9,008 11,441
Interest expense 4,878 4,575 12,766 14,605
----------- ----------- ----------- -----------
769,175 626,701 2,058,006 1,748,886
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 4,973 24,899 13,129 49,199
INCOME TAXES 1,951 8,466 4,969 17,712
----------- ----------- ----------- -----------
NET EARNINGS $ 3,022 $ 16,433 $ 8,160 $ 31,487
=========== =========== =========== ===========
Basic earnings per share $ 0.11 $ 0.59 $ 0.29 $ 1.17
Diluted earnings per share $ 0.11 $ 0.56 $ 0.28 $ 1.13
Cash dividends per share $ 0.08 $ 0.065 $ 0.24 $ 0.195
Average basic shares outstanding 28,047,456 27,983,434 28,284,752 27,007,668
Average diluted shares outstanding 28,147,577 29,131,438 28,645,492 27,904,366
See notes to condensed consolidated financial statements.
4
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
May 31,
---------------------
2003* 2002*
-------- --------
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES:
Net earnings $ 8,160 $ 31,487
Adjustments to earnings not requiring cash:
Depreciation and amortization 45,856 46,507
Provision for losses on receivables 3,375 2,991
Deferred income taxes 2,182 (3,069)
Tax benefits from stock plans 112 4,316
Gain on sale of SMI Owen -- (5,234)
Other 789 54
Changes in operating assets and liabilities, net of effect
of Coil Steels Group and Symons acquisitions and sale of SMI Owen:
Decrease (increase) in accounts receivable (48,691) (72,957)
Funding from accounts receivable sold 44,973 --
Decrease (increase) in inventories (26,760) (36,528)
Decrease (increase) in other assets (19,707) 31,586
Increase (decrease) in accounts payable,
accrued expenses, other payables and income taxes (24,025) 36,387
Increase in other long-term liabilities 4,186 9,435
-------- --------
Net Cash Flows From (Used By) Operating Activities (9,550) 44,975
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (35,936) (28,153)
Acquisition of Symons' Denver, CO business (5,628) --
Acquisition of Coil Steels Group, net of cash received -- (6,834)
Sale of assets of SMI Owen -- 19,705
Sales of property, plant and equipment 136 401
-------- --------
Net Cash Used By Investing Activities (41,428) (14,881)
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:
Short-term borrowings - net change -- (9,981)
Payments on long-term debt (498) (9,036)
Stock issued under incentive and purchase plans 4,588 29,133
Treasury stock acquired (14,610) --
Dividends paid (6,802) (5,244)
-------- --------
Net Cash From (Used by) Financing Activities (17,322) 4,872
-------- --------
Decrease in Cash and Cash Equivalents (68,300) 34,966
Cash and Cash Equivalents at Beginning of Year 124,397 56,021
-------- --------
Cash and Cash Equivalents at End of Period $ 56,097 $ 90,987
======== ========
* As restated, see Note L.
See notes to condensed consolidated financial statements.
5
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands except share data)
(Unaudited)
Common Stock Accumulated
-------------------------- Add'l Other
Number of Paid-in Comprehensive Retained
Shares Amount Capital Income (Loss) Earnings
---------- ----------- -------- ------------- -----------
Balance September 1, 2002: 32,265,166 $ 161,326 $ 170 $ (1,458) $ 392,004
Comprehensive income:
Net earnings for nine months
ended May 31, 2003 8,160
Other comprehensive income:
Foreign currency translation
adjustment, net of taxes of $2,340 4,345
Comprehensive income
Cash dividends (6,802)
Stock issued under incentive and
purchase plans 478
Tax benefits from stock plans 112
Treasury stock acquired
---------- ----------- -------- ------------- -----------
Balance May 31, 2003 32,265,166 $ 161,326 $ 760 $ 2,887 $ 393,362
========== =========== ======== ============= ===========
Treasury Stock
--------------------------
Number of
Shares Amount Total
---------- ---------- ---------
Balance September 1, 2002: (3,746,713) $ (50,736) $ 501,306
Comprehensive income:
Net earnings for nine months
ended May 31, 2003 8,160
Other comprehensive income:
Foreign currency translation
adjustment, net of taxes of $2,340 4,345
---------
Comprehensive income 12,505
Cash dividends (6,802)
Stock issued under incentive and
purchase plans 301,133 4,110 4,588
Tax benefits from stock plans 112
Treasury stock acquired 951,410) (14,610) (14,610)
---------- ---------- ---------
Balance May 31, 2003 (4,396,990) $ (61,236) $ 497,099
========== ========== =========
See notes to condensed consolidated financial statements.
6
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - QUARTERLY FINANCIAL DATA
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position as
of May 31, 2003 and August 31, 2002 and the results of operations for the three
and nine months ended May 31, 2003 and 2002 and cash flows for the nine months
ended May 31, 2003 and 2002. The results of operations for the nine month
periods are not necessarily indicative of the results to be expected for a full
year. These interim financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended August 31, 2002
included in its Form 10-K/A filed with the Securities and Exchange Commission.
NOTE B - ACCOUNTING POLICIES
Effective September 1, 2002, goodwill was no longer amortized.
Goodwill was $6.8 million at May 31, 2003 and at August 31, 2002. The comparison
to the prior year period was as follows (in thousands):
Three months ended Nine months ended
May 31, May 31,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Reported net earnings $ 3,022 $16,433 $ 8,160 $31,487
Add: goodwill amortization -- 184 -- 521
------- ------- ------- -------
Adjusted net earnings $ 3,022 $16,617 $ 8,160 $32,008
======= ======= ======= =======
The goodwill amortization was $0.01 per basic and diluted share for
the three months ended May 31, 2002, and $0.02 per basic and diluted share for
the nine months ended May 31, 2002.
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees on Indebtedness of Others which
applies to all guarantees issued or modified after December 31, 2002. The
Company has not entered into or modified any significant guarantees since
December 31, 2002, and therefore no liability was recorded at May 31, 2003. The
Company's existing guarantees at December 31, 2002 had been given at the request
of a customer and its surety bond issuer. The Company has agreed to indemnify
the surety against all costs that the surety may incur should the customer fail
to perform its obligations under construction contracts covered by payment and
performance bonds issued by the surety. As of May 31, 2003, the surety had
issued bonds in the total amount (without reduction for the work performed to
date) of $11.9 million, which are subject to the Company's guarantee obligation
under the indemnity agreement. The fair value of these guarantees was not
significant.
7
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees and
directors using the intrinsic value based method of accounting. Under this
method, the Company does not recognize compensation expense for the stock
options because the exercise price is equal to the market price of the
underlying stock on the date of the grant. If the Company had used the fair
value based method of accounting, net earnings and earnings per share would have
been reduced to the pro-forma amounts listed in the table below. The
Black-Scholes option pricing model was used to calculate the pro forma
stock-based compensation costs. For purposes of the pro forma disclosures, the
assumed compensation expense is amortized over the option's vesting periods. The
pro forma information is consistent with assumptions used in the year end
calculations.
