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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK
ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 1-4304
COMMERCIAL METALS COMPANY
(Exact name of registrant as specified in its Charter)
DELAWARE 75-0725338
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7800 STEMMONS FREEWAY, DALLAS, TEXAS 75247
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (214) 689-4300
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $5 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ X ]
THE AGGREGATE MARKET VALUE OF THE COMMON STOCK ON NOVEMBER 19, 1998, HELD BY
NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE OF $25.625 PER SHARE
ON NOVEMBER 19, 1998, ON THE NEW YORK STOCK EXCHANGE WAS APPROXIMATELY
$373,000,000.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF NOVEMBER 19, 1998: COMMON STOCK, $5.00 PAR -- 14,584,816.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENT ARE INCORPORATED BY REFERENCE INTO THE LISTED
PART OF FORM 10-K:
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 28, 1999 -- PART III.
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PART I
ITEM 1. BUSINESS
Commercial Metals Company was incorporated in 1946 in Delaware as a
successor to a secondary metals recycling business in existence since
approximately 1915. The Company maintains executive offices at 7800 Stemmons
Freeway, Dallas, Texas 75247 (telephone 214/689-4300). The terms "Company" or
"registrant" as used herein include Commercial Metals Company and its
consolidated subsidiaries. The Company's fiscal year ends August 31 and all
references to years refer to the fiscal year ended August 31 of that year unless
otherwise noted.
The Company considers its businesses to be organized into three
segments - (i) Manufacturing, (ii) Recycling and (iii) Marketing and Trading.
The Company's activities are primarily concerned with metals related activities.
Financial information for the last three fiscal years concerning the segments is
incorporated herein by reference from "Note 12 Business Segments," of the Notes
to Consolidated Financial Statements at Part II, Item 8.
THE MANUFACTURING SEGMENT
The Manufacturing segment is the registrant's dominant and most rapidly
expanding segment in terms of assets employed, capital expenditures, operating
profit and number of employees. It consists of two entities, the CMC Steel Group
and the Howell Metal Company subsidiary, a manufacturer of copper tubing. The
Steel Group is by far the more significant entity in this segment with
subsidiaries operating four steel minimills, twenty steel fabrication plants,
four steel joist manufacturing facilities, four steel fence post manufacturing
plants, a heat treating plant, eight metals recycling plants, a railcar
rebuilding facility, twelve concrete related product warehouses, two industrial
products supply facilities and a railroad salvage company.
The Company endeavors to operate all four minimills at full capacity in
order to minimize product costs. Increases in capacity and productivity are
continuously emphasized through both operating and capital improvements. The
steel minimill business is capital intensive with substantial capital
expenditures required on a regular basis to remain competitive as a low cost
producer. Over the past three fiscal years, approximately $173 million or 72% of
the Company's total capital expenditures have been for minimill projects. This
emphasis on productivity improvements is reflected in a generally increased
number of tons of steel melted, rolled and shipped from the minimills during
each of the last three years as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Tons Melted 1,561,000 1,755,000 1,932,000
Tons Rolled 1,477,000 1,581,000 1,693,000
Tons Shipped 1,730,000 1,926,000 2,008,000
</TABLE>
The Company's largest steel minimill, operated by Structural Metals,
Inc. ("SMI Texas") is located at Seguin, Texas, near San Antonio. SMI Steel,
Inc. ("SMI Alabama"), a steel minimill in Birmingham,
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Alabama, was acquired in 1983. This mill now known as SMI Steel South Carolina
("SMI South Carolina"), located in Cayce, South Carolina, was acquired in
November, 1994 as part of the acquisition of Owen Steel Company, Inc., and
affiliates. A fourth, much smaller mill, has been in operation since 1987 and is
located near Magnolia, Arkansas ("SMI Arkansas").
The SMI Texas, Alabama, and South Carolina mills consist of melt shops
with electric arc furnaces that melt the steel scrap, continuous casting
facilities to shape the molten metal into billets, reheating furnaces, rolling
mills, mechanical cooling beds, finishing facilities and supporting facilities.
The mills utilize both a Company-owned fleet of trucks and private haulers to
transport finished products to customers and Company-owned fabricating shops.
Mill capacity at SMI Texas is approximately 900,000 tons per year melted and
800,000 rolled. SMI Alabama's annual capacity is approximately 600,000 tons
melted and 500,000 rolled and SMI South Carolina's annual capacity is
approximately 550,000 tons melted and, before full operation of the new rolling
mill, approximately 350,000 tons rolled. The new rolling mill at SMI South
Carolina should increase capacity to approximately 700,000 tons when fully
operational.
SMI Texas manufactures steel reinforcing bars, angles, rounds,
channels, flats, and special sections used primarily in highways, reinforced
concrete structures and manufacturing. SMI Texas sells primarily to the
construction, service center, energy, petrochemical, and original equipment
manufacturing industries. Its primary markets are located in Texas, Louisiana,
Arkansas and Oklahoma although products are shipped to approximately 30 states
and Mexico. SMI Texas melted 847,000 tons during 1998 compared to 802,000 tons
the prior year and rolled 757,000 tons, up 50,000 tons from 1997. Both were
production records.
A substantial program to modernize and improve productivity at SMI
Alabama following its 1983 acquisition has resulted in approximately $121
million of capital expenditures through 1998. During 1998 work on improvements
to the mill finishing area including a new cooling bed, straighteners and
stackers commenced with completion scheduled for the first calendar quarter of
1999. During 1998 the melt shop recorded record production of 570,000 and
456,000 tons were rolled. SMI Alabama manufactures primarily larger size
products than the other three Steel Group mills such as mid-size structural
including angles, channels, up to eight inch wide flange beams and special bar
quality rounds and flats. Customers include primarily service centers as well as
the construction, manufacturing, and fabricating industries in the primary
market areas of Alabama, Georgia, Tennessee, North and South Carolina, and
Mississippi.
Facilities at SMI South Carolina are similar but on a generally smaller
capacity scale than the SMI Texas and SMI Alabama mills. SMI South Carolina
manufactures primarily steel reinforcing bars with limited but increasing
production of angles, rounds and squares. Its primary market area includes the
Southeast and mid-Atlantic area south through Florida and north into southern
New England. During 1998 SMI South Carolina melted 515,000 tons and rolled
346,000 tons. The largest single expenditure project in the Company's history,
in excess of $100 million, will replace SMI South Carolina's existing rolling
mill with a new state-of-the-art rolling mill. Construction began in July, 1997,
and is anticipated to be finished in the first calendar quarter of 1999 with
start up beginning upon completion. When fully operational the new rolling mill
will have a capacity of at least 700,000 tons with a substantially broader
product line than SMI South Carolina is presently capable of rolling.
The primary raw material for SMI Texas, Alabama and South Carolina is
secondary (scrap) ferrous metal purchased primarily from suppliers generally
within a 300 mile radius of each mill. A portion of the ferrous raw material,
generally less than half, is supplied from Company owned recycling plants. The
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supply of scrap is believed to be adequate to meet future needs but has
historically been subject to significant price fluctuations. All three minimills
also consume large amounts of electricity and natural gas, both of which are
believed to be readily available at competitive prices.
No melting facilities are located at SMI Arkansas since this mill
utilizes as its raw material rail salvaged from abandoned railroads for
rerolling and, on occasion, billets from Company minimills or other suppliers.
The rail or billets are heated in a reheat furnace and processed on a rolling
mill and finished at facilities similar to, but on a smaller scale, the other
mills. SMI Arkansas' finished product is primarily metal fence post stock, small
diameter reinforcing bar and sign posts with some high quality round and flat
products being rolled. Fence post stock is fabricated into studded "T" metal
fence posts at Company owned facilities at the Magnolia mill site, San Marcos,
Texas, Brigham City, Utah, and West Columbia, South Carolina. Because of this
mill's lack of melting capacity, it is dependent on an adequate supply of
competitively priced billets or used rail, the availability of which fluctuates
with the pace of railroad abandonments, rate of rail replacement by railroads
and demand for used rail from domestic and foreign rail rerolling mills.
Capacity at SMI Arkansas is approximately 150,000 tons rolled per year.
The Steel Group's downstream processing facilities are engaged in the
fabrication of reinforcing and structural steel, steel warehousing, joist
manufacturing, fence post manufacturing and railcar repair and rebuilding. Steel
fabrication capacity now exceeds 850,000 tons with a record 839,000 tons of
fabricated steel shipped in 1998. Steel for fabrication may be obtained from
unrelated vendors as well as Company owned mills. Fabrication activities are
conducted at various locations in Texas in the cities of Beaumont, Buda (near
Austin), Corpus Christi, Dallas, Houston, San Marcos, Seguin, Victoria, and
Waco; Baton Rouge and Slidell, Louisiana; Magnolia and Hope, Arkansas; Brigham
City, Utah; Starke and Whitehouse, Florida; Fallon, Nevada; Cayce, Columbia, and
Taylors, South Carolina; Lawrenceville, Georgia; Gastonia, North Carolina and
Fredericksburg, Virginia. Fabricated steel products are used primarily in the
construction of commercial and non-commercial buildings, including high-rise
office or hotel towers, hospitals, convention centers, industrial plants, power
plants, highways, arenas, stadiums, and dams. Sales of fabricated steel are
generally made in response to bid solicitation from construction contractors or
owners on a competitive bid basis and less frequently on a negotiated basis.
Safety Railway Service in Victoria, Texas, repairs, rebuilds and
provides custom maintenance with some manufacturing of railroad freight cars
owned by railroad companies and private industry. That work is obtained
primarily on a bid and contract basis and may include maintenance of the cars.
During 1998 a second location operated by Safety Railway Service in Tulsa,
Oklahoma was closed. Secondary metals recycling plants in Austin and at the SMI
Texas mill in Seguin, Texas, and Cayce, South Carolina, together with five
smaller feeder facilities nearby operate as part of the Steel Group due to the
predominance of secondary ferrous metals sales to the nearby SMI minimills. The
Cayce recycling plant installed and began operating a new automobile shredder
during 1997 at a cost of approximately $5 million and the Seguin recycling
facility began operating a new automobile shredder in late 1998 at a cost of
approximately $9 million. SMI Joist Company, headquartered in Hope, Arkansas,
manufactures steel joists and decking for roof supports using steel obtained
primarily from the Steel Group's minimills at locations in Hope, Starke,
Florida, Cayce, South Carolina, and Fallon, Nevada. Joist consumers are
typically construction contractors or large chain store owners. Joists are
generally made to order and sales, which may include custom design and
fabrication, are primarily obtained on a competitive bid basis.
The Company sells concrete related supplies including the sale or
rental of equipment to the concrete installation trade at eleven warehouse
locations in Texas and one location opened in 1998 in Atlanta, Georgia. Two
smaller operations which emphasize a broader industrial product supply are
located in Columbia and Cayce, South Carolina.
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The operating assets of Allegheny Heat Treating, Inc., of Chicora,
Pennsylvania, were purchased in January, 1997. AHT, Inc. is the Steel Group's
entry into the steel heat treating business. AHT works closely with SMI Alabama
and other steel mills that sell specialized heat treated steel for customer
specific use, primarily in original or special equipment manufacturing. AHT's
operating capacity is approximately 30,000 tons per year.
The copper tube minimill operated by Howell Metal Company is located in
New Market, Virginia. It manufactures primarily copper water tube as well as air
conditioning and refrigeration tubing in straight lengths and coils for use in
commercial, industrial and residential construction. Its customers, largely
equipment manufacturers and wholesale plumbing supply firms, are located
primarily east of the Mississippi river. High quality copper scrap supplemented
occasionally by virgin copper ingot, is the raw material used in the melting and
casting of billets. Copper scrap is readily available subject to rapid price
fluctuations generally related to the price or supply of virgin copper. A small
portion of the scrap is supplied by the Company's metal recycling yards.
