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 February 28, 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 MacArthur Blvd.
Irving, Texas 75039
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(Address of principal executive offices)
(Zip Code)
(214) 689-4300
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(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 [X] No [ ]
As of April 4, 2003 there were 28,123,750 shares of the Company's common stock
issued and outstanding excluding 4,141,416 shares held in the Company's
treasury.
EXPLANATORY NOTE
This Amendment No. 1 to Commercial Metals Company's quarterly report on Form
10-Q for the quarter ended February 28, 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, included additional information on the annual meeting of
stockholders 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)
February 28, August 31,
2003* 2002
CURRENT ASSETS: ----------- -----------
Cash and cash equivalents $ 49,746 $ 124,397
Accounts receivable (less allowance for
collection losses of $8,521 and $8,877) 338,329 350,885
Inventories 322,362 268,040
Other 55,638 50,930
----------- -----------
TOTAL CURRENT ASSETS 766,075 794,252
PROPERTY, PLANT AND EQUIPMENT:
Land 32,920 29,099
Buildings 123,618 119,592
Equipment 736,683 727,650
Leasehold improvements 35,763 34,637
Construction in process 15,788 10,801
----------- -----------
944,772 921,779
Less accumulated depreciation
and amortization (571,279) (543,624)
----------- -----------
373,493 378,155
OTHER ASSETS 55,356 57,669
----------- -----------
$ 1,194,924 $ 1,230,076
=========== ===========
*As restated, see Note K.
See notes to condensed consolidated financial statements.
2
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands except share data)
February 28, August 31,
2003* 2002
CURRENT LIABILITIES: ------------ ----------
Short-term borrowings $ -- $ --
Accounts payable 264,650 275,232
Accrued expenses and other payables 106,309 133,608
Income taxes payable 4,461 5,676
Current maturities of long-term debt 611 631
------- -------
TOTAL CURRENT LIABILITIES 376,031 415,147
DEFERRED INCOME TAXES 33,788 32,813
OTHER LONG-TERM LIABILITIES 28,235 24,841
LONG-TERM DEBT 257,414 255,969
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock:
Preferred stock -- --
Common stock, par value $5.00 per share:
Authorized 40,000,000 shares; issued
32,265,166 shares;
outstanding 28,213,050 and 28,518,453
shares 161,326 161,326
Additional paid-in capital 772 170
Accumulated other comprehensive income (loss) 762 (1,458)
Retained earnings 392,592 392,004
----------- -----------
555,452 552,042
Less treasury stock,
4,052,116 and 3,746,713 shares at cost (55,996) (50,736)
----------- -----------
499,456 501,306
----------- -----------
$ 1,194,924 $ 1,230,076
=========== ===========
*As restated, see Note K.
See notes to condensed consolidated financial statements.
3
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except share data)
(Unaudited)
Three months ended Six months ended
February 28, February 28,
------------------------------ ------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET SALES $ 660,809 $ 574,317 $ 1,296,987 $ 1,146,485
COSTS AND EXPENSES:
Cost of goods sold 592,897 499,445 1,168,015 993,518
Selling, general and administrative expenses 56,772 56,078 107,043 111,705
Employees' retirement plans 2,930 3,125 5,885 6,932
Interest expense 3,553 5,069 7,888 10,030
----------- ----------- ----------- -----------
656,152 563,717 1,288,831 1,122,185
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 4,657 10,600 8,156 24,300
INCOME TAXES 1,724 4,028 3,018 9,246
----------- ----------- ----------- -----------
NET EARNINGS $ 2,933 $ 6,572 $ 5,138 $ 15,054
=========== =========== =========== ===========
Basic earnings per share $ 0.10 $ 0.24 $ 0.18 $ 0.57
Diluted earnings per share $ 0.10 $ 0.24 $ 0.18 $ 0.55
Cash dividends per share $ 0.08 $ 0.065 $ 0.16 $ 0.13
Average basic shares outstanding 28,320,223 26,832,546 28,403,401 26,519,786
Average diluted shares outstanding 28,825,167 27,932,996 28,894,450 27,290,828
See notes to condensed consolidated financial statements.
4
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
February 28,
-------------------------
2003* 2002*
-------- --------
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES:
Net earnings $ 5,138 $ 15,054
Adjustments to earnings not requiring cash:
Depreciation and amortization 30,271 31,231
Provision for losses on receivables 1,257 2,562
Deferred income taxes 975 --
Tax benefits from stock plans 101 1,544
Other 763 194
Changes in operating assets and liabilities, net of effect
of Coil Steels Group acquisition:
Decrease (increase) in accounts receivable (5,760) (10,758)
Funding from accounts receivable sold 30,550 6,556
Decrease (increase) in inventories (54,197) (44,034)
Decrease (increase) in other assets (15,333) (1,112)
Increase (decrease) in accounts payable,
accrued expenses, other payables and income taxes (39,276) 13,778
Increase in other long-term liabilities 3,394 1,235
-------- --------
Net Cash From (Used By) Operating Activities (42,117) 16,250
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (23,455) (18,486)
Acquisition of Coil Steels Group, net of cash received -- (6,834)
Sales of property, plant and equipment 162 256
-------- --------
Net Cash Used By Investing Activities (23,293) (25,064)
CASH FLOWS USED BY FINANCING ACTIVITIES:
Short-term borrowings - net change -- (4,830)
Payments on long-term debt (33) (7,915)
Stock issued under incentive and purchase plans 4,533 16,301
Treasury stock acquired (9,191) --
Dividends paid (4,550) (3,426)
-------- --------
Net Cash From (Used by) Financing Activities (9,241) 130
-------- --------
Decrease in Cash and Cash Equivalents (74,651) (8,684)
Cash and Cash Equivalents at Beginning of Year 124,397 56,021
-------- --------
Cash and Cash Equivalents at End of Period $ 49,746 $ 47,337
======== ========
*As restated, See Note K.
See notes to condensed consolidated financial statements.
5
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands except share data)
(Unaudited)
Accumulated
Common Stock Other Treasury Stock
---------------------- Add'l Comprehensive ---------------------
Number of Paid-in Income Retained Number of
Shares Amount Capital (Loss) Earnings Shares Amount Total
---------- -------- ------- ------------- -------- ---------- --------- --------
Balance September 1, 2002: 32,265,166 $161,326 $170 $(1,458) $392,004 (3,746,713) $(50,736) $501,306
Comprehensive income:
Net earnings for six months
ended February 28, 2003 5,138 5,138
Other comprehensive income:
Foreign currency
translation adjustment,
net of taxes of $1,195 2,220 2,220
--------
7,358
Comprehensive income
Cash dividends (4,550) (4,550)
Stock issued under incentive and
purchase plans 501 288,207 3,931 4,432
Tax benefits from stock plans 101 101
Treasury stock acquired (593,610) (9,191) (9,191)
---------- -------- ----- ------- -------- ---------- --------- ---------
Balance February 28, 2003 32,265,166 $161,326 $772 $762 $392,592 (4,052,116) $(55,996) $499,456
========== ======== ==== ==== ======== ========== ======== ========
See notes to condensed consolidated financial statements.