(in thousands, except per share amounts)
Three months ended Nine months ended
May 31, May 31,
------------------------ ------------------------
2003 2002 2003 2002
--------- ---------- --------- ----------
Net earnings-as reported $ 3,022 $ 16,433 $ 8,160 $ 31,487
Pro forma stock-based
compensation cost 588 603 1,265 1,038
--------- ---------- --------- ----------
Net earnings-pro forma $ 2,434 $ 15,830 $ 6,895 $ 30,449
========= ========== ========= ==========
Net earnings per share-as reported:
Basic $ .11 $ 0.59 $ .29 $ 1.17
Diluted $ .11 $ 0.56 $ .28 $ 1.13
Net earnings per share-pro forma:
Basic $ .09 $ 0.57 $ .24 $ 1.13
Diluted $ .09 $ 0.54 $ .24 $ 1.09
NOTE C - SALES OF ACCOUNTS RECEIVABLE
The Company has an accounts receivable securitization program (Securitization
Program) which it utilizes as a cost-effective, short-term financing
alternative. Under the Securitization Program, the Company and several of its
subsidiaries (the Originators) periodically sell accounts receivable to the
Company's wholly-owned consolidated special purpose subsidiary (CMCR). CMCR is
structured to be a bankruptcy-remote entity. CMCR, in turn, sells an undivided
percentage ownership interest (Participation Interest) in the pool of
receivables to an affiliate of a third party financial institution (Buyer).
CMCR may sell undivided interests of up to $130 million, depending on the
Company's level of financing needs.
This Program is designed to enable receivables sold by the Company to CMCR to
constitute true sales under US Bankruptcy Laws, and the Company has received an
opinion from counsel relating to the "true sale" nature of the program. As a
result, these receivables are available to satisfy CMCR's own obligations to
its third party creditors. The Company accounts for the Securitization Program
in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The transfers meet all of
the criteria for a sale under SFAS No. 140. At the time a Participation Interest
in the pool of receivables is sold, the amount sold is removed from the
consolidated balance sheet and the proceeds from the sale are reflected as cash
provided by operating activities.
At May 31, 2003 and August 31, 2002, uncollected accounts receivable of $156
million and $146 million, respectively, had been sold to CMCR, and the
Company's undivided interest in these receivables was subordinate to any
interest owned by the Buyer. At May 31, 2003 and August 31, 2002, $20 million
and $0, respectively of Participation Interests in CMCR's accounts receivable
pool were owned by the Buyer and therefore reflected as a reduction in accounts
receivable on the Company's consolidated balance sheets.
Discounts (losses) on the sales of accounts receivable to the Buyer under this
Securitization Program were $199 thousand and $510 thousand for the three and
nine months ended May 31, 2003, respectively. These discounts were $69 thousand
and $699 thousand for the three and nine months ended May 31, 2003,
respectively. These losses, representing primarily the costs of funds, were
included in selling, general and administrative expenses. The carrying amount
of the Company's retained interest (representing the Company's interest in the
receivable pool) was $136 million in the revolving pool of receivables of $156
million at May 31, 2003. At August 31, 2002, the carrying amount of the
Company's retained interest was $146 million (100%) in the revolving pool of
receivables of $146 million. The carrying amount of the Company's retained
interest in the receivables approximated fair value due to the short-term
nature of the collection period. The retained interest is determined reflecting
100% of any allowance for collection losses on the entire receivables pool. No
other material assumptions are made in determining the fair value of the
retained interest. The Company is responsible for servicing the entire pool of
receivables.
In addition to the Securitization Program described above, the Company's
international subsidiaries periodically sell accounts receivable. These
arrangements also constitute true sales and, once the accounts are sold, they
are no longer available to satisfy the Company's creditors in the event of
bankruptcy. Uncollected accounts receivable that had been sold under these
arrangements and removed from the consolidated balance sheets were $27.1 million
at May 31, 2003 and $2.1 million at August 31, 2002.
8
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - INVENTORIES
Before deduction of last in first out (LIFO) inventory valuation
reserves of $16.1 million and $8.1 million at May 31, 2003 and August 31, 2002,
respectively, inventories valued under the first-in, first-out method
approximated replacement cost. The majority of the Company's inventories are in
finished goods, with minimal work in process. Approximately $16.3 million and
$16.5 million were in raw materials at May 31, 2003 and August 31, 2002,
respectively.
NOTE E - LONG TERM DEBT
Long-term debt (in thousands) was as follows:
May 31, August 31,
2003 2002
-------- ----------
7.20% notes due 2005 $106,873 $104,775
6.80% notes due 2007 50,000 50,000
6.75% notes due 2009 100,000 100,000
Other 1,327 1,825
-------- --------
258,200 256,600
Less current maturities 567 631
-------- --------
$257,633 $255,969
======== ========
On April 9, 2002 the Company entered into two interest rate swaps to convert a
portion of the Company's long term debt from a fixed interest rate to a floating
interest rate. The impact of these swaps is to adjust the amount of fixed rate
and floating rate debt and to reduce overall financing costs. The swaps
effectively convert the interest rate on the $100 million debt due July 2005
from the fixed rate of 7.20% to six month LIBOR (determined in arrears) plus a
spread of 2.02%. The interest rate is set on January 15th and July 15th, and for
the quarter ended May 31, 2003, was estimated to be an annualized rate of 3.19%.
The total fair value of both swaps, including accrued interest, was $8.4 million
and $5.2 million at May 31, 2003 and August 31, 2002, respectively. The swaps
are recorded in other long-term assets, with a corresponding increase in the
7.20% long-term notes, representing the change in fair value of the hedged debt.
These hedges were highly effective for the three and nine months ended May 31,
2003.
NOTE F - EARNINGS PER SHARE
On May 20, 2002, the Company's Board of Directors declared a
two-for-one stock split in the form of a 100% stock dividend on its common
stock.
In calculating earnings per share, there were no adjustments to net
earnings to arrive at income for the three or nine months ended May 31, 2003 or
2002. The reconciliation of the denominators of earnings per share calculations
are as follows:
Three months ended Nine months ended
May 31, May 31,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Shares outstanding for basic earnings per share 28,047,456 27,983,434 28,284,752 27,007,668
Effect of dilutive securities-stock options/purchase plans 100,121 1,148,004 360,740 896,698
---------- ---------- ---------- ----------
Shares outstanding for diluted earnings per share 28,147,577 29,131,438 28,645,492 27,904,366
9
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock options with total share commitments of 1,206,335 at May 31, 2003 were
anti-dilutive based on the average share price for the quarter of $15.34. All
stock options expire by 2010.
At May 31, 2003, the Company had authorization to purchase 1,116,152 of its
common shares.
All stock options at May 31, 2002 were dilutive based on the average share price
of $21.145 for the quarter.
NOTE G- DERIVATIVES AND RISK MANAGEMENT
The Company's worldwide operations and product lines expose it to
risks from fluctuations in foreign currency exchange rates and metals commodity
prices. The objective of the Company's risk management program is to mitigate
these risks using futures or forward contracts (derivative instruments). The
Company enters into metal commodity forward contracts to mitigate the risk of
unanticipated declines in gross margin due to the volatility of the commodities'
prices, and enters into foreign currency forward contracts which match the
expected settlements for purchases and sales denominated in foreign currencies.