Howell's facilities include melting, casting, piercing, extruding, drawing,
finishing and other departments. Capacity is approximately 55,000,000 pounds per
year. Demand for copper tube is dependent mainly on the level of new residential
construction and renovation.
No single customer purchases ten percent or more of the manufacturing
segment's production. The nature of certain stock products sold in the
manufacturing segment are, with the exception of the steel fabrication and joist
jobs, not characteristic of a long lead time order cycle. Orders for other stock
products are generally filled promptly from inventory or near term production.
As a result the Company does not believe backlog levels are a significant factor
in evaluating most operations. Backlog in the CMC Steel Group at 1998 year-end
was approximately $300,221,000. Backlog at 1997 year-end was approximately
$261,506,000. Because most of the segment's sales are to consumers located in
the sunbelt where construction activity generally continues throughout the year,
demand for the Company's products is not considered seasonal although adverse
weather can slow shipments.
THE RECYCLING SEGMENT
The Recycling segment is engaged in processing secondary (scrap) metals
for further recycling into new metal products. This segment consists of the
Company's 40 secondary metals processing divisions's recycling plants (excluding
eight such facilities operated by the CMC Steel Group as a part of the
Manufacturing segment). During the past year the secondary metals division
purchased operating assets of recycling facilities in Houston, Texas; Joplin,
Missouri; Miami, Oklahoma and Frontenac and Independence, Kansas. In addition
the operating assets and inventory of three automobile salvage yards located in
Ocala, Leesburg and Gainesville, Florida, were purchased in 1998 and constitute
the recycling division's entry into the automobile salvage business.
The Company's metal recycling plants purchase ferrous and nonferrous
secondary or scrap metals, processed and unprocessed, in a variety of forms.
Sources of metals for recycling include manufacturing and industrial plants,
metal fabrication plants, electric utilities, machine shops, factories,
railroads, refineries, shipyards, ordinance depots, demolition businesses,
automobile salvage and wrecking firms. Numerous small secondary metals
collection firms are also, in the aggregate, major suppliers.
These plants processed and shipped approximately 1,469,000 tons of
scrap metal during 1998, up from 1,367,000 the prior year. Ferrous metals
comprised the largest tonnage of metals recycled at approximately 1,280,940 tons
- - approximately 126,000 tons more than the prior year - followed by
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approximately 188,055 tons compared to 212,000 in 1997, of non-ferrous metals,
primarily aluminum, copper and stainless steel. The Company also purchased and
sold an additional 187,000 tons of metals processed by other metal recycling
facilities. With the exception of precious metals, practically all metals
capable of being recycled are processed by these plants. The CMC Steel Group's
eight metals recycling facilities processed and shipped an additional 360,000
tons of primarily ferrous scrap metal during 1998.
The metal recycling plants generally consist of an office and warehouse
building equipped with specialized equipment for processing both ferrous and
nonferrous metal. Most of the larger plants are equipped with scales, shears,
baling presses, briquetting machines, conveyors and magnetic separators. Two
locations have extensive equipment for mechanically processing large quantities
of insulated wire to segregate metallic content. All ferrous processing centers
are equipped with either presses, shredders or hydraulic shears, locomotive and
crawler cranes and railway tracks to facilitate shipping and receiving. The
segment operates six large shredding machines capable of pulverizing obsolete
automobiles or other ferrous metal scrap with the addition in 1998 of a new
shredder in Jacksonville, Florida. Two additional shredders are operated by the
Manufacturing segment's recycling facilities. A typical recycling plant includes
several acres of land used for receiving, sorting, processing and storage of
metals. Several recycling plants devote a small portion of their site or a
nearby location for display and sales of metal products considered reusable for
their original purpose.
The auto salvage operations in Gainesville, Ocala and Leesburg,
Florida, assist in the supply of crushed auto bodies, an important feed stock,
to the new Jacksonville shredder. These operations purchase wrecked or
inoperable motor vehicles at prices related to estimated recovery value of
usable parts prior to ultimate sale to scrap metal processors, usually shredding
facilities. The operating assets of scrap processing facilities in Joplin,
Missouri, Miami, Oklahoma and Independence and Frontenac, Kansas, acquired
during 1998 extend the geographic area served by the Company's Springfield,
Missouri facility.
Recycled metals are sold to steel mills and foundries, aluminum sheet
and ingot manufacturers, brass and bronze ingot makers, copper refineries and
mills, secondary lead smelters, specialty steel mills, high temperature alloy
manufacturers and other consumers. Sales of material processed through the
Company's recycling plants are coordinated through the recycling segment's
office in Dallas. Export sales are negotiated through the Company's network of
foreign offices as well as the Dallas office.
No single source of material or customer of the Recycling segment
represents a material part of purchases or revenues. The Recycling segment
competes with other secondary processors and primary nonferrous metals
producers, both domestic and foreign, for sales of nonferrous materials.
Consumers of nonferrous scrap metals often have the capability to utilize
primary or "virgin" ingot processed by mining companies interchangeably with
secondary metals. The prices for nonferrous scrap metals are normally closely
related to but generally less than, the prices of the primary or "virgin" metal
producers. Ferrous scrap is the primary raw material for electric arc furnaces
such as those operated by the Company's steel minimills.
Relatively high prices and the need for low residual elements in the melting
process have recently caused some minimills to supplement purchases of scrap
metal with direct reduced iron and pig iron for certain product lines.
THE MARKETING AND TRADING SEGMENT
The Marketing and Trading segment buys and sells primary and secondary
metals and other industrial products through a network of trading offices
located around the globe. Steel, nonferrous metals, specialty metals, chemicals,
industrial minerals, ores, concentrates, ferroalloys, and other basic
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industrial materials are purchased primarily from producers in domestic and
foreign markets. On occasion these materials are purchased from trading
companies or industrial consumers with surplus supplies. Long-term contracts,
spot market purchases and trading or barter transactions are all utilized to
obtain materials. A large portion of these transactions involve fabricated
semi-finished or finished product.
Customers for these materials include industrial concerns such as the
steel, nonferrous metals, metal fabrication, chemical, refractory and
transportation sectors. Sales are generally made directly to consumers through
and with coordination of offices in Dallas; New York City; Englewood Cliffs, New
Jersey; Los Angeles; Hurstville near Sydney, Australia; Singapore; Zug,
Switzerland; Hong Kong, and Surrey, and Sandbach, United Kingdom and Bergisch
Gladbach, Germany. The Company also maintains representative offices in Moscow,
Seoul, and Beijing, as well as agents in other significant international
markets. These offices form a network for the exchange of information on the
materials marketed by the Company as well as servicing sources of supply and
purchasers. In most transactions the Company acts as principal and often as a
marketing representative. The Company utilizes agents when appropriate and
occasionally acts as broker. The Company participates in transactions in
practically all major markets of the world where trade by American-owned
companies is permitted.
This segment focuses on the marketing of physical products as
contrasted to traders of commodity futures contracts who frequently do not take
delivery of the commodity. Sophisticated global communications and the
development of easily accessible, although not always accurate, quoted market
prices for many products has resulted in the Company emphasizing creative
service functions for both sellers and buyers. Actual physical market pricing
and trend information, as contrasted with sometimes more speculative metal
exchange market information, technical information and assistance, financing,
transportation and shipping (including chartering of vessels), storage,
warehousing, just in time delivery, insurance, hedging and the ability to
consolidate smaller purchases and sales into larger, more cost efficient
transactions are examples of the services offered. The Company attempts to limit
its exposure to price fluctuations by offsetting purchases with concurrent sales
and entering into foreign exchange contracts as hedges of trade receivables and
payables denominated in foreign currencies. The Company does not, as a matter of
policy, speculate on changes in the markets and hedges only firm commitments not
anticipated transactions. During the past year over 1.4 million tons of steel
products were sold by the Marketing and Trading segment. The Australian
operations maintain three warehousing facilities for just in time delivery of
steel and industrial products and operate a heat treating facility for special
steel products.
COMPETITION
The Company's steel manufacturing, steel fabricating, and copper tube
manufacturing businesses compete with regional, national and foreign
manufacturers and fabricators of steel and copper. Price, quality and service
are the primary methods of competition. The Company does not produce a
significant percentage of the total national output of most of its products but
is considered a substantial supplier in the markets near its facilities. The
large job structural steel capacity and expertise resulting from the acquisition
of Owen Steel Company, Inc. enables the Company to compete throughout the United
States for large structural steel projects. SMI Joist is believed to be the
second largest manufacturer of joist in the United States although significantly
smaller than the largest joist supplier. The Company's Southern Post operations
are believed to be the largest manufacturer of steel fence posts in the United
States.
The Company believes the Recycling segment is among the larger entities
recycling nonferrous secondary metals and is also a major regional processor of
ferrous scrap. The past two years have brought
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active consolidation in the scrap processing industry with aggressively priced
acquisitions of significant operations by several relatively new industry
members. Poor markets for secondary metals and poor results for many scrap
processors in late 1998 resulted in an abrupt halt to acquisitions by most of
these competitors and attempts to sell some recently acquired facilities. The
secondary metals business is subject to cyclical fluctuations depending upon the
availability and price of unprocessed scrap metal and the demand in steel and
nonferrous metals consuming industries. The Company will continue with selective
acquisitions at prices consistent with the cyclical nature of the metals
recycling industry.
All phases of the Company's marketing and trading business are highly
competitive. Many of the marketing and trading segment's products are standard
commodity items. The principal elements of competition are price, quality,
reliability, financing alternatives, and additional services. This segment
competes with other domestic and foreign trading companies, some of which are
larger and may have access to greater financial resources or be able to pursue
business without regard for the laws and regulations governing the conduct of
corporations subject to the jurisdiction of the United States. The Company also
competes with industrial consumers who purchase directly from suppliers and
importers and manufacturers of semi-finished ferrous and nonferrous products.
ENVIRONMENTAL MATTERS
Compliance with environmental laws and regulations is a significant
factor in the Company's business. The Company is subject to local, state,
federal and supranational environmental laws and regulations concerning, among
other matters, solid waste disposal, air emissions, waste and storm water
effluent and disposal and employee health. The Company's manufacturing and
recycling operations produce significant amounts of by-products, some of which
are handled as industrial waste or hazardous waste. For example, the electric
arc furnace ("EAF") dust generated by the Company's minimills is classified as a
hazardous waste by the Environmental Protection Agency (EPA) because of lead,
cadmium and chromium content and requires special handling and recycling for
recovery of zinc or disposal. Additionally the Company's scrap metal recycling
facilities operate eight shredders for which the primary feed materials are
automobile hulks and obsolete household appliances. Approximately twenty percent
(20%) of the weight of an automobile hulk consists of material (shredder fluff)
which remains after the segregation of ferrous and saleable non-ferrous metals.
Federal environmental regulations require shredder fluff to pass a toxic
leaching test to avoid classification as a hazardous waste. The Company
endeavors to have hazardous contaminants removed from the feed material prior to
shredding and as a result the Company believes the shredder fluff generated is
properly not considered a hazardous waste. Should the laws, regulations or
testing methods change with regard to EAF dust processing or shredder fluff
disposal, the Company may incur additional significant expenditures. To date,
the Company has not experienced difficulty in contracting for recycling of EAF
dust or disposing of shredder fluff in municipal or private landfills.