6
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - QUARTERLY FINANCIAL DATA
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals, except for the voidable preference accrual as
discussed in Note H, Contingencies) necessary to present fairly the financial
position as of February 28, 2003 and August 31, 2002 and the results of
operations for the three and six months ended February 28, 2003 and 2002 and
cash flows for the six months ended February 28, 2003 and 2002. The results of
operations for the six month periods are not necessarily indicative of the
results to be expected for a full year. These interim financial statements
should be read in conjunction with the Company's consolidated financial
statements for the year ended August 31, 2002 included in its Form 10-K/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 February 28, 2003 and August 31, 2002. The comparison to the
prior year period was as follows (in thousands):
Three months ended Six months ended
February 28, February 28,
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Reported net earnings $ 2,933 $ 6,572 $ 5,138 $15,054
Add: goodwill amortization -- 171 -- 337
------- ------- ------- -------
Adjusted net earnings $ 2,933 $ 6,743 $ 5,138 $15,391
======= ======= ======= =======
The goodwill amortization was $0.01 per basic and diluted share for the
three and six months ended February 28, 2002.
During the three months ended February 28, 2003, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The adoption of SFAS No. 146 had no
significant impact on the Company's financial position or results of operations.
During the three months ended February 28, 2003, the Company accrued $773
thousand for medical benefits provided under early retirement arrangements.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees on Indebtedness of Others which
applies to all guarantees issued or modified after December 31, 2002. The
Company has not entered into or modified any significant guarantees since
December 31, 2002, and therefore no liability was recorded at February 28, 2003.
The Company's existing guarantees at December 31, 2002 had been given at the
request of a customer and its surety bond issuer. The Company has agreed to
indemnify the surety against all costs that the surety may incur should the
customer fail to perform its obligations under construction contracts covered by
payment and performance bonds issued by the surety. As of December 31, 2002 and
February 28, 2003, the surety had issued bonds in the total amount (without
reduction for the work performed to date) of $11.9 million, which are subject to
the Company's guarantee obligation under the indemnity agreement. The fair value
of these guarantees is not significant.
7
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 17, 2003, the FASB issued Interpretation No. 46(FIN 46),
Consolidation of Variable Interest Entities, which requires consolidation of
certain special purpose entities. The Company does not anticipate that FIN 46
will have a material impact on its results of operations or financial position.
PROPERTY, PLANT AND EQUIPMENT
During the three months ended February 28, 2003, the Company acquired
$1.5 million in property, plant and equipment after foreclosing on a delinquent
note receivable from a customer.
The Company evaluates the carrying value of property, plant and equipment
whenever a change in circumstances indicates that the carrying value may not be
recoverable from the undiscounted future cash flows from operations. Pursuant to
such an evaluation, the Company wrote-down $630 thousand on certain equipment at
a fabrication-related facility during the three months ended February 28, 2003.
During the three months ended February 28, 2002, the Company closed its
recycling facility in Midland, Texas, resulting in a write-down of $455 thousand
on certain equipment. These write-downs were included in selling, general and
administrative expenses.
NOTE C - SALES OF ACCOUNTS RECEIVABLE
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 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 February 28, 2003 and August 31, 2002, uncollected accounts receivable of
$128 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 February 28, 2003 and August, 2002, $15 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 $188 thousand and $311 thousand for the three and
six months ended February 28, 2003, respectively. These discounts were $284
thousand and $630 thousand for the three and six months ended February 28, 2002,
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 $113 million in the revolving pool of receivables of $128
million at February 28, 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 $17.7 million
at February 28, 2003 and $2.1 million at August 31, 2002.
NOTE D - INVENTORIES
Before deduction of LIFO reserves of $10.9 million and $8.1 million at
February 28, 2003 and August 31, 2002, respectively, inventories valued under
the first-in, first-out method approximated replacement cost. The majority of
the Company's inventories are in finished goods, with minimal work in process.
Approximately $13.3 million and $16.5 million were in raw materials at February
28, 2003 and August 31, 2002, respectively.
8
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE E - LONG TERM DEBT
Long-term debt (in thousands) was as follows:
February 28, August 31,
2003 2002
------------- -----------
7.20% notes due 2005 $ 106,232 $ 104,775
6.80% notes due 2007 50,000 50,000
6.75% notes due 2009 100,000 100,000
Other 1,793 1,825
------------ -----------
258,025 256,600
Less current maturities 611 631
------------ -----------
$ 257,414 $ 255,969
============ ===========
On April 9, 2002 the Company entered into two interest rate swaps to convert a
portion of the Company's long term debt from a fixed interest rate to a floating
interest rate. The impact of these swaps is to adjust the amount of fixed rate
and floating rate debt and to reduce overall financing costs. The swaps
effectively convert the interest rate on the $100 million debt due July 2005
from the fixed rate of 7.20% to six month LIBOR (determined in arrears) plus a
spread of 2.02%. The interest rate is set on January 15th and July 15th, and for
the quarter ended February 28, 2003, was estimated to be an annualized rate of
3.25%. The total fair value of both swaps was $6.2 million and $4.8 million at
February 28, 2003 and August 31, 2002, respectively. The swaps are recorded in
other long-term assets, with a corresponding increase in the 7.20% long-term
notes, representing the change in fair value of the hedged debt.
NOTE F - EARNINGS PER SHARE
On May 20, 2002, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend on its common stock. All 2002
per share and weighted average share amounts in the accompanying condensed
consolidated financial statements have been restated to reflect this stock
split.
In calculating earnings per share, there were no adjustments to net
earnings to arrive at income for the three or six months ended February 28, 2003
or 2002. The reconciliation of the denominators of earnings per share
calculations are as follows:
Three months ended Six months ended
February 28, February 28,
------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Shares outstanding for basic earnings per share 28,320,223 26,832,546 28,403,401 26,519,786
Effect of dilutive securities-stock options/purchase plans 504,944 1,100,450 491,049 771,042
---------- ---------- ---------- ----------
Shares outstanding for diluted earnings per share 28,825,167 27,932,996 28,894,450 27,290,828
Stock options with total share commitments of 1,208,863 at February 28, 2003
were anti-dilutive based on the average share price for the quarter of $15.42.