The Company designates only those contracts as hedges for accounting purposes
which closely match the terms of the underlying transaction. These hedges
resulted in substantially no ineffectiveness in the statements of earnings for
the three or nine months ended May 31, 2003 and 2002. Certain of the foreign
currency and all of the commodity contracts were not designated as hedges for
accounting purposes, although management believes they are essential economic
hedges. The changes in fair value of these instruments resulted in a $106
thousand increase and a $199 thousand decrease in cost of goods sold for the
three months ended May 31, 2003 and 2002, respectively. Also, cost of goods sold
decreased by $391 thousand and $546 thousand for the nine months ended May 31,
2003 and 2002, respectively, due to changes in the fair value of these
instruments. All of the instruments are highly liquid, and none are entered into
for trading purposes or speculation.
See Note E, Long-Term Debt, regarding the Company's interest rate risk
management strategy.
NOTE H - CONTINGENCIES
CONSTRUCTION CONTRACT DISPUTES
See Note 10, Commitments and Contingencies, to the consolidated
financial statements for the year ended August 31, 2002.
At August 31, 2002, $9.6 million was accrued (including interest) for
an adverse trial judgment. The judgment was upheld on appeal in February 2003,
and paid and released during the three months ended May 31, 2003.
Subsequent to May 31, 2003, the Company's subsidiary, SMI-Owen Steel
Company, Inc., (SMI-Owen) settled, contingent upon approval by the Bankruptcy
Court which has jurisdiction over one of the parties, all disputes between
SMI-Owen, the general contractor and the owner of a large hotel and casino
complex. SMI-Owen will pay $1.25 million of the $3.5 million settlement payment
with $2.25 million to be paid by an insurance company. The resolution of this
dispute will resolve all material claims asserted against SMI-Owen arising from
the project. The settlement agreement provides that SMI-Owen reserves all rights
with regard to pending litigation against an insurance broker for insurance
benefits not received by SMI-Owen due to the broker's acts, errors, omissions
and other conduct related to the insurance program for the project. The Company
had adequate amounts accrued at May 31, 2003.
10
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ENVIRONMENTAL AND OTHER MATTERS
In the ordinary course of conducting its business, the Company
becomes involved in litigation, administrative proceedings and governmental
investigations, including environmental matters. Management believes that
adequate provision has been made in the financial statements for the potential
impact of these issues, and that the outcomes will not significantly impact the
results of operations or the financial position of the Company, although they
may have a material impact on earnings for a particular quarter.
A subsidiary of the Company has been notified that a customer, now in
bankruptcy proceedings, alleges the subsidiary received payments from the
customer within 90 days of bankruptcy filing which are voidable and should be
returned to the bankruptcy estate. The payments were for materials and services
sold by the subsidiary to the customer. The Company believes it has valid legal
defenses against such claim and intends to vigorously defend this claim. The
Company had accrued $1 million as of May 31, 2003 relating to this matter.
The Company is involved in various other claims and lawsuits
incidental to its business. In the opinion of management, these claims and suits
in the aggregate will not have a material adverse effect on the results of
operations or the financial position of the Company.
NOTE I - RECLASSIFICATIONS
Certain reclassifications have been made in the 2002 financial
statements to conform to the classifications used in the current year.
NOTE J - ACQUISITIONS
On May 5, 2003, the Company acquired substantially all of the
operating assets of the Denver, Colorado location of Symons Corporation for $5.6
million cash. This acquisition expands the Company's concrete form and
construction-related product sales in the western part of the United States. The
purchase price allocation has been prepared on a preliminary basis, and
reasonable changes may be made following valuation by business appraisers of the
intangible assets. Following is a summary of the estimated fair values of the
assets acquired as of the date of the acquisition (in thousands):
Rental equipment $4,400
Identifiable intangible assets 1,000
Inventory 173
Equipment 55
------
$5,628
======
Rental equipment and intangible assets are included in long-term other assets on
the May 31, 2003 condensed consolidated balance sheets. The results of
operations subsequent to May 5, 2003 are included in the condensed consolidated
statement of earnings.
11
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE K - BUSINESS SEGMENTS
The following is a summary of certain financial information by reportable
segment (in thousands):
Three months ended May 31, 2003
-------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ --------- ------------
Net sales - unaffiliated customers $ 353,547 $ 113,525 $ 307,025 $ 51 $ 774,148
Inter-segments sales 847 10,224 4,046 (15,117) --
--------- --------- --------- --------- ---------
354,394 123,749 311,071 (15,066) 774,148
Adjusted operating profit (loss) 2,314 5,067 5,840 (3,171) 10,050
Three months ended May 31, 2002
-------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ --------- ------------
Net sales - unaffiliated customers $355,898 $ 95,182 $ 200,285 $ 235 $651,600
Inter-segments sales 974 7,061 2,382 (10,417) --
-------- -------- --------- --------- --------
356,872 102,243 202,667 (10,182) 651,600
Adjusted operating profit (loss) 26,139 2,169 3,254 (2,019) 29,543
Nine months ended May 31, 2003
-------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ --------- ------------
Net sales - unaffiliated customers $955,816 $297,184 $ 817,728 $ 407 $ 2,071,135
Inter-segments sales 2,407 23,389 14,512 (40,308) --
-------- -------- --------- --------- ------------
958,223 320,573 832,240 (39,901) 2,071,135
Adjusted operating profit (loss) 7,206 10,521 15,953 (7,275) 26,405
Total assets - May 31, 2003 714,117 98,068 310,492 87,213 1,209,890
Nine months ended May 31, 2002
-------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ --------- ------------
Net sales - unaffiliated customers $1,016,314 $251,589 $ 529,816 $ 366 $ 1,798,085
Inter-segments sales 2,594 16,203 10,425 (29,222) --
---------- -------- --------- --------- ------------
1,018,908 267,792 540,241 (28,856) 1,798,085
Adjusted operating profit (loss) 62,189 1,145 7,740 (6,571) 64,503
Total assets - May 31, 2002 717,680 100,488 253,885 114,084 1,186,137
The following table provides a reconciliation of the non-GAAP measure,
adjusted operating profit (loss), to net earnings (loss), the most comparable
GAAP measure (in thousands):
Marketing and Corporate and
Segment Manufacturing Recycling Distribution Eliminations Total
-------------------------------- ------------- --------- ------------- ------------- -------
Three months ended May 31, 2003:
Net earnings (loss) $ 1,378 $ 3,222 $ 3,498 $ (5,076) $ 3,022
Income taxes 837 1,813 947 (1,646) 1,951
Financing costs 99 32 1,395 3,551 5,077
------- ------- ------- -------- -------
Adjusted operating profit (loss) $ 2,314 $ 5,067 $ 5,840 $ (3,171) $10,050
======= ======= ======= ======== =======
Three months ended May 31, 2002:
Net earnings (loss) $16,219 $ 1,379 $ 1,663 $ (2,828) $16,433
Income taxes 9,773 757 909 (2,973) 8,466
Financing costs 147 33 682 3,782 4,644
------- ------- ------- -------- -------
Adjusted operating profit (loss) $26,139 $ 2,169 $ 3,254 $ (2,019) $29,543
======= ======= ======= ======== =======
Marketing and Corporate and
Segment Manufacturing Recycling Distribution Eliminations Total
-------------------------------- ------------- --------- ------------- ------------- -------
Nine months ended May 31, 2003:
Net earnings (loss) $ 4,383 $ 6,689 $10,629 $(13,541) $ 8,160
Income taxes 2,575 3,762 2,991 (4,359) 4,969
Financing costs 248 70 2,333 10,625 13,276
------- ------- ------- -------- -------
Adjusted operating profit (loss) $ 7,206 $10,521 $15,953 $ (7,275) $26,405
======= ======= ======= ======== =======
Nine months ended May 31, 2002:
Net earnings (loss) $38,418 $ 646 $ 3,856 $(11,433) $31,487
Income taxes 23,196 355 2,102 (7,941) 17,712
Financing costs 575 144 1,782 12,803 15,304
------- ------- ------- -------- -------
Adjusted operating profit (loss) $62,189 $ 1,145 $ 7,740 $ (6,571) $64,503
======= ======= ======= ======== =======
NOTE L - RESTATEMENT
In October of 2003, the Company determined that the amounts previously reported
at May 31, 2003 and August 31, 2002 as temporary investments should have been
classified as "cash equivalents" and combined with the amounts reported as cash
on its consolidated balance sheets. Also, the Company has determined that it
should have consolidated its interests in CMCR, the primary effect of which is
to combine the amounts previously reported as notes receivables from affiliate
with accounts receivable on the consolidated balance sheets. As a result, cash
and cash equivalents shown in the accompanying consolidated balance sheets as
of May 31, 2003 and August 31, 2002 have been increased by $25 million and $91
million, respectively, from the amounts previously reported as cash, and the
previously reported temporary investments line has been removed. As a result of
consolidating CMCR, accounts receivable as of May 31, 2003 and August 31, 2002
have been increased by $133 million and $143 million, respectively, from the
amounts previously reported, and the previously reported notes receivable from
affiliates line has been removed. In conjunction with these balance sheet
changes, net cash from (used by) investing activities in the accompanying
statements of cash flows for the nine months ended May 31, 2003 and 2002 have
been changed from $25 million and ($54) million, respectively, to ($41) million
and ($15) million. In addition, the disclosures in Note C, Sales of Accounts
Receivable, have been revised. Other changes were also made to the consolidated
balance sheets and statements of cash flows and accompanying notes as a result
of the consolidation of CMCR, none of which are material to the financial
statements.