The Company may also be required from time to time to clean up or take
certain remediation action with regard to sites formerly used in connection with
its operations. Furthermore, the Company may be required to pay for a portion of
the costs of clean up or remediation at sites the Company never owned or on
which it never operated if it is found to have arranged for treatment or
disposal of hazardous substances on the sites. (See Item 3. Legal Proceedings).
The Company has been named a potentially responsible party (PRP) at several
Superfund sites because the EPA contends that the Company and other PRP scrap
metal suppliers are liable for the cleanup of those sites solely as a result of
having sold scrap metal to unrelated manufacturers for recycling as a raw
material in the manufacture of new products. The
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Company's position is that an arms length sale of valuable scrap metal for use
as a raw material in a manufacturing process over which the Company exercises no
control should not, contrary to EPA's assertion, constitute "an arrangement for
disposal or treatment of hazardous substances" within the meaning of federal
law. If the EPA's position is consistently upheld by the courts and no
clarification or amendment of the law is provided by legislative bodies, the
Company believes the possible liability arising from the sale of secondary
metals may reduce recycling rates for metals and other recyclable materials in
general. In particular, the Company believes that sellers of secondary or
recycled metals could be at material disadvantage compared to sellers of
"virgin" ingot from mining operations because the EPA's position apparently
excludes suppliers of virgin metals with the same levels of hazardous substances
from liability for sales of those materials to the same manufacturers for use,
often interchangeably with secondary metals, in the same manufacturing process.
The Company believes this result is contrary to public policy objectives and
federal and state legislation encouraging recycling and promoting the use of
recycled materials.
New federal, state and local laws, regulations and changing
interpretations, together with uncertainty regarding adequate control levels,
testing and sampling procedures, new pollution control technology and cost
benefit analysis based on market conditions are all factors which impact the
Company's future expenditures to comply with environmental requirements. It is
not possible to predict the total amount of capital expenditures or increases in
operating costs or other expenses or whether such costs can be passed on to
customers through product price increases. During 1998, the Company incurred
environmental costs including disposal, permit, license fees, tests, studies,
remediation, consultant fees and environmental personnel expense of
approximately $10.9 million. In addition the Company estimates that
approximately $1.4 million of capital expenditures put in service during 1998
were for environmental projects. The Company believes that it is in material
compliance with currently applicable environmental laws and regulations and does
not presently anticipate material capital expenditures for new environmental
control facilities during 1999 other than a new baghouse at SMI Texas which will
be put in service during 1999 at an estimated cost of approximately $6 million,
of which $1.3 million remains to be spent in 1999.
EMPLOYEES
As of October, 1998, the Company had approximately 7,350 employees.
Approximately 5,993 were employed by the manufacturing segment, 1,019 by the
recycling segment, 270 by the marketing and trading segment, 38 in general
corporate management and administration with 30 employees providing service
functions for divisions and subsidiaries. Production employees at one metals
recycling plant are represented by a union for collective bargaining. The
Company believes that its labor relations are generally good to excellent and
its work force highly motivated.
ITEM 2. PROPERTIES
The SMI Texas steel minimill is located on approximately 600 acres of
land owned by the Company. Facilities including buildings occupying
approximately 760,000 square feet, are used for manufacturing, storage, office
and related uses. SMI Alabama's steel mill in Birmingham is located on
approximately 36 acres with buildings occupying approximately 435,000 square
feet used for manufacturing, storage, office and related use. The SMI South
Carolina mill in Cayce, South Carolina is located on approximately 81 acres, all
owned, with buildings occupying approximately 372,000 square feet. The SMI
Arkansas facility at Magnolia is located on approximately 113 acres with
buildings occupying approximately 194,000 square feet. Approximately 30 acres of
the Alabama mill property and all Arkansas
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mill property is leased in conjunction with revenue bond financing and may be
purchased by the Company at the termination of the leases for a nominal sum. The
steel fabricating operations including the fabrication plants, fence post and
joist operations own approximately 929 acres of land and lease approximately 44
acres of land at various locations in Texas, Louisiana, Arkansas, Utah, South
Carolina, Florida, Virginia, Georgia, North Carolina and Nevada. Howell Metal
owns approximately 21 acres of land with buildings occupying about 228,000
square feet in New Market, Virginia.
The Company's recycling plants occupy in the aggregate approximately
450 acres owned by the Company located at Austin, Beaumont, Dallas, Galveston,
Houston, Lubbock, Midland, Odessa, Victoria and Vinton, all in Texas; as well as
the Jacksonville, Ocala, Leesburg, Gainesville, Lake City, Orlando, and Tampa,
Florida; and Shreveport, Louisiana; Chattanooga, Tennessee; Springfield and
Joplin, Missouri; Burlington, North Carolina and Frontenac, Kansas plants. It
leases the real estate at Clute, Edinburg, and Laredo,Texas; Ocala, Port Sutton
(Tampa) and Casselberry, Florida; East Ridge, Tennessee. The smaller of two
locations at Beaumont and Victoria, Texas, and Shreveport, Louisiana, are
leased. The Fort Worth, Corpus Christi, and smaller Houston, Texas, Miami,
Oklahoma and Independence, Kansas, recycling plants are partially owned and
partially leased. Most small feeder yard locations are leased.
The corporate headquarters, all domestic marketing and trading offices
and all foreign offices occupy leased premises.
The leases on the leased properties described above will expire on
various dates within the next ten years. Several of the leases have renewal
options and the Company has had little difficulty in renewing such leases as
they expire. The minimum annual rental obligation of the Company for real estate
operating leases in effect at August 31, 1998, to be paid during fiscal 1999 is
approximately $4,272,000. The Company also leases a portion of the equipment
used in its plants. The minimum annual rental obligation of the Company for
equipment operating leases in effect at August 31, 1998, to be paid during
fiscal 1999, is approximately $4,684,000.
ITEM 3. LEGAL PROCEEDINGS
As of August 31, 1998, the Company or its affiliates has received
notices from the United States Environmental Protection Agency (EPA) or state
agency with similar responsibility that the Company and numerous other parties
are considered potentially responsible parties (a PRP) and may be obligated
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 (CERCLA) or similar state statute to pay for the cost of remedial
investigation, feasibility studies and ultimately remediation to correct alleged
releases of hazardous substances at approximately thirteen locations. The
Company is contesting or intends to contest its designation as a PRP with regard
to several sites, while at other sites the Company is participating with other
named PRPs in agreements or negotiations expected to result in agreements to
remediate the sites. The locations, none of which involve real estate ever owned
or on which operations were conducted by the Company, are commonly referred to
by the EPA or state agency as the Peak Oil Site (Tampa, FL), the Metcoa Site
(Pulaski, PA), the NL Industries/Taracorp Site (Granite City, IL), the Sapp
Battery Site (Cottondale, Florida), the Interstate Lead Company ("ILCO") Site
(Leeds, Alabama), the Poly-Cycle Industries Site (Techula, Texas), the Taylor
Road Site (Tampa, Florida), the Jensen Drive Site (Houston, TX), the Houston
Lead Site (Houston, TX), the SoGreen/Parramore Site (Tifton, GA), the Stoller
Site (Jericho, SC), the RSR Corporation Site (Dallas, TX), the Sandoval Zinc
Company Site (Marion County, IL) and the Ross Metals Site (Rossville, TN). The
Company has periodically received information requests with regard to other
sites which are apparently under consideration by the EPA as existing or
potential CERCLA clean-up sites. It is not known if any demand
9
<PAGE> 11
will ultimately be made against the Company as a result of those inquiries.
The EPA has notified the Company and other alleged PRPs that under Sec.
106 of CERCLA it could be subject to a maximum penalty fine of $25,000 per day
and the imposition of treble damages if they refused to clean up the Peak Oil,
Sapp Battery, NL/Taracorp, SoGreen/Parramore and Stoller sites as ordered by the
EPA. The Company is presently participating in a PRP organization at the Peak
Oil, Sapp Battery, SoGreen/Parramore and Stoller sites, although reserving the
right to contest its PRP status, and does not believe that the EPA will pursue
any fine against it so long as it continues to participate in the PRP groups.
The Company is evaluating a de minimis settlement offer at the NL/Taracorp Site
and believes it has adequate defenses to any attempt by the EPA to impose fines
in that matter.
CMC Oil Company (CMC Oil), a wholly-owned subsidiary which has been
inactive since 1985, is subject to a final judgment resulting from an order
entered in 1993 by the Federal Energy Regulatory Commission (the "FERC Order").
Judgment upholding the FERC Order was entered by Federal District Court in
November, 1994 and affirmed by the Court of Appeals in November, 1995. The FERC
Order found CMC Oil liable for overcharges constituting violations of crude oil
reseller regulations from December, 1977 to January, 1979, in joint venture
transactions with RFB Petroleum, Inc. The overcharges total approximately
$1,330,000 plus interest from the transaction dates calculated under the
Department of Energy's interest rate policy to the date of the District Court
judgment with interest thereafter at 6.48% per annum. Although CMC Oil accrued a
liability on its books during 1995 it does not have sufficient assets to satisfy
the judgment. No claim has ever been asserted against Commercial Metals Company
arising out of the CMC Oil litigation. Commercial Metals Company will vigorously
contest liability should any such claim be asserted.
In August, 1998, the Company and former stockholders of Owen Steel
Company, Inc. ("Owen Steel") and affiliates settled litigation with regard to
the Company's claims against a portion of the purchase price held in escrow
following the Company's November, 1994, acquisition of Owen Steel. The Company
received approximately $3,000,000 of the $5,000,000 escrow balance with the
former Owen Steel stockholders receiving the remainder. Dorothy G. Owen, a
director of the Company and former stockholder of Owen Steel was one of four
designated representatives of former Owen Steel stockholders and received a
portion of the escrowed funds equivalent to her pro rata ownership interest of
Owen Steel. The settlement terminates all disputes related to the acquisition.
While the Company is unable to estimate the ultimate dollar amount of
exposure to loss in connection with the above-described environmental matters,
government proceedings, and disputes that could result in additional litigation,
some of which may have a material impact on earnings and cash flows for a
particular quarter, it is the opinion of the Company's management that the
outcome of the suits and proceedings mentioned, and other miscellaneous
litigation and proceedings now pending, will not have a material adverse effect
on the business or the consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
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<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The table below summarizes the high and low sales prices reported on
the New York Stock Exchange for the Company's common stock and cash dividends
paid for the past two fiscal years.
<TABLE>
<CAPTION>
1998 Price Range
Fiscal of Common Stock Cash
Quarter --------------- Dividends
High Low
-------------------------------------------------------------------------------
<S> <C> <C> <C>
1ST $33 9/16 $30 1/16 13(cent)
2ND 33 13/16 29 3/8 13(cent)
3RD 36 30 1/2 13(cent)
4TH 32 11/16 24 1/8 13(cent)
<CAPTION>
1997 Price Range
Fiscal of Common Stock Cash
Quarter --------------- Dividends
High Low
-------------------------------------------------------------------------------
<S> <C> <C> <C>
1ST $33 1/2 $29 5/8 13(cent)
2ND 30 28 13(cent)
3RD 30 3/8 27 1/8 13(cent)
4TH 32 1/2 28 3/4 13(cent)
</TABLE>
Since August 3, 1982, the Company's common stock has been listed and
traded on the New York Stock Exchange. Prior to that date and since 1959 the
Company's common stock was traded on the American Stock Exchange. The number of
shareholders of record of the registrant's common stock at November 17, 1998,
was approximately 2,634.