All stock options expire by 2010.
At February 28, 2003, the Company had authorization to purchase 473,952
of its common shares. On March 17, 2003, the Company's Board of Directors
authorized the purchase of an additional 1,000,000 shares.
In January 2003, the Company's stockholders approved an amendment to the
Company's General Employees Stock Purchase Plan that increased by 1,000,000 the
maximum number of shares that may be eligible for issuance and increased the
maximum number of shares that an eligible employee may purchase annually from
200 to 400 shares.
9
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - DERIVATIVES AND RISK MANAGEMENT
The Company's worldwide operations and product lines expose it to risks
from fluctuations in foreign currency exchange rates and metals commodity
prices. The objective of the Company's risk management program is to mitigate
these risks using futures or forward contracts (derivative instruments). The
Company enters into metal commodity forward contracts to mitigate the risk of
unanticipated declines in gross margin due to the volatility of the commodities'
prices, and enters into foreign currency forward contracts which match the
expected settlements for purchases and sales denominated in foreign currencies.
The Company designates only those contracts as hedges for accounting purposes
which closely match the terms of the underlying transaction. These hedges
resulted in substantially no ineffectiveness in the statements of earnings for
the three or six months ended February 28, 2003 and 2002. Certain of the foreign
currency and all of the commodity contracts were not designated as hedges for
accounting purposes, although management believes they are essential economic
hedges. The changes in fair value of these instruments resulted in a $158
thousand decrease and a $180 thousand decrease in cost of goods sold for the
three months ended February 28, 2003 and 2002, respectively. Also, cost of goods
sold decreased by $497 thousand and decreased by $333 thousand for the six
months ended February 28, 2003 and 2002, respectively, due to changes in the
fair value of these instruments. All of the instruments are highly liquid, and
none are entered into for trading purposes or speculation.
See Note E, Long-Term Debt, regarding the Company's interest rate risk
management strategy.
NOTE H - CONTINGENCIES
CONSTRUCTION CONTRACT DISPUTES
There were no material developments relating to the Company's
construction contract disputes since August 31, 2002. See Note 10, Commitments
and Contingencies, to the consolidated financial statements for the year ended
August 31, 2002.
At February 28, 2003 and August 31, 2002, $9.8 million and $9.6 million,
respectively, were accrued (including interest) relating to an adverse trial
judgment. The judgment was upheld on appeal in February 2003 and paid subsequent
to the quarter end.
In another matter, a subsidiary of the Company entered into a fixed price
contract with the design/builder general contractor (D/B) to furnish, erect and
install structural steel, hollow core pre-cast concrete planks, fireproofing,
and certain concrete slabs along with related design and engineering work for
the construction of a large hotel and casino complex. In connection with the
contract, the D/B secured insurance under a subcontractor/vendor default
protection policy that named the Company as an insured in lieu of performance
and payment bonds. A large subcontractor to the Company defaulted, and the
Company incurred unanticipated costs to complete the work. During 2002, the
Company recovered $15 million from the insurance company, of which $7.4 million
was recorded as deferred insurance proceeds (in other long-term liabilities at
February 28, 2003 and August 31, 2002) pending final resolution of the Company's
disputes with the D/B. The Company has filed a lawsuit against the insurance
broker for insurance benefits not received due to the broker's acts, errors and
omissions.
Disputes between the Company and the D/B have been submitted to binding
arbitration. Depending upon future rulings in the arbitration, a portion of the
Company's recovery from the insurance company may be credited toward the
Company's claim against the D/B. The Company has filed a claim for approximately
$27 million against the D/B. The claim seeks recovery of unpaid contract
receivables, amounts for delays and change orders all of which have not been
paid by the D/B. At February 28, 2003 and August 31, 2002, the Company
maintained contract receivables of $7.2 million from the D/B. Such amounts are
included within other assets on the accompanying balance sheets.
10
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The D/B has not disputed certain amounts owed under the contract, but
contends that other deductive items, disputed by the Company reduce the contract
balance by approximately $6.3 million which together with other D/B claims
(discussed below) exceed the unpaid contract balance. The Company disputes the
deductive items in the D/B's claim and intends to vigorously pursue recovery of
the contract balance in addition to all amounts not recovered under insurance
program coverage as a result of misrepresentations or omissions of the D/B.
The owner of the Project and the D/B have filed joint claims in the
arbitration proceeding against the Company, primarily for alleged delay damages,
totaling approximately $144 million which includes alleged delay damages in
construction of a retail area adjacent to the Project. Management believes the
claims are generally unsubstantiated, and the Company has valid legal defenses
against such claims and intends to vigorously defend these claims. Management is
unable to determine a range of potential loss related to such claims, and
therefore no losses have been accrued; however, it believes the ultimate
resolution will not have a material effect on the Company's consolidated
financial statements. Due to the uncertainties inherent in the estimating
process, it is at least reasonably possible that a change in the Company's
estimate of its collection of amounts receivable and possible liability could
occur in the near term.
ENVIRONMENTAL AND OTHER MATTERS
In the ordinary course of conducting its business, the Company becomes
involved in litigation, administrative proceedings and governmental
investigations, including environmental matters. Management believes that
adequate provision has been made in the financial statements for the potential
impact of these issues, and that the outcomes will not significantly impact the
results of operations or the financial position of the Company, although they
may have a material impact 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 accrued $1 million during the 2003 second quarter relating to this
matter.
The Company is involved in various other claims and lawsuits incidental
to its business. In the opinion of management, these claims and suits in the
aggregate will not have a material adverse effect on the results of operations
or the financial position of the Company.
NOTE I - RECLASSIFICATIONS
Certain reclassifications have been made in the 2002 financial statements
to conform to the classifications used in the current year.