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
(in millions)
Three Months Ended Nine Months Ended
May 31, May 31,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $ 774 $ 652 $ 2,071 $ 1,798
Net earnings 3.0 16.4 8.2 31.5
EBITDA 25.4 44.7 71.8 110.3
Ending LIFO reserve 16.1 6.3
We have included a financial statement measure in the table above that was not
derived in accordance with generally accepted accounting principles (GAAP).
Earnings before interest expense, income taxes, depreciation and amortization
(EBITDA) is a non-GAAP financial performance measure. In calculating EBITDA, we
exclude our largest recurring non-cash charge, depreciation and amortization. We
use EBITDA as one guideline to assess our ability to pay our current debt
obligations as they mature and a tool to calculate possible future levels of
leverage capacity. Reconciliations to the most comparable GAAP measure, net
earnings, are provided below (in millions):
Three Months Ended Nine Months Ended
May 31, May 31,
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
Net earnings $ 3.0 $ 16.4 $ 8.2 $ 31.5
Income taxes 2.0 8.5 5.0 17.7
Interest expense 4.9 4.6 12.8 14.6
Depreciation and amortization 15.5 15.2 45.8 46.5
------- ------- ------- -------
EBITDA $ 25.4 $ 44.7 $ 71.8 $ 110.3
======= ======= ======= =======
Our management uses a non-GAAP measure, adjusted operating profit, to compare
and evaluate the financial performance of our segments. Adjusted operating
profit, as presented below, is the sum of our earnings before income taxes, and
financing costs. Adjusted operating profit provides a core operational earnings
measurement that compares segments without the need to adjust for federal, but
more specifically state and local taxes which have considerable variation
between domestic jurisdictions. Tax regulations in international operations add
additional complexity. Also, we exclude interest cost in our calculation of
adjusted operating profit. The results are therefore without consideration of
financing alternatives of capital employed. See Note K, Business Segments, to
the condensed consolidated financial statements.
The following table provides a reconciliation of the non-GAAP measure,
adjusted operating profit (loss), to net earnings (loss), the most comparable
GAAP measure (in thousands):
Marketing and Corporate and
Segment Manufacturing Recycling Distribution Eliminations Total
-------------------------------- ------------- --------- ------------- ------------- -------
Three months ended May 31, 2003:
Net earnings (loss) $ 1,378 $ 3,222 $ 3,498 $ (5,076) $ 3,022
Income taxes 837 1,813 947 (1,646) 1,951
Financing costs 99 32 1,395 3,551 5,077
------- ------- ------- -------- -------
Adjusted operating profit (loss) $ 2,314 $ 5,067 $ 5,840 $ (3,171) $10,050
======= ======= ======= ======== =======
Three months ended May 31, 2002:
Net earnings (loss) $16,219 $ 1,379 $ 1,663 $ (2,828) $16,433
Income taxes 9,773 757 909 (2,973) 8,466
Financing costs 147 33 682 3,782 4,644
------- ------- ------- -------- -------
Adjusted operating profit (loss) $26,139 $ 2,169 $ 3,254 $ (2,019) $29,543
======= ======= ======= ======== =======
Marketing and Corporate and
Segment Manufacturing Recycling Distribution Eliminations Total
-------------------------------- ------------- --------- ------------- ------------- -------
Nine months ended May 31, 2003:
Net earnings (loss) $ 4,383 $ 6,689 $10,629 $(13,541) $ 8,160
Income taxes 2,575 3,762 2,991 (4,359) 4,969
Financing costs 248 70 2,333 10,625 13,276
------- ------- ------- -------- -------
Adjusted operating profit (loss) $ 7,206 $10,521 $15,953 $ (7,275) $26,405
======= ======= ======= ======== =======
Nine months ended May 31, 2002:
Net earnings (loss) $38,418 $ 646 $ 3,856 $(11,433) $31,487
Income taxes 23,196 355 2,102 (7,941) 17,712
Financing costs 575 144 1,782 12,803 15,304
------- ------- ------- -------- -------
Adjusted operating profit (loss) $62,189 $ 1,145 $ 7,740 $ (6,571) $64,503
======= ======= ======= ======== =======
The following events had a significant financial impact during the third quarter
ended May 31, 2003 as compared to 2002:
- We recorded a $3.4 million (after-tax) LIFO expense ($0.12 per diluted
share) compared to minimal LIFO expense in the prior year period.
- Our steel and the copper tube minimills' earnings decreased due
primarily to higher scrap, utility and other input costs which were not
offset by increased selling prices.
- Margins were lower at the steel group's fabrication operations due to
lower selling prices, in spite of higher shipments.
- In the prior year third quarter, we recorded a $3.4 million (after-tax)
gain from the sale of the assets of SMI Owen Steel Company.
13
- Adjusted operating profits in our recycling segment more than doubled
from last year's third quarter due mostly to the steel (ferrous) scrap
markets.
- Marketing and distribution's adjusted operating profit was
significantly higher than last year's third quarter, with most of the
improvement in international markets.
- We reduced bonuses, contributions and employee's retirement plan
expenses in line with lower earnings.
- We maintained excess cash and had no short-term debt at May 31, 2003.
CONSOLIDATED DATA -
The LIFO method of inventory valuation decreased net earnings by $3.4 million
and $5.2 million for the three and nine months ended May 31, 2003, respectively.