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<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth a summary of selected consolidated financial
information of the Company for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Sales 2,367,569 2,258,388 2,322,363 2,116,779 1,666,234
Net Earnings 42,714 38,605 46,024 38,208 26,170
Net Income Per 2.82 2.54 3.01 2.51 1.75
Diluted Share
Total Assets 1,002,617 839,061 766,756 748,103 604,877
Stockholders' Equity 381,389 354,872 335,133 303,164 242,773
Long-term Debt 173,789 185,211 146,506 158,004 72,061
Cash Dividend Per Share .52 .52 .48 .48 .46
</TABLE>
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Results
(in millions except share data) Year ended August 31,
- ------------------------------------------------------------------
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Net sales $2,368 $2,258 $2,322
Net earnings 42.7 38.6 46.0
Cash flow 93.5 83.2 89.9
International sales 752 739 892
As % of total 32% 33% 39%
LIFO effect on net earnings 5.0 (.2) 2.9
Per share .33 (.01) .19
LIFO reserve 22.5 30.1 29.8
% of inventory on LIFO 72% 72% 79%
</TABLE>
SIGNIFICANT EVENTS AFFECTING THE COMPANY THIS YEAR:
/ Second-best net earnings year ever; fourth quarter
was the highest quarterly earnings in history.
/ Manufacturing segment achieved record profits,
sales, and shipments.
/ Recycling segment's record four-year period of operating profits came to an
abrupt end.
/ Marketing and Trading performed remarkably in spite of demise of Far East
markets.
Segments
Net sales and operating profit by business segment are shown in the following
table:
<TABLE>
<CAPTION>
(in millions) Year ended August 31,
- --------------------------------------------------------------
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Net sales:
Manufacturing $1,234 $1,083 $1,018
Recycling 415 485 464
Marketing and Trading 788 758 890
Operating profit:
Manufacturing 74.8 54.8 61.8
Recycling (1.4) 7.6 12.1
Marketing and Trading 20.6 17.6 17.7
</TABLE>
MANUFACTURING
The Manufacturing segment includes the CMC Steel Group and Howell Metal Company.
With revenues up 14% and operating profit increasing 36%, the segment set
all-time records for the year. The Steel Group led the way ending the fourth
quarter with all-time record quarterly sales and record fourth quarter
shipments. The Copper Tube Division's annual operating profit was down slightly
from last year.
<TABLE>
<CAPTION>
August 31,
----------------------
1998 1997
----------------------
<S> <C> <C>
Average mill selling price $ 322 $ 314
Average fab selling price 660 650
Average scrap purchase price 113 114
</TABLE>
Selling prices were lower at the beginning of the year but recovered, and
combined with record shipments produced a 42% increase in annual operating
profit for the Steel Group. Mill tonnage shipped at 2,008,000 was 4% ahead of
last year.
The four mills showed a 22% increase in operating profit led by SMI-Alabama
and SMI-Arkansas, each with increases in excess of 24%; particularly notable is
the turnaround in profitability of SMI-South Carolina which was profitable all
fiscal year. Its results were all the more noteworthy as they were attained in
the midst of construction of a new rolling mill. SMI-Texas operating profit was
7% ahead of the prior year, a strong performance as last year's results included
a $1.7 million nonrecurring insurance recovery. By year end the Company's newest
and largest shredder was in successful operation at SMI-Texas.
Operating profit in the Company's steel fabrication businesses more than
doubled with record results in virtually all product areas. Fabricated shipments
of 839,000 tons were well ahead of the previous year of 690,000 tons. SMI Owen
Steel, the large structural fabrication facility in Columbia, South Carolina,
had operating profit $4.4 million ahead of the prior year. A similar gain was
accomplished by the combined joist plants. As of August 31, 1998, the Company
ceased operations at its railcar rebuilding facility in Tulsa, Oklahoma.
Substantially all employees were released and accruals raised for liabilities
including severance, warranties, and facility costs.
Steel Group computer migration project expense totaled $8.6 million compared
with $6 million last year. Final pension settlement cost of $3.3 million was
incurred as the Company's only major defined benefit plan was terminated.
The Company had a record $120 million in capital spending for fiscal 1998,
primarily at the steel mills. Construction of the new rolling mill and ancillary
equipment at SMI-South Carolina will ultimately double capacity, reduce costs,
and broaden the product line. The finishing upgrade at SMI-Alabama (replacement
of the mill cooling bed, straighteners and stackers) will improve quality,
enhance efficiency and also broaden the product line. Start up of both projects
is scheduled to begin during the first calendar quarter of 1999.
Attractive interest rates continue to strengthen residential construction
markets, maintaining demand for plumbing tube. Margins were weak in the early
months of the year, but improved to moderate proportions by the fourth quarter.
Copper tube shipments increased 11% over the prior year to 51 million pounds.
Annual production was 4% ahead of last year's rate.
RECYCLING
The Asian economic crisis brought the Recycling segment's four-year period of
record operating profits to an abrupt end. Scrap normally exported by
competitors was diverted for domestic consumption. Selling prices were
decimated, falling to their lowest levels in many years. Margins eroded while
total processing costs increased due to acquisitions;
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<PAGE> 15
however, the new capacity failed to bring in sufficient margin increases. All of
these factors resulted in a moderate operating loss - the first in six years in
this cyclical industry.
The fourth quarter saw ferrous scrap markets in full retreat with scrap sales
especially difficult. Nonferrous markets had weakened earlier and remained soft.
For the year the average copper and brass scrap price dropped 22%, aluminum fell
6%, and steel scrap was unchanged; at year end this left prices 20% below the
previous year. Ferrous scrap shipped increased 11% to 1.28 million tons;
however, nonferrous shipments declined 11% to 188,000 tons, due to a drop in
copper and brass shipments. Total volume of scrap processed, including the Steel
Group processing plants, reached 1,948,000 tons.
During the year the Company made several small acquisitions within existing
geographic areas, none of which were significant to the overall operations of
the Company. In the fourth quarter a new shredder in Jacksonville, Florida and a
new shear in Odessa, Texas came online. The Division restructured its management
into five autonomous profit centers, which should provide better coordination of
processing equipment, personnel, marketing strength, sourcing and management.
MARKETING AND TRADING
Revenues for the Marketing and Trading segment increased 4%, and operating
income rose 17% over the prior year. This was a remarkable performance given the
demise of traditional Far East markets and a higher LIFO credit in the previous
year. Most of the Asian markets did a complete reversal and induced a shift in
trade flows. Purchases from new sources in the Far East increased significantly
while sales were sharply reduced. Shipments into North America were brisk for
most product lines and business in Europe increased.
Operating profits from steel marketing and distribution increased; however,
profitability in steel trading decreased because of reduced volume and margins.
Nonferrous metal product tonnage increased particularly in semi-finished
aluminum products. Activity for ores, minerals and industrial materials
continued solid; meanwhile, new marketing channels were added.
Near-Term Outlook
Despite the global weakness and import surge of low-priced steel into the
U.S.A., the Company's domestic steel markets are relatively firm and
manufacturing margins should remain at a good level. It is likely that in the
long products that the Company produces the market can better absorb the
quantities that will be imported and the effect on prices will be more limited
while raw material costs decline further. The outlook for steel fabrication also
is favorable. Demand for copper tube is good, but the supply is adequate.
Activity in the Company's important end-use construction markets in the U.S.,
including private nonresidential, public, and residential, is robust, although
it has diminished from the frenzied pace earlier in the year. Manufacturing
sector and distributor demand are somewhat softer as service centers continue to
reduce inventories.
Ferrous scrap prices have continued to fall and nonferrous prices remain very
weak; consequently, the first part of fiscal 1999 will be very difficult for the
Recycling segment. Nevertheless, some improvement in Recycling profits should be
expected in the second half of the year with some restoration of margins
beginning in the second quarter.
Marketing and Trading anticipates reasonably good sales in North America,
Western Europe, and Australia. The sharply lower global demand and prices for
steel and nonferrous metals will persist, and it appears that any recovery in
Asia will be slow; however, the Company plans to continue to capitalize on new
marketing opportunities as a result of the dislocations throughout the world.
Profitability in fiscal 1999 will be affected by the major project start ups
in the Steel Group, higher depreciation, and increased interest expense.
Conversely, some recoveries from the graphite electrode anti-trust litigation
settlements are anticipated. Computer migration costs will be lower, and the
Company's only major pension plan was terminated.
This year the $217 billion six-year transportation bill, known as The
Transportation Equity Act for the 21st Century, was enacted. This legislation
will help restore the nation's infrastructure and will substantially increase
highway spending. Additionally, it includes especially large increases for the
states of Texas and South Carolina. The Company should benefit considerably from
this program.
Long-Term Outlook
Near term the Asian crisis has altered the nature of U.S. economic growth away
from capital investment, manufacturing and exports toward personal consumption,
housing, and services. Commodity-based industries have been impacted
significantly in the short run.
The Company's long-term prospects remain encouraging. Some of the reasons for
optimism include: first-class capable people are spread throughout the Company;
expected continued high growth rates in the Sunbelt; capital projects that will
contribute significant incremental profits; major computer migration costs will
be completed by the end of fiscal 1999; high-cost producers will be compelled to
reduce output on account of the prevailing low prices; a number of planned
capacity increases around the world in steel and metal production will be
canceled or delayed; European economies appear set to grow more strongly while
Asia will recover and contribute to higher consumption; there is likely to be a
concerted effort by the industrialized countries to tackle the global economic
and financial problems and to combat deflation; the new transportation act will
boost demand for steel long products in the U.S.
The sections regarding near- and long-term outlook contain forward-looking
statements regarding the outlook for the Company's financial results including
estimated expenses, shipments, pricing, demand and general market conditions.
There is inherent risk and uncertainty in any
14
<PAGE> 16
forward-looking statements. Variances will occur and some could be materially
different from management's current opinion. Developments that could impact the
Company's expectations include interest rate changes, construction activity,
unanticipated start-up expenses and delays, metals pricing, over which the
Company exerts little influence, new capacity and product availability from
competing steel minimills and other steel suppliers including import quantities
and pricing, global factors including credit availability, currency
fluctuations, timing of litigation settlements and decisions by governments
impacting the level and pace of overall economic activity.
1997 Compared to 1996
SEGMENTS
MANUFACTURING
The Steel Group achieved record sales and tons melted, rolled and shipped;
however, operating profits were held back by computer migration costs,
termination of a defined benefit plan, and the start-up costs of a new joist
facility.
Shipments by the four minimills increased 11% to 1.93 million tons while
fabricated shipments increased 6% to 690 thousand tons. A decrease of $4 per ton
to $321 for average mill prices combined with slightly higher fabrication prices
of $656 per ton resulted in a 7% increase in revenues to over $1 billion.
Steel Group revenues were $1.0 billion compared with $949 million in the
prior year. Operating profit for the Steel Group was $48.6 million or 15% lower.
Computer migration costs totalled $6 million, and pension expense included a
$541,000 curtailment loss for termination of the Company's last defined benefit
plan. The Company's fourth joist plant, which opened in Nevada in June 1997, had
start-up costs of $2.8 million, all of which were expensed as incurred.
SMI-Texas set new records for shipments and production, and SMI Alabama had
record profits. Most notable was SMI South Carolina's turnaround from a very
weak performance last year to break even this year. Steel fabrication profits
were only half of last year's strong results due to delays on larger structural
jobs, generally lower margins, and the joist plant start up.
In January 1997 the Company acquired the assets of a heat treating plant in
Pennsylvania. The purchase price was not significant to the Company. The
operation has been profitable since the acquisition.
The Copper Tube Division operating profit was up 40% from last year based on
6% higher shipments and increased productivity. Late in the year, margins came
under pressure due to imports from Mexico and reduced housing starts.