11
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE J - BUSINESS SEGMENTS
The following is a summary of certain financial information by reportable
segment (in thousands):
Three months ended February 28, 2003
---------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ ------- ------------
Net sales - unaffiliated customers $ 306,739 $ 93,952 $ 259,967 $ 151 $ 660,809
Inter-segments sales 760 6,516 4,839 (12,115) --
--------- --------- --------- --------- ---------
307,499 100,468 264,806 (11,964) 660,809
Adjusted operating profit (loss) 1,148 4,050 5,341 (2,141) 8,398
Three months ended February 28, 2002
-----------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ -------- ------------
Net sales - unaffiliated customers $ 322,624 $ 78,526 $ 173,126 $ 41 $ 574,317
Inter-segments sales 816 4,392 5,255 (10,463) --
--------- --------- --------- --------- ---------
323,440 82,918 178,381 (10,422) 574,317
Adjusted operating profit (loss) 15,850 198 2,206 (2,301) 15,953
Six months ended February 28, 2003
-----------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- --------- ------------ --------- ------------
Net sales - unaffiliated customers $ 602,269 $ 183,659 $ 510,703 $ 356 $ 1,296,987
Inter-segments sales 1,560 13,165 10,466 (25,191) --
----------- --------- ----------- --------- -----------
603,829 196,824 521,169 (24,835) 1,296,987
Adjusted operating profit (loss) 4,892 5,454 10,113 (4,104) 16,355
Total assets - February 28, 2003 709,228 96,769 312,025 76,902 1,194,924
Six months ended February 28, 2002
-------------------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------- -------- ------------- -------- -------------
Net sales - unaffiliated customers $ 660,416 $ 156,407 $ 329,531 $ 131 $ 1,146,485
Inter-segments sales 1,620 9,142 8,043 (18,805) --
----------- ----------- ----------- ----------- -----------
662,036 165,549 337,574 (18,674) 1,146,485
Adjusted operating profit (loss) 36,050 (1,024) 4,486 (4,552) 34,960
Total assets - February 28, 2002 741,079 84,970 237,177 69,869 1,133,095
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 FEBRUARY 28, 2003:
Net earnings (loss) $ 723 $ 2,565 $ 4,304 $(4,659) $ 2,933
Income taxes 350 1,465 501 (592) 1,724
Interest expense 33 (1) 499 3,022 3,553
Discounts on sales of accounts receivable 42 21 37 88 188
------- ------- ------- ------- -------
Adjusted operating profit (loss) $ 1,148 $ 4,050 $ 5,341 $(2,141) $ 8,398
======= ======= ======= ======= =======
THREE MONTHS ENDED FEBRUARY 28, 2002:
Net earnings (loss) $ 9,785 $ 103 $ 1,123 $(4,439) $ 6,572
Income taxes 5,903 56 610 (2,541) 4,028
Interest expense 74 -- 405 4,590 5,069
Discounts on sales of accounts receivable 88 39 68 89 284
------- ------- ------- ------- -------
Adjusted operating profit (loss) $15,850 $ 198 $ 2,206 $(2,301) $15,953
======= ======= ======= ======= =======
SIX MONTHS ENDED FEBRUARY 28, 2003:
Net earnings (loss) $ 3,006 $ 3,465 $ 7,131 $(8,464) $ 5,138
Income taxes 1,737 1,950 2,044 (2,713) 3,018
Interest expense 66 -- 862 6,960 7,888
Discounts on sales of accounts receivable 83 39 76 113 311
------- ------- ------- ------- -------
Adjusted operating profit (loss) $ 4,892 $ 5,454 $10,113 $(4,104) $16,355
======= ======= ======= ======= =======
SIX MONTHS ENDED FEBRUARY 28, 2002:
Net earnings (loss) $22,199 $ (733) $ 2,193 $(8,605) $15,054
Income taxes 13,423 (403) 1,193 (4,967) 9,246
Interest expense 161 1 896 8,972 10,030
Discounts on sales of accounts receivable 267 111 204 48 630
------- ------- ------- ------- -------
Adjusted operating profit (loss) $36,050 $(1,024) $ 4,486 $(4,552) $34,960
======= ======= ======= ======= =======
NOTE K-RESTATEMENT
In October 2003, the Company determined that the amounts previously reported at
February 28, 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 receivable 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
February 28, 2003 and August 31, 2002 have been increased by $20 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 February 28, 2003 and August 31,
2002 have been increased by $111 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 six months ended February 28, 2003 and 2002
have been changed from $48 million and ($22) million, respectively, to ($23)
million and ($25) 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 Six Months Ended
February 28, February 28,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 661 $ 574 $ 1,297 $ 1,146
Net earnings 2.9 6.6 5.1 15.1
EBITDA 23.3 31.1 46.3 65.5
Ending LIFO reserve 10.9 6.5
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 Six Months Ended
February 28, February 28,
2003 2002 2003 2002
------ ------ ----- -----
Net earnings $ 2.9 $ 6.6 $ 5.1 $15.1
Income taxes 1.7 4.0 3.0 9.2
Interest expense 3.6 5.1 7.9 10.0
Depreciation and amortization 15.1 15.4 30.3 31.2
----- ----- ----- -----
EBITDA $23.3 $31.1 $46.3 $65.5
===== ===== ===== =====
Our management uses a non-GAAP measure, adjusted operating profit, to compare
and evaluate the financial performance of our segments. See Note J, Business
Segments to the condensed consolidated financial statements. Adjusted
operating profit 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. In the following table we are
providing 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 FEBRUARY 28, 2003:
Net earnings (loss) $ 723 $ 2,565 $ 4,304 $(4,659) $ 2,933
Income taxes 350 1,465 501 (592) 1,724
Interest expense 33 (1) 499 3,022 3,553
Discounts on sales of accounts receivable 42 21 37 88 188
------- ------- ------- ------- -------
Adjusted operating profit (loss) $ 1,148 $ 4,050 $ 5,341 $(2,141) $ 8,398
======= ======= ======= ======= =======
THREE MONTHS ENDED FEBRUARY 28, 2002:
Net earnings (loss) $ 9,785 $ 103 $ 1,123 $(4,439) $ 6,572
Income taxes 5,903 56 610 (2,541) 4,028
Interest expense 74 -- 405 4,590 5,069
Discounts on sales of accounts receivable 88 39 68 89 284
------- ------- ------- ------- -------
Adjusted operating profit (loss) $15,850 $ 198 $ 2,206 $(2,301) $15,953
======= ======= ======= ======= =======
SIX MONTHS ENDED FEBRUARY 28, 2003:
Net earnings (loss) $ 3,006 $ 3,465 $ 7,131 $(8,464) $ 5,138
Income taxes 1,737 1,950 2,044 (2,713) 3,018
Interest expense 66 -- 862 6,960 7,888
Discounts on sales of accounts receivable 83 39 76 113 311
------- ------- ------- ------- -------
Adjusted operating profit (loss) $ 4,892 $ 5,454 $10,113 $(4,104) $16,355
======= ======= ======= ======= =======
SIX MONTHS ENDED FEBRUARY 28, 2002:
Net earnings (loss) $22,199 $ (733) $ 2,193 $(8,605) $15,054
Income taxes 13,423 (403) 1,193 (4,967) 9,246
Interest expense 161 1 896 8,972 10,030
Discounts on sales of accounts receivable 267 111 204 48 630
------- ------- ------- ------- -------
Adjusted operating profit (loss) $36,050 $(1,024) $ 4,486 $(4,552) $34,960
======= ======= ======= ======= =======
The following financial events were significant during the second quarter ended
February 28, 2003:
- Key markets in our manufacturing segment remained weak early in the
quarter, but improved some in January and February 2003.