LIFO reduced diluted earnings per share by 12 cents and 18 cents for the three
and nine months ended May 31, 2003, respectively. For the three and nine months
ended May 31, 2002, LIFO increased net earnings by $137 thousand and $101
thousand, respectively, (no effect per diluted share).
SEGMENT OPERATING DATA -
Unless otherwise indicated, all dollars below are before income taxes.
14
The following table shows net sales and adjusted operating profit (loss) by
business segment (in thousands):
Three months ended Nine months ended
May 31, May 31,
--------------------------- -----------------------------
2003 2002 2003 2002
--------- ----------- ----------- -----------
NET SALES:
Manufacturing $ 354,394 $ 356,872 $ 958,223 $ 1,018,908
Recycling 123,749 102,243 320,573 267,792
Marketing and Distribution 311,071 202,667 832,240 540,241
Corporate and Eliminations (15,066) (10,182) (39,901) (28,856)
--------- ----------- ----------- -----------
$ 774,148 $ 651,600 $ 2,071,135 $ 1,798,085
========= =========== =========== ===========
OPERATING PROFIT (LOSS):
Manufacturing $ 2,314 $ 26,139 $ 7,206 $ 62,189
Recycling 5,067 2,169 10,521 1,145
Marketing and Distribution 5,840 3,254 15,953 7,740
Corporate and Eliminations (3,171) (2,019) (7,275) (6,571)
--------- ----------- ----------- -----------
$ 10,050 $ 29,543 $ 26,405 $ 64,503
========= =========== =========== ===========
15
MANUFACTURING -
We include our steel group and our copper tube division in our manufacturing
segment. Adjusted operating profit is equal to earnings before income taxes for
our four steel minimills, our copper tube mill and the steel group's fabrication
operations. Our manufacturing adjusted operating profit for the three months
ended May 31, 2003 decreased $23.8 million as compared to 2002. Excluding the
gain of $5.2 million from the sale of SMI Owen in 2002, adjusted operating
profit decreased 89%. Without the 2002 gain, net sales increased $2.7 million
(1%). Scrap purchase prices were driven sharply higher by offshore demand and
the weakening value of the U.S. dollar. Our steel minimills implemented higher
selling prices late in the second quarter 2003, and again in the third quarter.
These price increases became partially effective in our third quarter.
Therefore, the price increases did not fully offset higher scrap and utility
costs. Gross margins were significantly lower as a result of these conditions.
Our copper tube mill's gross margins were also lower due to increased copper
scrap purchase prices and lower selling prices for its products. Our steel
group's downstream fabrication operations (excluding the gain on the sale of SMI
Owen in 2002) were less profitable in 2003 due to much lower selling prices
which more than offset the impact of higher 2003 shipments.
Our manufacturing segment's adjusted operating profit for the nine months ended
May 31, 2003 decreased $55.0 million as compared to 2002. The sale of SMI Owen
and a litigation settlement at the mills in 2002 accounted for $10.6 million of
the decrease. Overall shipments for the nine months ended May 31, 2003 were
higher as compared to 2002. However, gross margins were lower primarily because
scrap and utility costs were not offset by price increases.
The table below reflects steel and scrap prices per ton:
Three months ended Nine months ended
May 31, May 31,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ -----
Average mill selling price (total sales) $280 $267 $274 $270
Average mill selling price (finished goods) 289 273 283 275
Average fabrication selling price 520 598 536 619
Average ferrous scrap purchase price 106 84 96 76
Adjusted operating profit for our four steel minimills decreased 91% for the
three months ended May 31, 2003 as compared to 2002. The effect of valuing
inventories under the LIFO method accounted for 35% of the decrease in adjusted
operating profit for the three months ended May 31, 2003 as compared to 2002.
Also, adjusted operating profit in 2003 decreased because higher selling prices
and more shipments were not enough to offset higher input costs, including scrap
and utilities. Our adjusted operating profit at SMI Texas decreased 30% to $5.1
million for the three months ended May 31, 2003 as compared to an adjusted
operating profit of $7.3 million in 2002. SMI South Carolina lost $2.0 million
for the three months ended May 31, 2003 as compared to a $1.6 million adjusted
operating profit in 2002. Adjusted operating profit at our SMI Alabama mill for
the three months ended May 31, 2003 decreased 51% to $949 thousand as compared
to $1.9 million in 2002. SMI Arkansas reported a $3.0 million adjusted operating
loss in 2003 as compared to a $1.1 million adjusted operating profit in 2002.
The adjusted operating loss was entirely attributable to LIFO expense caused by
anticipated higher year end inventories of rerolling rail at SMI Arkansas. The
mills shipped 634,000 tons in 2003 compared to 612,000 tons in 2002, an increase
of 4%, due to higher billet sales. The mills rolled 544,000 tons, down 2% as
compared to 2002. Tons melted increased 1% to 572,000. The average total mill
selling price at $280 per ton was $13 (5%) above last year. Our mill selling
price for finished goods increased $16 per ton (6%). Average scrap purchase
costs were $22 per ton (26%) higher than last year. Utility expenses increased
by $3.5 million for the three months ended May 31, 2003 as compared to 2002,
mostly due to higher natural gas costs.
16
Adjusted operating profit for our four steel minimills decreased 78% for the
nine months ended May 31, 2003 as compared to 2002. The effect of valuing
inventories under the LIFO method accounted for 21% of the decrease in adjusted
operating profit for the nine months ended May 31, 2003 as compared to 2002. The
average total mill selling price at $274 per ton was $4 (1%) above last year.
But average scrap purchase costs were $20 per ton (26%) higher than last year.
Also, utility expenses increased by $6.6 million for the nine months ended May
31, 2003 as compared to 2002, mostly due to higher natural gas costs. The mills
shipped 1,676,000 tons year to date in 2003 as compared to 1,589,000 tons in
2002, an increase of 5%. Also, during the nine months ended May 31, 2002 we
received $2.5 million from a graphite electrode litigation settlement.
The steel group's fabrication and other businesses reported a combined adjusted
operating profit of $3.6 million for the three months ended May 31, 2003 as
compared to an adjusted operating profit of $14.1 million in 2002. We recorded a
$5.2 million gain from the sale of SMI Owen Steel Company in March 2002.
Excluding this gain, adjusted operating profits decreased by $5.3 million (60%)
for the three months ended May 31, 2003 as compared to 2002. Our fabrication
plants shipped 286,000 tons in 2003, 15% more than 2002's third quarter
shipments of 248,000 tons. Our fabricated rebar shipments increased 51,000 tons
(37%) as compared to 2002. Lower structural, joist and post plant shipments
partially offset this increase. The average fabrication selling price for the
three months ended May 31, 2003 decreased $78 per ton (13%). Our rebar
fabrication, construction-related products, post and heat treating plants were
profitable during the third quarter 2003. Our joist and structural steel
fabrication operations recorded adjusted operating losses during the three
months ended May 31, 2003 primarily due to lower selling prices. During the
three months ended May 31, 2003, the joist plants reduced their inventory book
values by $720,000 to their estimated current market value. Also, during the
three months ended May 31, 2003, we wrote-down $393 thousand of inventory at one
of our other fabrication facilities and we recognized a $365 thousand gain on
the trade-in of rental forms in construction-related products. On May 5, 2003,
we acquired substantially all of the operating assets of the Denver, Colorado
location of Symons Corporation, a concrete formwork supplier servicing
construction needs throughout the Rocky Mountain States. The purchase price for
this operation was $5.6 million. See Note J, Acquisitions, to the condensed
consolidated financial statements.