RECYCLING
Although revenues increased 4%, the Recycling segment reported a 37% decrease in
operating profit compared to last year. The largest single factor was a LIFO
charge this year versus a credit the prior year resulting in a change in LIFO
expense of $4.7 million. Gross margins on nonferrous scrap improved, but ferrous
margins were less because of lower volume. Shipments amounted to 1.15 million
tons of ferrous scrap and 212 thousand tons of nonferrous scrap, down 2% in
total from last year (excludes scrap tons processed by the six Steel Group
processing plants). Rail service disruption, especially in the Southwest, was a
problem.
Domestic demand for scrap was good, while exports were slack except for
Mexico. Average steel scrap prices were down slightly from last year. Aluminum
prices were a bit higher while copper prices were 9% lower.
15
<PAGE> 17
1997 Compared to 1996 (continued):
The consolidation within the scrap industry accelerated during the past year
with major acquisitions pursued at what the Company believes are overvaluations.
The Company made an acquisition in 1997 of a complementary processing facility
in Midland/Odessa, Texas, which was not significant to its overall operations.
The synergism of the combined operations fueled a turnaround in profitability
for the location.
MARKETING AND TRADING
Operating income for the Marketing and Trading segment was consistent with last
year although revenues were down 15%. For the year, the segment had pretax LIFO
income of $2,006,000 compared to an expense of $324,000 last year.
Steel trading margins were pressured by intensely competitive global markets,
diminished buying by China and continuing exports from the CIS. The Southeast
Asian markets, wracked in the latter stages of the year with severe financial
downturns, were particularly weak. The steel and nonferrous marketing and
distribution businesses achieved good results with just-in-time delivery and
other warehousing programs, especially in Australia. Similar programs in the
United Kingdom reversed the poor results of the prior year. Trading operations
located in the U.S., which import substantial quantities into North America, had
excellent results. Semi-fabricated metals and minerals and chemicals had
equivalent results to the prior year. New steel products surpassed last year.
In the second half of the year, a steel supply contract was consummated with
Essar Steel in India, and CMC Trading AG will market over $100 million of steel
products for Essar during the next three years. At year end, a similar but
smaller arrangement was concluded with a mill in China for performance over the
next year. The Tokyo office was converted to an exclusive representative agency
arrangement, and a small office was opened in Germany to facilitate steel
imports.
Liquidity and Capital Resources
Cash flow from operations (before changes in operating assets and liabilities)
for fiscal 1998 was the highest in the Company's history. Strong Company
earnings and record depreciation expense generated the cash flow.
Cash flow from operating activities was used to fund increases in accounts
receivable in the Manufacturing segment (particularly fabrication operations)
and Marketing and Trading. The Recycling segment had a significant decrease in
accounts receivable. Inventories increased in all segments. Other assets
increased due to almost $22 million in advances to suppliers for inventory
commitments. Accounts payable increased due to normal seasonal commercial
activity in the Manufacturing segment.
Due to expanded operations, strong sales activity in the fourth quarter, and
a record capital expenditure program, short-term borrowings increased $101
million over the prior year.
Net working capital was $247 million as of August 31, 1998, compared to $307
million last year. The current ratio was lower at 1.6.
The Company's sources of short-term funds include a commercial paper program
of $40 million. The Company's commercial paper is rated in the second highest
category by both Standard & Poor's Corporation (A-2) and Fitch IBCA, Inc. (F-2).
Formal bank credit lines equal to 100% of the amount of all commercial paper
outstanding are maintained.
The Company's $150 million long-term notes issued in July 1997 ($50 million)
and July 1995 ($100 million) are rated investment grade by Standard & Poor's
Corporation and Fitch IBCA, Inc. (BBB+) and by Moody's Investors Service (Baa1).
The Company has numerous informal credit facilities available from domestic
and international banks. These credit facilities are priced at banker's
acceptance rates or on a cost of funds basis.
At August 31, 1998, the Company had filed a shelf registration of $200
million of long- and medium-term notes, of which $100 million is expected to be
drawn in fiscal 1999.
Management believes it has adequate capital resources available from
internally generated funds and from short-term and long-term capital markets to
meet anticipated working capital needs, planned capital expenditures, dividend
payments to shareholders, stock repurchases and to take advantage of new
opportunities requiring capital.
Capital investments in property, plant and equipment were a record $120
million in 1998 compared to $71 million the prior year. Capital spending for
fiscal 1999 is projected to be the largest plan in Company history at $150
million. The most important projects to be completed are the rolling mill at
SMI-South Carolina and the finishing upgrade at SMI-Alabama. These expenditures
are expected to be funded from internally generated funds and existing credit
facilities.
16
<PAGE> 18
Total capitalization was $577 million at the end of fiscal 1998. The ratio of
long-term debt to capitalization was 30%, down from 33% last year. Stockholders'
equity was $381 million or $26.18 per share. During the fiscal year, the Company
repurchased 496,000 shares of Company stock at an average cost of $29.70 per
share. The Company has authorized an additional 585,081 for repurchase. On
August 31, 1998, 1,562,972 treasury shares were held by the Company. There were
14,569,611 million shares outstanding at year end.
Contingencies
In the ordinary course of conducting its business, the Company becomes involved
in litigation, administrative proceedings and governmental investigations,
including environmental matters.
The Company's origin and one of its core businesses for over three quarters
of a century has been metals recycling. In the present era of conservation of
natural resources and ecological concerns, the Company has a continuing
commitment to sound ecological and business conduct. Certain governmental
regulations regarding environmental concerns, however well intentioned, are
presently at odds with goals of greater recycling and expose the Company and the
industry to potentially significant risks. Such exposures are causing the
industry to shrink, leaving fewer but more well-financed operators as survivors
to face the challenge.
The Company believes that materials that are recycled are commodities that
are neither discarded nor disposed. They are diverted by recyclers from the
solid waste streams because of their inherent value. Commodities are materials
that are purchased and sold in public and private markets and commodities
exchanges every day around the world. They are identified, purchased, sorted,
processed and sold in accordance with carefully established industry
specifications.
Environmental agencies at various federal and state levels would classify
certain recycled materials as hazardous substances and subject recyclers to
material remediation costs, fines and penalties. Taken to extremes, such actions
could cripple the recycling industry and undermine any national goal of material
conservation. Enforcement, interpretation, and litigation involving these
regulations are not well developed.
The Company has received notices from the U.S. Environmental Protection
Agency (EPA) or equivalent state agency that it is considered a potentially
responsible party (PRP) at thirteen sites, none owned by the Company, and may be
obligated under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA) or similar state statute to conduct remedial
investigation, feasibility studies, remediation and/or removal of alleged
releases of hazardous substances or to reimburse the EPA for such activities.
The Company is involved in litigation or administrative proceedings with regard
to several of these sites in which the Company is contesting, or at the
appropriate time may contest, its PRP designation. In addition, the Company has
received information requests with regard to other sites which may be under
consideration by the EPA as potential CERCLA sites.
Some of these environmental matters or other proceedings may result in fines,
penalties or judgments being assessed against the Company which, from time to
time, may have a material impact on earnings and cash flows for a particular
quarter. While the Company is unable to estimate precisely the ultimate dollar
amount of exposure to loss in connection with the above-referenced matters, it
makes accruals as warranted. It is the opinion of the Company's management that
the outcome of these proceedings, individually or in the aggregate, will not
have a material adverse effect on the business or consolidated financial
position of the Company.
In fiscal 1998, the Company incurred environmental expense of $10.9 million.
This included the cost to staff environmental personnel at various divisions,
permit and license fees, accruals and payments for studies, tests, assessment,
and remediation, consultant fees, baghouse dust removal and various other
expenses. The Company estimates that approximately $1.4 million of its capital
expenditures for fiscal 1998 related to costs directly associated with
environmental compliance. The nature and timing of these environmental costs is
such that it is not practical for the Company to estimate their magnitude in
future periods. At August 31, 1998, $5.7 million remained in accrued expenses
for environmental liabilities.
The November 22, 1994 Final Order of the United States District Court for the
Southern District of Texas against CMC Oil Company, a subsidiary of the Company,
is a final, non-appealable order. This liability has been accrued in the
financial statements of CMC Oil Company. CMC Oil does not have sufficient assets
to satisfy the judgment. No claim has been asserted against Commercial Metals
Company in connection with this litigation. Commercial Metals Company will
vigorously contest liability should any such claim be asserted.
During 1998, the Company and former stockholders of Owen Steel Company, Inc.
and affiliates settled litigation with regard to the Company's claims against a
portion of the purchase price held in escrow since the November 1994
acquisition. The Company received approximately $3 million of the approximately
$5 million escrow balance. The proceeds were substantially offset against claim
payments paid and deferred pending settlement.
Dividends
Quarterly cash dividends have been paid in each of the past 34 consecutive
years. The annual dividend in 1998 was 52 cents a share paid at the rate of 13
cents each quarter.
17
<PAGE> 19
Year 2000
The Company's three operating segments, Manufacturing, Recycling, and Marketing
and Trading (combined with Corporate), have undertaken management information
system initiatives that address a broad spectrum of functionalities including
the Year 2000 issue, the ability of computer software to correctly interpret
dates at the turn of the century. The following is a discussion by segment of
the status of each of these initiatives.
MANUFACTURING
Since fiscal year 1995, the Steel Group has been in preparation and
implementation of a Year 2000 compliant enterprise resource planning system.
This system will cover all traditional financial systems and, in addition, cover
sales, raw material usage, transportation management, purchasing, maintenance
and other functional areas. Each of the four mills in the Steel Group,
SMI-Texas, SMI-Alabama, SMI-South Carolina, and SMI-Arkansas, have Year 2000
task teams that meet periodically. Non-mill operations have less formalized
structures as the effect is significantly reduced. Each of these teams is
charged with identifying, analyzing, implementing, and validating a plan that
will address the impact of the Year 2000 on the following areas:
1. State of readiness of key suppliers and vendors.
2. Conversion or changes necessary to any programs developed by the internal
information systems.
3. Verifying and validating the embedded electronic control systems in
equipment.
An infrastructure migration completed in July 1998 upgraded all personal
computer hardware and software to common compliant platforms. Major modules of
the enterprise system, e.g., general ledger, have been successfully rolled out
at every location. Remaining modules are being phased in so that the complete
system will be functioning by August 1999.
There are other niche software programs in use at various rebar and
structural fabrication operations, scrap yards, and concrete related products
locations. Some software vendors have already issued written letters of
compliance; the rest will be sought before the end of calendar 1998. Systems in
place at the Steel Group scrap yards, a relatively small portion of the Steel
Group, will need to be upgraded to a current release.
RECYCLING
The Recycling segment is completing a multi-year transition of its systems for
Year 2000 compliance. The segment is evaluating, determining alternatives,
implementing solutions, and testing the applications in each of the following
categories:
1. Mainframe computer hardware - All current computers have been certified by
the manufacturer as compliant. Outside of Year 2000 issues, some older machines
are being retired and replaced by certified compliant hardware.
2. Workstation hardware - Personal computer testing software has been
acquired and based on random sampling, perhaps 50% of the installed base of 200
PC's will require chip replacements; of those, 20% may be more cost effective to
replace. All PC's should be compliant by April 1999.
3. Business application software - Core applications developed in-house have
had conversion processes completed and are fully compliant. Outside package
software (general ledger, payroll, and fixed assets), is being upgraded with
completion expected by March 1999.
4. Systems software - The mainframe replacements discussed in point 1 above
will bring all operating systems up to a certified compliant version. It is
believed that all PC's have had Year 2000 patches installed; however, this will
be confirmed by the audit discussed in point 2.