- Our steel and the copper tube minimills' earnings decreased due
primarily to higher scrap, utility and other input costs which were not
offset by increased selling prices.
- Margins were lower at the steel group's fabrication operations due to
lower selling prices.
- LIFO expense (primarily in manufacturing) was $1.9 million (after-tax)
for the three months ended February 28, 2003 compared to $404 thousand
last year.
- We accrued $650 thousand (after-tax) during the three months ended
February 28, 2003 for our estimated likely loss in a lawsuit relating to
a customer's bankruptcy.
- Our recycling segment reported better adjusted operating profits with
continued improvements in both ferrous and nonferrous scrap markets over
last year.
- Marketing and distribution's adjusted operating profit was higher than
last year's second quarter, with most of the improvement in
international markets.
- We reduced our bonuses, contributions and employee's retirement plan
expenses in line with our lower earnings.
- Our financial position remained strong, with excess cash and cash
equivalents and no short-term debt at February 28, 2003.
13
CONSOLIDATED DATA -
The last in, first out (LIFO) method of inventory valuation decreased net
earnings by $1.9 million and $1.8 million for the three and six months ended
February 28, 2003, respectively. LIFO reduced diluted earnings per share by 7
cents and 6 cents for the three and six months ended February 28, 2003,
respectively. For the three months ended February 28, 2002, LIFO decreased net
earnings by $404 thousand (1 cent per diluted share). LIFO had substantially no
impact on the six months ended February 28, 2002. We have restated the prior
year's per share numbers to reflect the stock split referred to in Note F,
Earnings per Share, to the condensed consolidated financial statements.
SEGMENT OPERATING DATA -
Unless otherwise indicated, all dollars below are before income taxes.
The following table shows net sales and adjusted operating profit (loss) by
business segment (in thousands):
Three months ended Six months ended
February 28, February 28,
------------------------------- -------------------------------
(in thousands)
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET SALES:
Manufacturing $ 307,499 $ 323,440 $ 603,829 $ 662,036
Recycling 100,468 82,918 196,824 165,549
Marketing and Distribution 264,806 178,381 521,169 337,574
Corporate and Eliminations (11,964) (10,422) (24,835) (18,674)
----------- ----------- ----------- -----------
$ 660,809 $ 574,317 $ 1,296,987 $ 1,146,485
=========== =========== =========== ===========
OPERATING PROFIT (LOSS):
Manufacturing $ 1,148 $ 15,850 $ 4,892 $ 36,050
Recycling 4,050 198 5,454 (1,024)
Marketing and Distribution 5,341 2,206 10,113 4,486
Corporate and Eliminations (2,141) (2,301) (4,104) (4,552)
----------- ----------- ----------- -----------
$ 8,398 $ 15,953 $ 16,355 $ 34,960
=========== =========== =========== ===========
MANUFACTURING -
We include our steel group and our copper tube division in our manufacturing
segment. Adjusted operating profit is equal to earnings before income taxes for
our four steel minimills, our coppertube mill and the steel group's fabrication
operations. Our manufacturing adjusted operating profit for the three months
ended February 28, 2003 decreased $14.7 million (93%) as compared to 2002 on
$15.9 million (5%) less net sales. Scrap purchase prices rose significantly
because of the high demand for U.S. scrap, export restrictions in Russia and
Ukraine, severe weather hampering transportation, the decline in the value of
the U.S. dollar and increased demand in Asia, particularly China. Our steel
minimills implemented higher selling prices late in the second quarter 2003, but
these price increases will take effect gradually in our third and fourth
quarters of fiscal 2003. Therefore, the price increases did not offset higher
scrap and utility costs. Gross margins were significantly lower as a result of
these conditions. Our copper tube mill's gross margins were also lower due to
increased copper scrap purchase prices and lower selling prices for its
products. Our steel group's downstream fabrication operations were less
profitable due to much lower selling prices combined with slightly lower
shipments. Lower business spending and commercial construction in the United
States resulted in reduced demand for the segment's products, and thus
resistance to selling price increases.
14
The table below reflects steel and scrap prices per ton:
Three months ended
February 28,
------------------------
2003 2002
---- ----
Average mill selling price (total sales) $271 $266
Average mill selling price (finished goods) 277 270
Average fabrication selling price 535 620
Average ferrous scrap purchase price 89 71
Adjusted operating profit for our four steel minimills decreased 62% for the
three months ended February 28, 2003 compared to 2002. Modest increases in
selling prices and more shipments were not enough to offset the higher input
costs. Our adjusted operating profits at SMI Texas decreased $1.2 million (22%)
for the three months ended February 28, 2003 as compared to 2002. SMI South
Carolina lost $2.4 million for the three months ended February 28, 2003 as
compared to a $1.9 million adjusted operating profit in 2002. Combined results
for SMI Alabama and SMI Arkansas were slightly better than last year. The mills
shipped 537,000 tons in the current quarter compared to 501,000 last year, an
increase of 7%. We scheduled downtime at the mills in December in order to
manage inventories. As a result, mill production decreased with tons rolled down
10% to 429,000. Tons melted decreased 1% to 475,000. The average total mill
selling price at $271 per ton was $5 (2%) above last year. Our mill selling
price for finished goods increased $7 per ton (3%). Average scrap purchase costs
were $18 per ton (25%) higher than last year. Utility expenses increased by $2.0
million as compared to last year, mostly due to higher natural gas costs. During
the three months ended February 28, 2003, we accrued $773 thousand for medical
benefits provided under early retirement arrangements at SMI Alabama and SMI
South Carolina. In the three months ended February 28, 2002, the mills received
$2.5 million from a graphite electrode litigation settlement.