The steel group's fabrication and other businesses reported a combined adjusted
operating profit of $3.0 million for the nine months ended May 31, 2003 as
compared to an adjusted operating profit of $30.6 million in 2002. The gain on
the sale of SMI Owen in 2002 accounted for $5.2 million of the decrease. Also,
prior to its sale, SMI Owen had an adjusted operating profit of $2.9 million for
the nine months ended May 31, 2002. Fabrication plant shipments for the nine
months ended May 31, 2003 were about the same as last year. However, the average
fabrication selling price decreased $83 per ton (13%). Also, during the nine
months ended May 31, 2003, the joist and other fabrication plants wrote down
their inventories by $1.9 million as compared to $627 thousand in 2002. During
the nine months ended May 31, 2003, we recorded a $1 million accrual related to
the bankruptcy of a customer.
Our copper tube division reported an adjusted operating loss of $563 thousand
for the three months ended May 31, 2003 as compared to an adjusted operating
profit of $1.3 million in 2002. Net sales were 13% lower for the 2003 third
quarter as compared to 2002. During the three months ended May 31, 2003, the
division reported $777 thousand expense under the LIFO inventory valuation
method as compared to $512 thousand expense in 2002. Copper tube shipments
decreased 6% to 16.0 million pounds during the 2003 third quarter as compared to
2002. Also, average net selling prices decreased by 9 cents per pound (7%) to
$1.15 in 2003 as compared to $1.24 in 2002. Production was constant at 14.8
million pounds. The average copper scrap price increased 2 cents per pound (3%)
during the three months ended May 31, 2003 as compared to 2002. Although single
family residential construction held up relatively well, other market sectors
were weaker, which put pressure on selling prices. Also, poor weather caused us
to delay some shipments during the three months ended May 31, 2003.
Our copper tube division reported an adjusted operating profit of $68 thousand
for the nine months ended May 31, 2003 as compared to an adjusted operating
profit of $4.6 million in 2002. Copper tube shipments increased slightly.
However, average net selling prices decreased by 9 cents per pound (7%) to $1.14
in 2003 as compared to $1.23 in 2002. The average copper scrap price increased
by 4 cents per pound (6%) during the nine months ended May 31, 2003 as compared
to 2002.
17
RECYCLING -
Our recycling segment reported an adjusted operating profit of $5.1 million for
the three months ended May 31, 2003 as compared to an adjusted operating profit
of $2.2 million in 2002. Net sales for the three months ended May 31, 2003 were
21% higher at $124 million. Gross margins were 31% higher than 2002. The segment
recorded $445 thousand LIFO expense during the three months, ended May 31, 2003
as compared to $71 thousand LIFO income in 2002. The segment processed and
shipped 452,000 tons of ferrous scrap during the three months ended May 31,
2003, 17% more than 2002. Ferrous sales prices were on average $110 per ton, or
28% higher than 2002. Greater demand from overseas markets contributed to this
increase, as well as the weaker U.S. dollar. Ferrous scrap prices peaked early
during the three months ended May 31, 2003, having advanced over $30 per ton
from January 1, 2003. At May 31, 2003, prices were somewhat less than their
peak, as overseas demand slackened, and warmer weather and the higher prices
caused a significant increase in supply.
Nonferrous markets improved moderately during the three months ended May 31,
2003. The average nonferrous scrap sales price of $1,047 per ton was 5% higher
than in 2002, although shipments were 2% lower at 59,000 tons. The total volume
of scrap processed, including the steel group's processing plants, was 768,000
tons, an increase of 15% from the 667,000 tons processed in 2002.
Our recycling segment reported an adjusted operating profit of $10.5 million for
the nine months ended May 31, 2003 as compared to an adjusted operating profit
of $1.1 million in 2002. Year to date gross margins were 28% higher than in
2002, due to increased selling prices for both ferrous and nonferrous scrap. The
total volume of scrap processed and shipped, including the steel group's
processing plants, was 2,079,000 tons, an increase of 13% from the 1,834,000
tons processed in 2002.
MARKETING AND DISTRIBUTION -
Net sales in the three months ended May 31, 2003 for our marketing and
distribution segment increased to $311 million, a 53% increase from 2002. Most
of the increase related to sales outside of the United States. Adjusted
operating profit for the three months ended May 31, 2003 was $5.8 million, up
79% from 2002, due mostly to better results from our international operations.
Our marketing and distribution and service center operations in Australia
continued to be very profitable even excluding a $450 thousand favorable duty
ruling in May 2003. Our joint venture facility in Belgium, Europickling, had
record output for the three months ended May 31, 2003. Central Europe continued
to be a source of profitability for us. After rising for several quarters,
international steel prices weakened, mainly because of lower prices in China.
However, our volumes increased, except for imports into the United States. Our
U.S. divisions were slightly less profitable for the three months ended May 31,
2003 as compared to 2002 due to the economy, the weaker U.S. dollar and import
duties. Gross margins, volumes and selling prices on our sales of nonferrous
semi-finished goods and industrial materials were mixed. During the three months
ended May 31, 2003, our Cometals division recorded a $450 thousand expense due
to an antidumping action by U.S. Customs.
Adjusted operating profit for the nine months ended May 31, 2003 for our
marketing and distribution segment increased to $16.0 million as compared to
$7.7 million in 2002 due mostly to better results from our international
operations. Adjusted operating profits were better for Europe and Australia.
Sales into Asia, including China were strong, especially during the first and
second quarters of our fiscal 2003. Our U.S. divisions were also more profitable
for the nine months ended May 31, 2003 as compared to 2002.
OTHER -
Employee's retirement plan expenses were lower for the three months ended May
31, 2003 as compared to 2002. Overall selling, general and administrative
expenses were 6% higher during the three months ended May 31, 2003 as compared
to 2002. Discretionary items, such as bonuses, contributions and profit sharing
were much lower commensurate with less profitability. Additional selling,
general and
18
administrative expenses resulting from operations acquired since May 31, 2002
offset these decreases in discretionary expenses.
Employee's retirement plan expenses were lower for the nine months ended May 31,
2003 as compared to 2002. Overall selling, general and administrative expenses
were slightly lower for the nine months ended May 31, 2003 as compared to 2002.
Discretionary items, such as bonuses, contributions and profit sharing were
lower commensurate with less profitability. Interest expense for the nine months
ended May 31, 2003 was lower as compared to 2002 due primarily to two interest
rate swaps which resulted in lower effective interest rates.
CONTINGENCIES -
See Note H, Contingencies, to the condensed consolidated financial statements.
In the ordinary course of conducting our business, we become involved in
litigation, administrative proceedings, governmental investigations including
environmental matters, and contract disputes. We may incur settlements, fines,
penalties or judgments because of some of these matters. While we are unable to
estimate precisely the ultimate dollar amount of exposure to loss in connection
with these matters, we make accruals as we deem necessary. The amounts we accrue
could vary substantially from amounts we pay due to several factors including
the following: evolving remediation technology, changing regulations, possible
third-party contributions, the inherent shortcomings of the estimation process,
and the uncertainties involved in litigation. Accordingly, we cannot always
estimate a meaningful range of possible exposure. We believe that we have
adequately provided in our financial statements for the estimable potential
impact of these contingencies. We also believe that the outcomes will not
significantly affect the long-term results of operations or our financial
position. However, they may have a material impact on earnings for a particular
period.