5. User level software and applications - Standard spreadsheet and word
processing software has been upgraded to current versions. There may remain
pockets of applications that will be discovered during the audit process, which
will be addressed as uncovered.
6. Communication equipment and software - The segment-wide communications
equipment will be compliant by December 1998. Individual branches will then need
to assess local phone and messaging systems.
7. Non-computer automated systems - Although considered a minor risk,
processing equipment, security systems, and other equipment will be evaluated on
a branch-by- branch basis.
MARKETING AND TRADING, INCLUDING CORPORATE
The Marketing and Trading segment, combined with the Corporate functions,
represent the most geographically dispersed operations of the Company. Several
systems were in place to address both financial applications and marketing
information needs. Compliance evaluations begun two years ago indicated that
generally the international divisions were compliant but reaching capacity
constraints and that the domestic operations had sufficient size but were not
compliant. Therefore, a joint program was developed to address both the
functional marketing requirements and the financial systems with the goal to
have the entire segment on a common platform with Corporate.
Separate teams have been established for completing the upgrade process for
both marketing and financials. To date, the committees have evaluated and
purchased software. Training is in process concurrently with implementation.
Both systems are expected to be rolled out, tested, and online by May 1999. A
common PC hardware and software platform has been established. All locations are
in substantial compliance with these requirements; however, there may be some
remaining individual PC's requiring upgrade.
SUMMARY
The area of greatest risk is the readiness of the Company's suppliers and
vendors. A letter requesting notice of their plans will be circulated in
November 1998 requesting a response before year end. Regardless of the response,
there will be a factor of the unknown until January 1, 2000.
18
<PAGE> 20
The Company has implemented the program described above with the use of
internal personnel and outside consultants. Resources are considered available
and adequate to meet the Company's goals. If necessary, contingency plans will
be developed by the end of March 1999 to address any anticipated shortfall.
The Steel Group's migration project has a remaining estimated expense of $6
million, all to be incurred in fiscal 1999. The Recycling segment should have
minimal costs (less than $100,000) to meet its plans. The Marketing and Trading
plus Corporate project has an estimated budget of $4 million, which will be
capitalized and amortized over five years.
The section titled "Year 2000" contains forward-looking statements regarding
the Company's expectations regarding addressing the Year 2000 computer problem.
These plans among other factors include the timing of implementation phases,
reallocation of in-house resources, use of outside personnel, third-party
hardware and software, and reliance on representations of third parties. There
is inherent risk and uncertainty in any forward-looking statements. Variances
will occur and could be materially different from management's current opinion.
Developments that could impact the Company's expectations include the
availability of Company personnel, malfunctions of third-party software and
hardware, over which the Company has no control, availability of outside
consultants, and the inability to fully assess the readiness of key vendors and
suppliers.
19
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk
APPROACH TO MINIMIZING MARKET RISK
The Company's product lines and its worldwide operations expose it to risks
associated with fluctuations, sometimes volatile, in exchange and interest rates
and commodity prices. It employs various strategies to mitigate the effects of
this volatility. None of the instruments used are entered into for trading
purposes or speculation; all are effected as hedges of underlying physical
transactions. The accompanying information mandated by the Securities and
Exchange Commission should be read in conjunction with footnotes 1 and 4 to the
annual financial statements with particular attention to the limitations on its
usefulness.
Foreign Exchange
The Company enters into foreign exchange contracts as hedges of trade
receivables and payables denominated in currencies other than the functional
currency. Effects of changes in currency rates are therefore minimized. No
single currency poses a primary risk to the Company; fluctuations that cause
temporary disruptions in one market segment tend to open opportunities in other
segments. As a matter of Company policy, foreign exchange contracts are used to
hedge only firm commitments, not anticipated transactions. Certain information
in the accompanying chart assumes that the foreign exchange contracts were
settled at August 31, 1998; this would defeat their purpose as hedges on
transactions that will not occur for some period after year end. Due to
customary weight and quality settlements on physical transactions, small gains
and losses do occur upon close of the foreign exchange contracts.
Interest Rates
Substantially all of the Company's short- and long-term debt is denominated in
United States dollars. The Company's financial results as affected by interest
rates are most vulnerable to swings in short-term commercial borrowing rates. At
August 31, 1998, approximately $7 million Australian dollars notional amount of
debt was covered by an interest rate swap. The swap is variable to fixed,
terminating June 2, 2003, intending to match physical asset lives with debt
provisions in one foreign subsidiary. The variable rate at year end was 5.6% and
the fixed rate 5.5%. At August 31, 1998, it had a fair value of $112,000.
Commodity Prices
Pricing of certain firm sales and purchase commitments is fixed to forward metal
commodity exchange quotes. The Company enters into metal commodity contracts for
copper, aluminum, and zinc as hedges of gross margins on these commitments. Of
these, copper is the most predominant. The hedges are closed when the underlying
sales and purchase commitments are priced, and gain or loss is recognized when
the sale or purchase is recorded. In general the Company is most affected in
periods of declining commodity prices as spreads narrow and sources withhold
recycled metals from the market. The settlement values expressed in the
accompanying chart as of August 31, 1998, should be read with caution as the
offsetting physical transactions for which the commodity futures are effective
as hedges are not quantified. Physical transaction quantities will not match
exactly with standard commodity lot sizes, leading to small gains and losses at
settlement.
The following table provides certain information regarding the financial
instruments discussed above.
20
<PAGE> 22
FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS AS OF AUGUST 31, 1998
<TABLE>
<CAPTION>
Range of U.S. $
Amount Currency Hedge Rates Equivalent
- ------------- ---------------- ------------- -------------
<S> <C> <C> <C>
27,886,000 German mark 1.829 - 1.757 $ 15,634,000
681,000 ECU 1.086 739,000
1,276,953,000 Italian lira 1749.25 730,000
5,950,000 Swiss franc 1.516 - 1.441 4,093,000
300,000 Singapore dollar 1.642 168,000
9,485,000 British pound .620 - .602 15,520,000
34,966,539 Australian dollar .6696 - .5662 21,399,000
3,642,000 Swedish krona 8.230 - 8.026 446,000
- ------------- ---------------- ------------- -------------
58,729,000
Revaluation as of August 31, 1998, at quoted market 57,398,000
-------------
Settlement gain (loss) $ 1,331,000
</TABLE>
/ All foreign currency exchange contracts mature within one year.
/ Foreign currency exchange contracts effective as hedges have no book carrying
value until maturity; they are considered reductions in otherwise available
bank credit lines.
METAL COMMODITY CONTRACT COMMITMENTS AS OF AUGUST 31, 1998
<TABLE>
<CAPTION>
Range of Total Contract
Long/ # of Standard Total Hedge Rates Value at
Terminal Exchange Metal Short Lots Lot Size Weight Per MT Inception
- -------------------- -------- ----- --- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
London Metal
Exchange (LME) Copper Long 62 25 MT 1550 MT $ 1617-2180 $ 2,676,000
Zinc Long 23 25 MT 575 MT 1069-1320 641,000
Aluminum Long 7 25 MT 175 MT 1349-1375 238,000
Aluminum Short 24 25 MT 600 MT (1360-1345) (813,000)
New York Mercantile Per 100/wt.
Exchange Copper Long 221 25,000 lbs. 5.5 MM lbs. 88.25-72.15 4,526,000
Commodities Division
(Comex) Copper Short 165 25,000 lbs. 4.1 MM lbs. (80.80-71.10) (3,081,000)
- -------------------- -------- ----- --- ----------- ----------- -------------- ------------
4,187,000
Revaluation as of August 31, 1998, at quoted market 3,577,000
------------
Settlement gain (loss) $ (610,000)
</TABLE>
/ Thirty-four lots mature after one year
/ MT = Metric Tons
/ Metal commodity contracts effective as hedges have no book carrying value
until maturity; a two million dollar letter of credit stands as margin
requirement for Comex transactions.
21
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(in thousands, except share data) Year ended August 31,
- --------------------------------- ----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Net sales $2,367,569 $2,258,388 $2,322,363
Costs and expenses:
Cost of goods sold 2,083,036 2,004,155 2,068,534
Selling, general and administrative expenses 178,961 164,173 151,171
Interest expense 18,055 14,637 15,822
Employees' pension and profit sharing plans (Note 7) 19,448 14,468 13,915
---------- ---------- ----------
2,299,500 2,197,433 2,249,442
---------- ---------- ----------
Earnings before income taxes 68,069 60,955 72,921
Income taxes 25,355 22,350 26,897
---------- ---------- ----------
Net earnings $ 42,714 $ 38,605 $ 46,024
========== ========== ==========
Net earnings per share basic $ 2.88 $ 2.59 $ 3.06
========== ========== ==========
Net earnings per share diluted $ 2.82 $ 2.54 $ 3.01
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
22
<PAGE> 24
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) August 31,
- --------------------------------- ----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash $ 30,985 $ 32,998
Accounts receivable (less allowance for collection losses of $8,120 and $6,116) 318,655 289,735
Inventories 257,231 220,644
Other 66,629 41,899
----------- -----------
Total current assets 673,500 585,276
Other assets 10,655 6,524
Property, plant and equipment:
Land 24,967 17,844
Buildings 67,505 55,700
Equipment 499,899 447,553
Leasehold improvements 26,084 19,666
Construction in process 61,946 29,841
----------- -----------
680,401 570,604
Less accumulated depreciation and amortization (361,939) (323,343)
----------- -----------
318,462 247,261
----------- -----------
$ 1,002,617 $ 839,061
=========== ===========
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
August 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 40,000 $ --
Notes payable 60,809 --
Accounts payable 156,389 136,988
Other payables and accrued expenses 150,512 129,036
Income taxes payable 6,870 618
Current maturities of long-term debt 11,483 11,502
----------- -----------
Total current liabilities 426,063 278,144
Deferred income taxes 21,376 20,834
Long-term debt 173,789 185,211
Commitments and contingencies
Stockholders' equity:
Capital stock:
Preferred stock -- --
Common stock, par value $5.00 per share: authorized 40,000,000 shares;
issued 16,132,583 shares; outstanding 14,569,611 and 14,760,930 shares 80,663 80,663
Additional paid-in capital 14,285 13,627
Cumulative translation adjustment (1,596) --
Retained earnings 328,597 293,600
----------- -----------
421,949 387,890
Less treasury stock 1,562,972 and 1,371,653 shares at cost (40,560) (33,018)
----------- -----------
381,389 354,872
----------- -----------
$ 1,002,617 $ 839,061
=========== ===========
</TABLE>
See notes to consolidated financial statements
24
<PAGE> 26
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) August 31,
- -------------- ---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 42,714 $ 38,605 $ 46,024
Adjustments to earnings not requiring cash:
Depreciation and amortization 47,460 43,720 41,599
Provision for losses on receivables 2,898 1,433 2,535
Deferred income taxes 542 (210) (6)
Other (164) (353) (258)
--------- --------- ---------
Cash Flows from Operations Before Changes in
Current Assets and Liabilities 93,450 83,195 89,894
Changes in Current Assets and Liabilities:
Decrease (increase) in accounts receivable (33,104) 3,443 (29,063)
Decrease (increase) in inventories (36,587) (34,443) 21,913
Decrease (increase) in other assets (30,457) (9,449) 1,601
Increase (decrease) in accounts payable,
accrued expenses, and income taxes 47,129 14,063 2,253
--------- --------- ---------
Net Cash Flows from Operating Activities 40,431 56,809 86,598
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (119,915) (70,955) (50,781)
Sales of property, plant and equipment 1,418 3,037 1,805
--------- --------- ---------
Net Cash Used by Investing Activities (118,497) (67,918) (48,976)
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper - net change 40,000 -- --
Notes payable - net change 60,809 -- --
Financial services notes payable -- -- (5,189)
New long-term debt -- 50,000 --
Payments on long-term debt (11,441) (11,287) (14,112)
Stock issued under stock option, purchase, and bonus plans 8,239 5,989 5,225
Tax benefits related to stock option plan 895 649 407
Treasury stock acquired (14,732) (17,727) (13,465)
Dividends paid (7,717) (7,777) (7,246)
--------- --------- ---------
Net Cash Provided (Used) by Financing Activities 76,053 19,847 (34,380)
Increase (Decrease) in Cash and Cash Equivalents (2,013) 8,738 3,242
Cash and Cash Equivalents at Beginning of Year 32,998 24,260 21,018
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 30,985 $ 32,998 $ 24,260
========= ========= =========
</TABLE>
See notes to consolidated financial statements
25
<PAGE> 27
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock
-------------------- Additional Cumulative ----------------------
Number of Paid-In Translation Retained Number of
(in thousands, except share data) Shares Amount Capital Adjustment Earnings Shares Amount
- --------------------------------- ---------- --------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 1, 1995 16,132,583 $ 80,663 $ 11,946 $ 223,994 (762,991) $ (13,439)
Net earnings 46,024
Cash dividends - $.48 per share (7,246)
Treasury stock acquired (557,600) (13,465)
Additional treasury stock issued
for Owen acquisition 552 37,196 472
Stock issued under stock option, purchase
and bonus plans 288 246,776 4,937
Tax benefits related to stock option plan 407
---------- --------- --------- -------- --------- ---------- ---------
<CAPTION>
Balance, August 31, 1996 16,132,583 80,663 13,193 262,772 (1,036,619) (21,495)
Net earnings 38,605
Cash dividends - $.52 per share (7,777)
Treasury stock acquired (628,993) (17,727)
Stock issued under stock option, purchase
and bonus plans (215) 293,959 6,204
Tax benefits related to stock option plan 649
---------- --------- --------- -------- --------- ---------- ---------
Balance, August 31, 1997 16,132,583 80,663 13,627 293,600 (1,371,653) (33,018)
Net earnings 42,714
Cash dividends - $.52 per share (7,717)
Treasury stock acquired (496,000) (14,732)
Stock received from escrow upon
settlement of Owen lawsuit (47,316) (1,286)
Stock issued under stock option, purchase
and bonus plans (237) 351,997 8,476
Tax benefits related to stock option plan 895
Translation adjustment (1,596)
---------- --------- --------- -------- --------- ---------- ---------
Balance, August 31, 1998 16,132,583 $ 80,663 $ 14,285 $ (1,596) $ 328,597 (1,562,972) $ (40,560)
========== ========= ========= ======== ========= ========== =========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, AUGUST 31, 1998
1. Summary of Significant Accounting Policies
NATURE OF OPERATIONS
The Company manufactures, recycles and markets steel and metal products and
related materials. Its manufacturing and recycling facilities and primary
markets are located in the Sunbelt from the mid-Atlantic area through the
Southwest.