The steel group's fabrication and other businesses reported a combined adjusted
operating loss of $2.0 million for the three months ended February 28, 2003 as
compared to an adjusted operating profit of $6.6 million in 2002. We recorded a
$1.3 million expense to value our inventories under the last-in, first-out
(LIFO) method during the three months ended February 28, 2003, as compared to a
$487 thousand expense in 2002. Excluding SMI-Owen (which was sold in March
2002), adjusted operating profits decreased by $8.2 million. Fabrication plant
shipments totaled 231,000 tons, 2% less than last year's second quarter
shipments of 235,000 tons. Excluding SMI Owen, shipments increased by 3,000 tons
(1%). One of our subsidiaries has been notified that a bankrupt customer alleges
the subsidiary received payments from the customer within 90 days of bankruptcy
filing. The customer claims that these payments are voidable and should be
returned to the bankruptcy estate. The payments were for materials and services
that we sold to the customer. We accrued $1 million during the 2003 second
quarter related to this matter. The average fabrication selling price for the
three months ended February 28, 2003 decreased $85 per ton (14%). Our rebar
fabrication, construction-related products and post plants reported higher
adjusted operating profits during the second quarter 2003, as compared to 2002.
We recognized a $482 thousand gain on the trade-in of rental forms in
construction-related products. Also, selling prices increased for rebar
fabricators. However, our joist and structural steel fabrication plants reported
adjusted operating losses on a combined basis for the second quarter 2003, as
compared to adjusted operating profits in 2002. In general, our continued cost
reduction efforts and initiatives to improve productivity were not enough to
offset the drop in gross margins. Joist shipments and joist and structural
fabrication selling prices decreased during the second quarter 2003 as compared
to 2002. During the three months ended February 28, 2003 the joist plants
reduced their inventory book values by $747,000 to their estimated current
market value. Also, during the three months ended February 28, 2003, we
wrote-down $630 thousand on equipment at one of our other facilities because our
projected cash flows from this operation decreased significantly. During the
second quarter 2003, we acquired substantially all of the operating assets of
E.L. Wills, Inc. in Fresno, California, and D&G Enterprises, Inc., in San
Antonio, Texas and American Steel Fabricators in Ft. Myers, Florida. These
operations are rebar fabricators. The aggregate purchase price for these
operations was not significant.
15
Our Copper tube division's adjusted operating profit decreased $748 thousand
(67%) despite 6% more net sales. Copper tube shipments increased 9% to 13.7
million pounds. Production increased 11% to 14.8 million pounds. However, the
average selling price dropped 3 cents per pound (3%) to $1.19 for the three
months ended February 28, 2003 as compared to $1.22 in 2002. The average copper
scrap price increased 6 cents per pound (9%) during the three months ended
February 28, 2003 as compared to 2002. Although construction of new homes held
up relatively well, other market sectors were weaker, which put pressure on
selling prices. Other copper tube producers switched production to compete in
our primary product line. We delayed some shipments due to bad weather. The
division continued to expand its sales of line sets.
RECYCLING -
Our recycling segment reported an adjusted operating profit of $4.1 million for
the three months ended February 28, 2003. This was our most profitable quarter
since 1997. For the same period in 2002, the segment reported an adjusted
operating profit of $198 thousand after incurring a $455 thousand charge for the
closure of its shredder operation in Midland, Texas. Net sales for the three
months ended February 28, 2003 were 21% higher at $100 million. Gross margins
were 30% higher than the same period last year. The segment processed and
shipped 374,000 tons of ferrous scrap during the three months ended February 28,
2003, 11% more than 2002. Ferrous sales prices were on average $94 per ton, or
32% higher than 2002. The following factors contributed to the increase:
o Greater demand from overseas markets caused by higher Chinese
demand for steel-making raw materials,
o winter weather which caused lower scrap collections,
o the weaker U.S. dollar,
o export restrictions from Russia and Ukraine.
Nonferrous shipments were slightly lower at 55,000 tons. The average nonferrous
scrap sales price of $1,020 per ton for the three months ended February 28, 2003
was 12% higher than in 2002. The total volume of scrap processed, including the
steel group's processing plants, was 642,000 tons, an increase of 10% from the
583,000 tons processed in 2002.
MARKETING AND DISTRIBUTION -
Net sales in the three months ended February 28, 2003 for our marketing and
distribution segment increased to $265 million, a 48% increase from 2002. Most
of the increase related to sales outside of the United States. Adjsuted
operating profit for the three months ended February 28, 2003 was $5.3 million,
up 142% from 2002, mostly due to better results from our international
operations. Our U.S. divisions were also more profitable on a combined basis for
the three months ended February 28, 2003, as compared to 2002. Sales to and
within Asia, especially China, were up significantly. Also, the economy in
Australia was still strong. Except for nonferrous semi-finished goods, prices
and shipments were generally higher. More demand in several of our key markets,
including that for processed material contributed to the improved results. Also,
the increased profitability in marketing and distribution was largely due to our
strategy in recent years to build up our regional business around the world and
to increase our downstream presence. Overall, the weaker U.S. dollar had a
positive impact on our marketing and distribution segment.
OTHER -
Employee's retirement plan expenses were lower for the three months ended
February 28, 2003 as compared to 2002, and selling general and administrative
expenses were flat. Discretionary items, such as bonuses, contributions and
profit sharing were much lower commensurate with less profitability. Interest
expense was lower due to two interest rate swaps, (see Note E, Long Term Debt,
to the condensed consolidated financial statements) which resulted in interest
expense savings.
16
CONTINGENCIES -
See Note H, Contingencies, to the consolidated condensed financial statements.
In the ordinary course of conducting our business, we become involved in
litigation, administrative proceedings, governmental investigations including
environmental matters, and contract disputes. We may incur settlements, fines,
penalties or judgments because of some of these matters. While we are unable to
estimate precisely the ultimate dollar amount of exposure to loss in connection
with these matters, we make accruals as we deem necessary. The amounts we accrue
could vary substantially from amounts we pay due to several factors including
the following: evolving remediation technology, changing regulations, possible
third-party contributions, the inherent shortcomings of the estimation process,
and the uncertainties involved in litigation. Accordingly, we cannot always
estimate a meaningful range of possible exposure. We believe that we have
adequately provided in our financial statements for the estimable potential
impact of these contingencies. We also believe that the outcomes will not
significantly affect the long-term results of operations or our financial
position. However, they may have a material impact on earnings for a particular
period.
We are subject to federal, state and local pollution control laws and
regulations in all locations we have operating facilities. We anticipate that
compliance with these laws and regulations will involve continuing capital
expenditures and operating costs.
OUTLOOK -
Assuming limited geopolitical fallout, we expect the second half of our fiscal
year ending August 31, 2003 to be more profitable due to increased production,
shipments and selling prices. We are expecting to achieve between 50% and 60% of
our historical second half net earnings over the past three years. During the
second half of fiscal 2003, we anticipate that public construction and
institutional building will increase despite tighter budgets at the state and
local level. Construction activity typically increases in the spring partially
due to better weather conditions. We are expecting some improvement in demand
from the industrial sector as well, and no further deterioration in commercial
construction.