We are subject to federal, state and local pollution control laws and
regulations in all locations we have operating facilities. We anticipate that
compliance with these laws and regulations will involve continuing capital
expenditures and operating costs.
OUTLOOK -
We expect the fourth quarter of our fiscal year ending August 31, 2003 to be
more profitable than the third quarter, although we do not expect it to be as
strong as last year's fourth quarter, primarily because of anticipated LIFO
expenses. Excluding LIFO, we are expecting to achieve net earnings of $6 million
to $9 million for the quarter ending August 31, 2003. We expect a number of our
markets to continue to improve in the fourth quarter and anticipate that profits
will be higher than the third quarter in our manufacturing segment because of
higher material margins and increased production, shipments and prices.
During our third quarter fiscal 2003, we continued to implement two price
increases for most of our steel mill products. These price increases totaled $35
per ton and were partly effective in our third quarter and should become fully
effective during our fourth quarter fiscal 2003. These increases should help
restore gross margins at our steel minimills. Our fabrication businesses should
be more profitable due to better markets and higher shipments. We are also
anticipating better profits at our copper tube mill during the last quarter of
fiscal 2003 when housing and commercial jobs get back on schedule following
weather-related delays. Strong demand for steel and nonferrous scrap combined
with the weaker U.S. dollar will enable our recycling segment to continue to be
profitable, although ferrous prices will be below our third quarter. We believe
that our marketing and distribution markets will have continued good results,
but not as favorable as in our third quarter because of lower demand in China
and elsewhere.
Our 2004 fiscal year should be much more profitable due to an expected overall
improvement in the U.S. economy. We should experience stronger demand for
construction-related products and services. We are also expecting that various
end-use markets around the world will improve, especially manufacturing
19
activity. We think that emerging markets will show a disproportionate increase
in the consumption of steel and nonferrous metals, and we are well-positioned to
take advantage of these markets.
In June 2003, our subsidiary, Commercial Metals (International) AG was selected
as the preferred bidder to continue with exclusive negotiations to buy 71.1% of
the outstanding shares of Huta Zawiercie, S.A. in Zawiercie, Poland. Huta
Zawiercie operates a steel minimill similar to those operated by our steel
group. Its annual capacity is about 1 million tons consisting of mainly rebar
and wire rod products. We expect that if a transaction occurs, we will pay cash
for the shares. The transaction is subject to the satisfactory completion of due
diligence reviews, negotiation of a definitive sales and purchase agreement and
possibly regulatory approvals. There can be no assurance that this possible
transaction will be consummated or that the terms or results of any transaction
will be advantageous to us. Also, we can provide no assurance with respect to
the timing, value or final determination to proceed.
This outlook and the liquidity and capital resources section contain
forward-looking statements regarding the outlook for our financial results
including net earnings, product pricing and demand, production and shipping
rates, interest rates, cost of raw materials, inventory costing, results of
litigation, construction activity, and general market conditions. These
forward-looking statements can generally be identified by phrases such as we
"expect", "anticipate", "believe", "presume", "think", "plan to", "should",
"likely", "appear", "projects", or other similar words or phrases of similar
impact. There is inherent risk and uncertainty in any forward-looking
statements. Variances will occur and some could be materially different from our
current opinion. Developments that could impact our expectations include the
following:
o interest rate changes
o construction activity
o litigation claims and settlements
o difficulties or delays in the execution of construction
contracts resulting in cost overruns or contract disputes
o metals pricing over which we exert little influence
o increased capacity and product availability from competing
steel minimills and other steel suppliers including import
quantities and pricing
o court decisions
o industry consolidation or changes in production capacity or
utilization
o global factors including credit availability and political
uncertainties
o currency fluctuations
o energy and insurance prices
o decisions by governments impacting the level of steel imports
and pace of overall economic activity
o inability to consummate acquisitions on favorable terms or to
successfully operate acquired businesses
LIQUIDITY AND CAPITAL RESOURCES -
We discuss liquidity and capital resources on a consolidated basis. Our
discussion includes the sources and uses of our three operating segments and
centralized corporate functions. We have a centralized treasury function and use
inter-company loans to efficiently manage the short-term cash needs of our
operating divisions. We invest any excess funds centrally.
We rely upon cash flows from operating activities, and to the extent necessary,
external short-term financing sources. Our short-term financing sources include
commercial paper, sales of certain accounts receivable and borrowing under our
bank credit facilities. From time to time, we have issued long-term public and
private debt placements. Our investment grade credit ratings and general
business conditions affect our access to external financing on a cost-effective
basis. Depending on the price of our common stock, we may realize significant
cash flows from the exercise of stock options.
Moody's Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch
(F-2) rate our $174.5 million commercial paper program in the second highest
category. To support our commercial paper program, we have unsecured
contractually committed revolving credit agreements with a group of eight
20
banks. Our $129.5 million facility expires in August 2003, and our $45 million
facility expires in August 2004. We plan to continue our commercial paper
program and the revolving credit agreements in comparable amounts to support the
commercial paper program.
For added flexibility, we may secure financing through securitized sales of
certain accounts receivable in an amount not to exceed $130 million and direct
sales of accounts receivable. We may continually sell accounts receivable on an
ongoing basis to replace those receivables that have been collected from our
customers. Our long-term public debt was $257 million at May 31, 2003 and is
investment grade rated by Standard & Poors' Corporation (BBB), Fitch (BBB) and
by Moody's Investors Services (Baa1). We have access to the public markets for
potential refinancing or the issuance of additional long-term debt. Also, we
have numerous informal, uncommitted credit facilities available from domestic
and international banks. These credit facilities are priced at current market
rates.
Credit ratings affect our ability to obtain short- and long-term financing and
the cost of such financing. If the rating agencies were to reduce our credit
ratings, we would pay higher financing costs and probably would have less
availability of the informal, uncommitted facilities. In determining our credit
ratings, the rating agencies consider a number of both quantitative and
qualitative factors. These factors include earnings, fixed charges such as
interest, cash flows, total debt outstanding, off balance sheet obligations and
other commitments, total capitalization and various ratios calculated from these
factors. The rating agencies also consider predictability of cash flows,
business strategy, industry condition and contingencies. We are committed to
maintaining our investment grade ratings.
Certain of our financing agreements include various covenants. The most
restrictive of these covenants requires us to maintain an interest coverage
ratio of greater than three times and a debt to capitalization ratio of 55%, as
defined in the financing agreement. A few of the agreements provide that if we
default on the terms of another financing agreement, it is considered a default
under these agreements. We have complied with the requirements, including the
covenants of our financing agreements as of and for the three months ended May
31, 2003.
Our revolving credit agreements and accounts receivable securitization agreement
include ratings triggers. The trigger in the revolving credit agreements is
solely a means to reset pricing for facility fees and, if a borrowing occurs, on
loans. Within the accounts receivable securitization agreement, the ratings
trigger is contained in a "termination event", but the trigger is set at
catastrophic levels. The trigger requires a combination of ratings actions on
behalf of two independent rating agencies and is set at levels seven ratings
categories below our current rating.