Through its global marketing offices, the Company trades primary and secondary
metals and other industrial products worldwide. As more fully discussed in
footnote 12, the Manufacturing segment is the most dominant in terms of capital
assets and operating profit.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany transactions and balances are
eliminated in consolidation.
REVENUE RECOGNITION
Sales are recognized when title to inventory passes to the customer based on
customary industry practice.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventory cost for most
domestic inventories is determined by the last-in, first-out (LIFO) method; cost
of international and remaining inventories is determined by the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is depreciated at annual
rates based upon the estimated useful lives of the assets using substantially
the straight-line method. Provision for amortization of leasehold improvements
is made at annual rates based upon the estimated useful lives of the assets or
terms of the leases, whichever is shorter.
START-UP COSTS
Start-up costs associated with the acquisition and expansion of manufacturing
and recycling facilities are expensed as incurred.
INCOME TAXES
Deferred income taxes are provided for temporary differences between financial
and tax reporting. The principal differences are described in footnote 5.
Benefits from tax credits are reflected currently in earnings.
FOREIGN CURRENCY
The functional currency of the Company's international subsidiaries in
Australia, the United Kingdom, and Germany is the local currency. The remaining
international subsidiaries' functional currency is the United States dollar.
Translation adjustments are reported as a separate component of stockholders'
equity.
Gain or loss on foreign currency exchange contracts designated as hedges is
deferred and recognized upon settlement of the related trade receivable or
payable.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make significant estimates
regarding assets and liabilities and associated revenues and expenses.
Management believes these estimates to be reasonable; however, actual results
may vary.
CASH FLOWS
For purposes of the statements of cash flows, the Company considers investments
that are short-term (generally with original maturities of three months or less)
and highly liquid to be cash equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1997 and 1996 financial
statements to conform to the classifications used in the current year.
OTHER
The Company will adopt Statement of Financial Accounting Standard No. 130,
Reporting Comprehensive Income, and Standard No. 131, Disclosures About Segments
of an Enterprise and Related Information, as of the quarter ending November 30,
1998. It will adopt Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities, as of the quarter ending November 30, 1999. Standards No.
130 and 131 are disclosure oriented and will not have an impact on reported
operations. The Company has not evaluated the impact of Standard No. 133.
2. Inventories
Before reduction of LIFO reserves of $22,450,000 and $30,131,000 at August 31,
1998 and 1997, respectively, inventories valued under the first-in, first-out
method approximated replacement cost.
At August 31, 1998 and 1997, 72% of total inventories were valued at LIFO.
The remainder of inventories, valued at FIFO, consist mainly of material
dedicated to international business.
3. Credit Arrangements
Periodically, the Company is active in the commercial paper market with a
program that permits borrowings up to $40,000,000. It is the Company's policy to
maintain formal bank credit lines equal to 100% of the amount of all commercial
paper outstanding.
The Company has numerous informal credit facilities available from domestic
and international banks. These credit facilities are priced at banker's
acceptance rates or on a cost of funds basis. No compensating balances or
commitment fees are required under these credit facilities.
At August 31, 1998, the Company had filed a shelf registration for $200
million of long- and medium-term notes, of which $100 million is expected to be
drawn in fiscal 1999.
The Company's $100 million investment grade, unsecured notes have a coupon
rate of 7.20%, which, after netting the proceeds of an interest rate hedge,
results in an effective interest rate of 7.04%.
27
<PAGE> 29
On July 30, 1997, the Company sold the remaining $50 million of notes under
its $150 million shelf registration. The notes have an effective yield of 6.8%.
On August 15, 1996, the Company arranged a five-year, $40 million unsecured
revolving credit loan facility with a group of four banks. The agreement
provides for borrowing in United States dollars indexed to the reference rate or
to the offshore dollar interbank market rate. A commitment fee of .1125% per
annum is payable on the credit line. No compensating balances are required.
Long-term debt and amounts due within one year as of August 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Long-Term Current
(in thousands) Debt Maturities Total
- -------------------- --------- ---------- --------
<S> <C> <C> <C>
7.20% notes due 2005 $100,000 $ -- $100,000
6.80% notes due 2007 50,000 -- 50,000
8.49% notes due 2001 21,428 7,143 28,571
8.75% note due 1999 2,141 4,286 6,427
Other 220 54 274
-------- -------- --------
$173,789 $ 11,483 $185,272
======== ======== ========
</TABLE>
All interest is payable semiannually. The 7.20% notes are due in July 2005; the
6.80% notes in August 2007. The 8.49% notes provide for annual principal
repayments beginning on December 1, 1995; all other notes are payable
semiannually.
Certain of the note agreements include various covenants. The most
restrictive of these requires maintenance of consolidated net current assets of
$75,000,000 and net worth (as defined) of $150,000,000. At August 31, 1998,
approximately $205,000,000 of retained earnings was available for cash dividends
under these covenants.
The aggregate amounts of all long-term debt maturities for the five years
following August 31, 1998 are (in thousands): 1999 - $11,483; 2000 - $9,332;
2001 - $7,179; 2002 - $7,163; 2003 - $21.
Interest expense is comprised of the following:
<TABLE>
<CAPTION>
(in thousands) Year ended August 31,
- -------------- ----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Long-term debt $11,568 $10,894 $11,903
Commercial paper 1,547 731 360
Notes payable 4,940 3,012 3,559
-------- -------- --------
$18,055 $14,637 $15,822
======== ======== ========
</TABLE>
Interest of $2,290,000, $804,000 and $320,000 was capitalized in the cost of
property, plant and equipment constructed in 1998, 1997, and 1996, respectively.
Interest of $20,691,000, $15,578,000, and $16,467,000 was paid in 1998, 1997,
and 1996, respectively.
4. Financial Instruments, Market and Credit Risk
Management believes that the historical financial statement presentation is the
most useful for displaying the Company's financial position. However, generally
accepted accounting principles require disclosure of an estimate of the fair
value of the Company's financial instruments as of year end.
These estimated fair values disregard management intentions concerning these
instruments and do not represent liquidation proceeds or settlement amounts
currently available to the Company. Differences between historical presentation
and estimated fair values can occur for many reasons including taxes,
commissions, prepayment penalties, make-whole provisions and other restrictions
as well as the inherent limitations in any estimation technique. Because of this
management believes that this information may be of limited usefulness in
understanding the Company and minimal value in making comparisons between
companies.
Due to near-term maturities, allowances for collection losses, investment
grade ratings and security provided, the following financial instruments'
carrying amounts are considered equivalent to fair value:
o Cash and temporary investments
o Commercial paper
o Notes payable
The Company's long-term debt is both publicly and privately held. Fair value
was determined for private debt by discounting future cash flows at current
market yields and for public debt at indicated market values.
<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------
Long-Term Debt 1998 1997
- -------------- -------- --------
<S> <C> <C>
Carrying Amount $185,272 $196,713
Estimated Fair Value $186,796 $196,494
======== ========
</TABLE>
The notional amount of foreign currency exchange contracts outstanding at year
end was $58,730,000. The fair value of these contracts effective as hedges if
settled at August 31, 1998 would result in a gain of $1,332,000. The fair value
of all outstanding letters of credit is not meaningful.
In 1998, the Company entered into an interest rate swap (variable to fixed)
effective as a hedge for certain debt outstanding of its Australian subsidiary.
The instrument's notional amount is seven million Australian dollars and
terminates June 2, 2003. The variable rate at year end was 5.6% and the fixed
rate 5.5%. At August 31, 1998, it had a fair value of $112,000.
The Company does not have significant off-balance-sheet risk from financial
instruments. It enters into foreign exchange contracts as hedges of trade
receivables and payables denominated in currencies other than the functional
currency. Effects of changes in currency rates are therefore minimized. As a
matter of Company policy, foreign exchange contracts are used to hedge only firm
commitments, not anticipated transactions.
Pricing of certain firm sales and purchase commitments is fixed to forward
metal commodity exchange quotes. The Company enters into metal commodity
contracts (predominantly copper) as hedges of gross margins on these
commitments. The hedges are closed when the underlying sales and purchase
commitments are priced, and gain or loss is recognized when the sale or purchase
is recorded.
28
<PAGE> 30
The Company maintains both corporate and divisional credit departments.
Limits are set for customers and countries. Letters of credit issued or
confirmed through sound financial institutions are obtained to further ensure
prompt payment in accordance with terms of sale; generally, collateral is not
required. At August 31, 1998, $6,751,000 of bankers acceptances were included in
accounts receivable.