During the second quarter 2003, we implemented two price increases for most of
our steel mill products. These price increases totaled $35 per ton and will
become partly effective in the third quarter and fully effective during our
fourth quarter fiscal 2003. These increases should help restore gross margins at
our steel minimills. We are also anticipating better profits at our copper tube
mill during the second half of fiscal 2003 due to higher demand in the spring.
We are expecting ferrous scrap prices to possibly decline by our fiscal year
end. We think that nonferrous prices will flatten. The recycling segment should
continue to be profitable under these conditions. We believe that our marketing
and distribution markets will have continued good results.
Our 2004 fiscal year should be much more profitable, and we should experience
stronger demand for construction-related products and services. We are also
expecting that various end-use markets around the world will improve, especially
manufacturing activity. We think that emerging markets will show a
disproportionate increase in the consumption of steel and nonferrous metals, and
we are well-positioned to take advantage of these markets.
This outlook section contains forward-looking statements regarding the outlook
for our financial results including net earnings, product pricing and demand,
production rates, interest rates, inventory levels, results of litigation, steel
import restrictions, and general market conditions. These forward-looking
statements can generally be identified by phrases such as we "expect",
"anticipate", "believe", "presume", "think", "plan to", "should", "likely",
"appear", "projects", or other similar words or phrases of similar impact. There
is inherent risk and uncertainty in any forward-looking statements. Variances
will occur and some could be materially different from our current opinion.
Developments that could impact our expectations include the following:
o interest rate changes
17
o construction activity
o litigation claims and settlements
o difficulties or delays in the execution of construction
contracts resulting in cost overruns or contract disputes
o metals pricing over which we exert little influence
o increased capacity and product availability from competing steel
minimills and other steel suppliers including import quantities
and pricing
o court decisions
o industry consolidation or changes in production capacity or
utilization
o global factors including credit availability and political
uncertainties
o currency fluctuations
o energy and insurance prices
o decisions by governments impacting the level of steel imports
and pace of overall economic activity.
LIQUIDITY AND CAPITAL RESOURCES -
We discuss liquidity and capital resources on a consolidated basis. Our
discussion includes the sources and uses of our three operating segments and
centralized corporate functions. We have a centralized treasury function and use
inter-company loans to efficiently manage the short-term cash needs of our
operating divisions. We invest any excess funds centrally.
We rely upon cash flows from operating activities, and to the extent necessary,
external short-term financing sources. Our short-term financing sources include
the issuance of commercial paper, sales of accounts receivable and borrowing
under our bank credit facilities. From time to time, we have issued long-term
public debt and private placements. Our investment grade credit ratings and
general business conditions affect our access to external financing on a
cost-effective basis. Depending on the price of our common stock, we may realize
significant cash flows from the exercise of stock options.
Moody's Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch
(F-2) rate our $174.5 million commercial paper program in the second highest
category. To support our commercial paper program, we have unsecured
contractually committed revolving credit agreements with a group of eight banks.
Our $129.5 million facility expires in August 2003, and our $45 million facility
expires in August 2004. We plan to continue our commercial paper program and the
revolving credit agreements in comparable amounts to support the commercial
paper program.
For added flexibility, we may secure financing through sales of certain accounts
receivable in an amount not to exceed $130 million. We 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 $256 million at
February 28, 2003 and is investment grade rated by Standard & Poors' Corporation
(BBB), Fitch (BBB) and by Moody's Investors Services (Baa1). We have access to
the public markets for potential refinancing or the issuance of additional
long-term debt. Also, we have numerous informal, uncommitted credit facilities
available from domestic and international banks. These credit facilities are
priced at bankers' acceptance rates on a cost of funds basis.
Credit ratings affect our ability to obtain short- and long-term financing and
the cost of such financing. If the rating agencies were to reduce our credit
ratings, we would pay higher financing costs and probably would have less
availability of the informal, uncommitted facilities. In determining our credit
ratings, the rating agencies consider a number of both quantitative and
qualitative factors. These factors include earnings, fixed charges such as
interest, cash flows, total debt outstanding, off balance sheet obligations and
other commitments, total capitalization and various ratios calculated from these
factors. The rating agencies also consider predictability of cash flows,
business strategy, industry condition and contingencies. We are committed to
maintaining our investment grade ratings.
Certain of our financing agreements include various covenants. The most
restrictive of these covenants requires us to maintain an interest coverage
ratio of greater than three times and a debt to capitalization
18
ratio of 55%, as defined in the financing agreement. A few of the agreements
provide that if we default on the terms of another financing agreement, it is
considered a default under these agreements. We have complied with the
requirements, including the covenants of our financing agreements as of and for
the three months ended February 28, 2003.
Our revolving credit agreements and accounts receivable securitization agreement
include ratings triggers. The trigger in the revolving credit agreements is
solely a means to reset pricing for facility fees and, if a borrowing occurs, on
loans. Within the accounts receivable securitization agreement, the ratings
trigger is contained in a "termination event", but the trigger is set at
catastrophic levels. The trigger requires a combination of ratings actions on
behalf of two independent rating agencies and is set at levels seven ratings
categories below our current rating.
Our manufacturing and recycling businesses are capital intensive. Our capital
requirements include construction, purchases of equipment and maintenance
capital at existing facilities. We plan to invest in new operations. We also
plan to invest in working capital to support the growth of our businesses,
maintain our ability to repay maturing long-term debt when due at its earliest
maturity in 2005 and pay dividends to our stockholders.
We continue to assess alternative means of raising capital, including potential
dispositions of under-performing or non-strategic assets. Any potential future
major acquisitions could require additional financing from external sources
including the issuance of common or preferred stock.
Cash Flows
Our cash flows from operating activities primarily result from sales of steel
and related products, and to a lesser extent, sales of nonferrous metal
products. We have a diverse and generally stable customer base. We use futures
or forward contracts as needed to mitigate the risks from fluctuations in
foreign currency exchange rates and metals commodity prices. See Note G,
Derivatives and Risk Management, to the condensed consolidated financial
statements.
The volume and pricing of orders from our U.S. customers in the manufacturing
and construction sectors affect our cash flows from operating activities. Our
international marketing and distribution operations also significantly affect
our cash flows from operating activities. The weather can influence the volume
of products we ship in any given period. Also, the general economy, the strength
of the U.S. dollar, governmental action, and various other factors beyond our
control influence our volume and prices. Periodic fluctuations in our prices and
volumes can result in variations in cash flows from operations. Despite these
fluctuations, we have historically relied on operating activities as a steady
source of cash.