Our manufacturing and recycling businesses are capital intensive. Our capital
requirements include construction, purchases of equipment and maintenance
capital at existing facilities. We plan to invest in new operations. We also
plan to invest in working capital to support the growth of our businesses and
pay dividends to our stockholders.
We continue to assess alternative means of raising capital, including potential
dispositions of under-performing or non-strategic assets. Any potential future
major acquisitions could require additional financing from external sources
including the issuance of common or preferred stock.
Cash Flows
Our cash flows from operating activities primarily result from sales of steel
and related products, and to a lesser extent, sales of nonferrous metal
products. We have a diverse and generally stable customer base. We use futures
or forward contracts as needed to mitigate the risks from fluctuations in
foreign currency exchange rates and metals commodity prices. See Note G,
Derivatives and Risk Management, to the condensed consolidated financial
statements.
The volume and pricing of orders from our U.S. customers in the manufacturing
and construction sectors affect our cash flows from operating activities. Our
international marketing and distribution operations also significantly affect
our cash flows from operating activities. The weather can influence the volume
of
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products we ship in any given period. Also, the general economy, the strength of
the U.S. dollar, governmental action, and various other factors beyond our
control influence our volume and prices. Periodic fluctuations in our prices and
volumes can result in variations in cash flows from operations. Despite these
fluctuations, we have historically relied on operating activities as a steady
source of cash.
We used $9.6 million of net cash flows in our operating activities for the nine
months ended May 31, 2003 as compared with $45.0 million of net cash flows
provided from our operating activities for the nine months ended May 31, 2002.
Our cash flows from operating activities were lower due to lower net earnings.
We used the cash from our operating activities for our working capital needs
during the nine months ended May 31, 2003. Net working capital, which is the
difference between our current assets of $776 million and our current
liabilities of $391 million, increased to $385 million at May 31, 2003. Working
capital at August 31, 2002 (current assets of $794 million less current
liabilities of $415 million) was $379 million. Accounts receivable were higher
in all segments, but primarily in our international marketing and distribution
operations. Also, inventories in marketing and distribution increased mostly due
to higher sales orders from outside of the United States. During the nine months
ended May 31, 2003, we paid more bonuses and other discretionary expenses, which
had been accrued at August 31, 2002, than we did during the nine months ended
May 31, 2002. Also, we paid $9.6 million during the nine months ended May 31,
2003 relating to an adverse trial judgment (see Note H, Contingencies, to the
condensed consolidated financial statements). As a result, our accrued expenses
decreased during the nine months ended May 31, 2003.
We invested $35.9 million in property, plant and equipment during the nine
months ended May 31, 2003, $7.8 million (28%) more than the nine months ended
May 31, 2002. The increase was primarily due to further investment in our rebar
fabrication operations and additional equipment at our steel and copper tube
minimills. In addition, we acquired the operating assets of the Denver, Colorado
location of Symons Corporation in May, 2003, for $5.6 million. In 2002, we
acquired the remaining shares of the Coil Steels Group (CSG) for $6.8 million.
We expect our capital spending for fiscal 2003 to be less than our $87 million
budget, including both new construction and acquisitions to expand our
downstream businesses in the United States. We assess our capital spending each
quarter and reevaluate our requirements based upon current and expected results.
We believe that our capital spending may be about $57 million for fiscal 2003.
During the nine months ended May 31, 2003, we sold $45 million of accounts
receivable to help meet our working capital requirements, purchase property,
plant and equipment and acquire our common stock for the treasury. We had no
short-term borrowings at May 31, 2003 or 2002. We have no significant amounts
due on our long-term debt until July 2005. The sales of accounts receivable to
financial institutions included $27.1 million in our international subsidiaries.
See Note C, Sales of Accounts Receivable, to the condensed consolidated
financial statements.
At May 31, 2003, 27,868,176 common shares were issued and outstanding, with
4,396,990 held in our treasury. We paid dividends of $6.8 million during the
nine months ended May 31, 2003, compared to the $5.2 million paid during 2002.
During the nine months ended May 31, 2003, we purchased 951,410 shares of our
common stock at an average price of $15.36 per share. These shares were held in
our treasury.
We believe that we have sufficient liquidity for fiscal 2003 and the foreseeable
future.
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CONTRACTUAL OBLIGATIONS
The following table represents our contractual obligations as of May 31, 2003
(dollars in thousands):
Payments Due Within *
------------------------------------------------
2-3 4-5 After
Total 1 Year Years Years 5 Years
-------- ------- -------- ------- --------
Contractual Obligations:
Long-term Debt (1) $258,200 $ 567 $107,509 $50,048 $100,076
Operating Leases (2) 37,150 8,627 12,606 7,742 8,175
Unconditional Purchase
Obligations (3) 80,294 36,787 19,691 6,822 16,994
-------- ------- -------- ------- --------
Total Contractual Cash
Obligations $375,644 $45,981 $139,806 $64,612 $125,245
======== ======= ======== ======= ========
* Cash obligations herein are not discounted.
(1) Total amounts are included in the May 31, 2003 condensed consolidated
balance sheet. See Note E, Long-Term Debt, to the condensed
consolidated financial statements.
(2) Includes minimum lease payment obligations for noncancelable equipment
and real-estate leases in effect as of May 31, 2003.
(3) About 55% of these purchase obligations are for inventory items to be
sold in the ordinary course of business; most of the remainder are for
supplies associated with normal revenue-producing activities.
At May 31, 2003, we received $45.0 million of net funding from the sales of
accounts receivable. See Note C, Sales of Accounts Receivable, to the condensed
consolidated financial statements. If we had terminated the accounts receivable
programs on May 31, 2003 we would have to pay the first $39.9 million of
collections from accounts sold to third party financial institutions. We have
complied with the terms of these programs as of, and for the nine months ended
May 31, 2003.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for our own
commitments to perform in certain instances when our customers and suppliers
request. Cash deposits of $10.2 million included in other current assets on the
condensed consolidated balance sheet collateralized a portion of our outstanding
letters of credit. All of the commitments expire within one year.
At the request of a customer and its surety bond issuer, we have agreed to
indemnify the surety against all costs the surety may incur should our customer
fail to perform its obligations under construction contracts covered by payment
and performance bonds issued by the surety. We are the customer's primary
supplier of steel, and steel is a substantial portion of our customer's cost to
perform the contracts. We believe we have adequate controls to monitor the
customer's performance under the contracts including payment for the steel we
supply. As of May 31, 2003, the surety had issued bonds in the total amount
(without reduction for the work performed to date) of $11.9 million which are
subject to our guaranty obligation under the indemnity agreement. See Note B,
Accounting Policies, to the condensed consolidated financial statements.
ACCOUNTING POLICIES-
See Note B, Accounting Policies, to the condensed consolidated financial
statements.
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PART II OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits furnished pursuant to Item 601 of Regulation S-K.
31.1 Certification of Stanley A. Rabin, Chairman of the
Board, President and Chief Executive Officer of
Commercial Metals Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of William B. Larson, Vice President and
Chief Financial Officer of Commercial Metals Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
32.1 Certification of Stanley A. Rabin, Chairman of the
Board, President and Chief Executive Officer of
Commercial Metals Company, pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of William B. Larson, Vice President and
Chief Financial Officer of Commercial Metals Company,
pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL METALS COMPANY
/s/ William B. Larson
------------------------------
October 31, 2003 William B. Larson
Vice President
& Chief Financial Officer
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