We used $42.1 million of net cash flows in our operating activities for the six
months ended February 28, 2003 as compared with the $16.3 million of net cash
flows provided from our operating activities for the six months ended February
28, 2002. This was due partly to lower net earnings. During the six months ended
February 28, 2003, we paid more bonuses and other discretionary expenses, which
had been accrued at August 31, 2002, than we did during the six months ended
February 28, 2002. Net working capital increased to $390 million at February 28,
2003 from $379 million at August 31, 2002. We used funds from cash equivalents
to pay the accrued expenses as warranted. Also, inventories in marketing and
distribution increased mostly due to higher sales orders from outside of the
United States and for goods in transit. The current ratio was 2.0 at February
28, 2003, up from 1.9 at August 31, 2002.
We invested $23.5 million in property, plant and equipment during the six months
ended February 28, 2003, which was comparable to 2002. In 2002, we acquired the
remaining shares of the Coil Steels Group (CSG) for $6.8 million. We expect our
capital spending for fiscal 2003 to be less than our $87 million budget,
including both new construction and acquisitions to expand our downstream
businesses.
19
We assess our capital spending each quarter and reevaluate our requirements
based upon current and expected results. We believe that our capital spending
may be about $50 million for fiscal 2003.
Our short-term financing needs were minimal during the six months ended February
28, 2003 mostly due to continued management of working capital and our
significant amount of cash and cash equivalents. We had no short-term borrowings
at February 28, 2003 or 2002. We have no significant amounts due on our
long-term debt until July 2005. During the six months ended February 28, 2003,
we used $30.6 million from sales of accounts receivable to financial
institutions. See Note C, Sales of Accounts Receivable, to the condensed
consolidated financial statements.
At February 28, 2003 , 28,213,050 common shares were issued and outstanding,
with 4,052,116 held in our treasury. We paid dividends of $4.6 million during
the six months ended February 28, 2003, compared to the $3.4 million paid during
2002. During the six months ended February 28, 2003, we purchased 593,610 shares
of our common stock at an average price of $15.48 per share. These shares were
held in our treasury.
We believe that we have sufficient liquidity for fiscal 2003 and the foreseeable
future.
20
CONTRACTUAL OBLIGATIONS
The following table represents our contractual obligations as of February 28,
2003 (dollars in thousands):
Payments Due Within *
----------------------------------------------------------------
2-3 4-5 After
Total 1 Year Years Years 5 Years
-------- -------- -------- -------- --------
Contractual Obligations:
Long-term Debt (1) $258,025 $ 611 $107,313 $ 50,027 $100,074
Operating Leases (2) 54,131 7,889 13,054 9,831 23,357
Unconditional Purchase
Obligations (3) 84,821 29,185 31,740 6,902 16,994
-------- -------- -------- -------- --------
Total Contractual Cash
Obligations $396,977 $ 37,685 $152,107 $ 66,760 $140,425
======== ======== ======== ======== ========
* Cash obligations herein are not discounted.
(1) Total amounts are included in the February 28, 2003 condensed consolidated
balance sheet. See Note E, Long-Term Debt, to the condensed consolidated
financial statements.
(2) Includes minimum lease payment obligations for noncancelable equipment and
real-estate leases in effect as of February 28, 2003.
(3) About 54% of these purchase obligations are for inventory items to be sold
in the ordinary course of business; most of the remainder are for supplies
associated with normal revenue-producing activities.
At February 28, 2003, we received $32.7 million of net funding from the sales of
accounts receivable. See Note C, Sales of Accounts Receivable, to the condensed
consolidated financial statements. If we terminated the accounts receivable
program on February 28, 2003 we would have to pay the first $32.7 million of
collections from accounts sold to third party financial institutions. We have
complied with the terms of this program as of, and for the six months ended
February 28, 2003.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for our own
commitments to perform in certain instances when our customers and suppliers
request. A cash deposit of $10.2 million included in other current assets on the
condensed consolidated balance sheet collateralized a portion of our outstanding
letters of credit. All of the commitments expire within one year.
At the request of a customer and its surety bond issuer, we have agreed to
indemnify the surety against all costs the surety may incur should our customer
fail to perform its obligations under construction contracts covered by payment
and performance bonds issued by the surety. We are the customer's primary
supplier of steel, and steel is a substantial portion of our customer's cost to
perform the contracts. We believe we have adequate controls to monitor the
customer's performance under the contracts including payment for the steel we
supply. As of February 28, 2003, the surety had issued bonds in the total amount
(without reduction for the work performed to date) of $11.9 million which are
subject to our guaranty obligation under the indemnity agreement. See Note B,
Accounting Policies, to the condensed consolidated financial statements.
ACCOUNTING POLICIES-
See Note B, Accounting Policies, to the condensed consolidated financial
statements.
21
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the registrant's annual meeting of stockholders held January 23,
2003, the three nominees named in the Company's Proxy Statement dated December
11, 2002, were elected to serve as directors until the 2006 annual meeting, the
proposal to amend the Company's General Employee Stock Purchase Plan to increase
by 1,000,000 the number of shares available for issuance pursuant to the Plan,
and to increase the maximum number of shares that an eligible employee may elect
to purchase annually from 200 to 400 was approved and the appointment of
Deloitte & Touche, LLP, as auditors of the registrant for the fiscal year ending
August 31, 2003 was ratified. There was no solicitation in opposition to
management's nominees for directors.
Additional information as to the vote on each director standing for election,
all matters voted on at the meeting and directors continuing in office is
provided below:
Proposal 1 - Election of Directors
For Withheld
---------- ----------
Anthony A. Massaro 25,231,205 807,252
Robert D. Neary 25,221,841 816,616
Clyde P. Selig 25,707,256 331,201
Directors continuing in office are:
Moses Feldman
A. Leo Howell
Ralph E. Loewenberg
Dorothy G. Owen
Stanley A. Rabin
Robert R. Womack
Proposal 2 - Amendment to the general employees' stock purchase plan to
increase by 1,000,000 the number of shares available for issuance pursuant to
the plan and to increase the maximum number of shares that an eligible employee
may elect to purchase annually form 200 to 400 shares.
For 24,881,105 Against 1,131,646 Abstain 25,706
Proposal 3 - Ratification of appointment of Deloitte & Touche LLP as
independent auditors for the year ending August 31, 2003.
For 25,782,903 Against 241,581 Abstain 13,973
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits required by 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
23
INDEX TO EXHIBITS
Exhibit No Description
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).