In the normal course of its marketing activities, the Company transacts
business with substantially all sectors of the metals industry. Customers are
internationally dispersed, cover the spectrum of manufacturing and distribution,
deal with various types and grades of metal, and have a variety of end markets
in which they sell. The Company's historical experience in collection of
accounts receivable falls within the recorded allowances. Due to these factors,
no additional credit risk beyond amounts provided for collection losses is
believed inherent in the Company's accounts receivable.
5. Income Taxes
The provisions for income taxes include the following:
<TABLE>
<CAPTION>
(in thousands) Year ended August 31,
- -------------- ----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
United States $21,651 $19,986 $22,356
Foreign 782 680 1,364
State and local 2,558 2,065 2,880
------- ------- -------
24,991 22,731 26,600
Deferred 364 (381) 297
------- ------- -------
$25,355 $22,350 $26,897
======= ======= =======
</TABLE>
Taxes of $21,444,000, $25,506,000 and $16,537,000 were paid in 1998, 1997 and
1996, respectively.
Deferred taxes arise from temporary differences between the tax basis of an
asset or liability and its reported amount in the financial statements. The
sources and tax effects of these differences are:
<TABLE>
<CAPTION>
(in thousands) August 31,
- -------------- --------------------
1998 1997
------- -------
<S> <C> <C>
U.S. taxes provided on foreign income
and foreign taxes $11,595 $11,524
Tax on difference between tax
and book depreciation 19,165 19,294
Net operating losses (2,660) (6,692)
Alternative minimum tax credit (1,713) (1,713)
Other accruals (2,030) (754)
Other (2,981) (825)
------- -------
Total $21,376 $20,834
======= =======
</TABLE>
The Company uses substantially the same depreciable lives for tax and book
purposes. Changes in deferred taxes relating to depreciation are mainly
attributable to differences in the basis of underlying assets recorded under the
purchase method of accounting. As noted above, the Company provides United
States taxes on unremitted foreign earnings. Such earnings have been reinvested
in the foreign operations except for dividends of $6,062,000.
The Company's effective tax rates were 37.2% in 1998, 36.7% in 1997, and 36.9%
in 1996. Reconciliations of the United States statutory rates to the effective
rates are as follows:
<TABLE>
<CAPTION>
Year ended August 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Tax credits (.5) (.5) (.5)
State and local taxes 2.6 2.2 2.6
Other .1 -- (.2)
----- ----- -----
Effective tax rate 37.2% 36.7% 36.9%
===== ===== =====
</TABLE>
Net operating losses reflected as deferred tax assets consist of $4.5 million
that are due to expire in 2009. These assets will be reduced as tax expense is
recognized in future periods. The $1.7 million alternative minimum tax credit is
available indefinitely.
6. Capital Stock
Stock Purchase Plan
Substantially all employees may participate in the Company's employee stock
purchase plan. The Directors have authorized the annual purchase of up to 200
shares at a discount of 25% from the stock's price. Annual activity of the stock
purchase plan was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Shares subscribed 161,130 165,300 158,490
Price per share $ 24.59 $ 23.80 $ 17.80
Shares purchased 138,640 152,260 138,180
Price per share $ 23.80 $ 17.80 $ 18.41
Shares available 501,191
</TABLE>
The Company recognized compensation expense for this plan of $1,053,000,
$906,000 and $844,000 in 1998, 1997 and 1996, respectively.
Stock Option Plans
The 1986 Stock IncentivePlan (1986Plan) terminated November 23, 1996, except as
to awards outstanding. Under the 1986 Plan, stock options were awarded to
full-time salaried employees. The option price was the fair market value of the
Company's stock at the date of grant, and the options are exercisable two years
from date of grant.
The 1996 Long-Term Incentive Plan (1996 Plan) was approved in December 1996.
Under the 1996 Plan, stock options, stock appreciation rights, and restricted
stock may be awarded to employees. The option price for both the stock options
and the stock rights will not be less than the fair market value of the
Company's stock at the date of grant. Vesting periods are variable but no award
may be exercised after ten years. The outstanding awards under the 1996 Plan
vest 50% after one year and 50% after two years from date of grant and will
expire seven years after grant.
29
<PAGE> 31
Combined share information for the two plans is as follows:
<TABLE>
<CAPTION>
Weighted Price
Average Range
Number Exercise Price Per Share
--------- -------------- -------------
<S> <C> <C> <C>
September 1, 1995
Outstanding 1,430,293 $20.81 $ 8.72-27.61
Granted 435,050 27.29 26.25-27.31
Exercised (119,362) 17.92 8.72-27.61
Forfeited (31,486) 24.57 12.61-27.61
Exercisable 1,003,670 20.02 8.72-27.61
--------- ------ -------------
August 31, 1996
Outstanding 1,714,495 $22.58 $ 8.72-27.61
Granted 390,251 28.00 28.00
Exercised (161,879) 18.60 8.72-27.61
Forfeited (23,559) 26.46 18.42-28.00
Exercisable 1,108,337 21.32 8.72-27.61
--------- ------ -------------
August 31, 1997
Outstanding 1,919,308 $23.99 $ 8.72-28.00
Granted 364,841 29.81 29.81
Exercised (229,277) 19.05 8.72-28.00
Forfeited (9,859) 27.35 8.72-29.81
Exercisable 1,454,626 24.14 12.61-28.00
--------- ------ -------------
August 31, 1998
Outstanding 2,045,013 $25.56 $ 12.61-29.81
Authorized
Shares Remaining 3,052
========= ====== =============
</TABLE>
Share information for options at August 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
- -------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
- ------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$12.61-18.42 257,027 2.8 years $16.48 257,027 $16.48
$20.20-24.50 420,526 5.5 years $22.51 420,526 $22.51
$26.25-29.81 1,367,460 6.5 years $28.21 777,073 $27.55
- ------------ ----------- ----------- -------- ----------- --------
$12.61-29.81 2,045,013 5.8 years $25.56 1,454,626 $24.14
</TABLE>
The Company has maintained its historical method for accounting for stock
options, which recognizes no compensation expense for fixed options granted at
current market values. Generally accepted accounting principles require
disclosure of an estimate of the weighted-average grant date fair value of
options granted during the year and pro forma disclosures of the effect on
earnings if compensation expense had been recorded.
The Black-Scholes option pricing model used requires the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate 5.44% 6.22% 6.74%
Expected life 4.60 YEARS 4.85 years 4.85 years
Expected volatility .170 .160 .160
Expected dividend yield 1.8% 1.7% 1.7%
</TABLE>
Management believes that the resulting answer has narrow reliability as
characteristics of the Company's options such as nontransferability, forfeiture
provisions, and long lives are inconsistent with the option model's basic
purpose of valuing traded options. For purposes of pro forma earnings
disclosures, the assumed compensation expense is amortized over the option's
vesting period. The 1998 pro forma information includes options granted in 1996,
1997, and 1998. The 1997 pro forma information includes options granted in 1996
and 1997.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Earnings (in thousands)
As reported $42,714 $38,605 $46,024
Pro Forma 41,120 37,584 45,667
Net Earnings per share
As reported $ 2.82 $ 2.53 $ 3.01
Pro Forma 2.72 2.47 $ 2.98
</TABLE>
The weighted-average fair value of options granted
in 1998, 1997 and 1996 was $6.06, $6.27 and $6.44, respectively.
Preferred Stock
Preferred stock has a par value of $1.00 a share, with 2,000,000 shares
authorized. It may be issued in series, and the shares of each series shall have
such rights and preferences as fixed by the Board of Directors when authorizing
the issuance of that particular series. There are no shares of preferred stock
outstanding.
7. Employees' Pension and Profit Sharing Plans
Substantially all employees of the Company and its subsidiaries are covered by
profit sharing or savings plans. Company contributions, which are discretionary,
to all plans were $19,448,000, $14,468,000, and $13,915,000, for 1998, 1997 and
1996, respectively.
During 1998 the Company settled its only remaining defined benefit plan,
which it had terminated in 1997. Included in 1998 is pension expense of
$3,310,000, substantially all of which was a settlement liability. There will be
no future pension expense.
8. Postretirement Benefits Other Than
Pensions/Postemployment Benefits
The Company has no significant postretirement obligations. The Company's
historical costs for postemployment benefits have not been significant and are
not expected to be in the future.
9. Commitments and Contingencies
Minimum rental commitments payable by the Company and its consolidated
subsidiaries for noncancelable operating leases in effect at August 31, 1998,
are as follows for the fiscal periods specified:
<TABLE>
<CAPTION>
Real
(in thousands) Equipment Estate
- ------------------ --------- --------
<S> <C> <C>
1999 $ 4,684 $ 4,272
2000 2,996 4,109
2001 3,212 2,394
2002 2,122 1,638
2003 and thereafter 1,415 2,721
-------- --------
$ 14,429 $ 15,134
======== ========
</TABLE>
Total rental expense was $9,634,000, $8,621,000 and $7,834,000 in 1998, 1997 and
1996, respectively.
30
<PAGE> 32
In the ordinary course of conducting its business, the Company becomes involved
in litigation, administrative proceedings and governmental investigations,
including environmental matters.
The Company has received notices from the U.S. Environmental Protection
Agency (EPA) or equivalent state agency that it is considered a potentially
responsible party (PRP) at thirteen sites, none owned by the Company, and may be
obligated under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA) or similar state statute to conduct remedial
investigations, feasibility studies, remediation and/or removal of alleged
releases of hazardous substances or to reimburse the EPA for such activities.
The Company is involved in litigation or administrative proceedings with regard
to several of these sites in which the Company is contesting, or at the
appropriate time may contest, its PRP designation. In addition, the Company has
received information requests with regard to other sites which may be under
consideration by the EPA as potential CERCLA sites.
Some of these environmental matters or other proceedings may result in fines,
penalties or judgments being assessed against the Company, which, from time to
time, may have a material impact on earnings for a particular quarter. While the
Company is unable to estimate precisely the ultimate dollar amount of exposure
to loss in connection with the above-referenced matters, it makes accruals as
warranted. Due to evolving remediation technology, changing regulations,
possible third-party contributions, the inherent shortcomings of the estimation
process and other factors, amounts accrued could vary significantly from amounts
paid. Accordingly, it is not possible to estimate a meaningful range of possible
exposure. It is the opinion of the Company's management that the outcome of
these proceedings, individually or in the aggregate, will not have a material
adverse effect on the business or consolidated financial position of the
Company.
During 1998 the Company and former stockholders of Owen Steel Company, Inc.
and affiliates settled litigation with regard to the Company's claims against a
portion of the purchase price held in escrow since the November 1994
acquisition. The Company received approximately $3 million of the approximately
$5 million escrow balance. The proceeds were substantially offset against claim
payments paid and deferred pending settlement.
10. Earnings Per Share
Statement of Financial Accounting Standards No. 128, Earnings per Share,
requires a reconciliation of both the numerator and denominator of the earnings
per share calculations. There are no adjustments to net earnings to arrive at
income for any years presented. The stock options granted June 11, 1998, with
total outstanding share commitments of 364,141 at year end is antidilutive. All
share data has been restated in accordance with the Standard.
<TABLE>
<CAPTION>
August 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Shares outstanding for
basic earnings per share 14,829,515 14,910,771 15,032,343
Effect of dilutive securities:
Stock options/purchase
plans 291,271 308,956 243,815
Shares outstanding for
dilutive earnings per
share 15,120,786 15,219,727 15,276,158
</TABLE>
11. Other Payables and Accrued Expenses
<TABLE>
<CAPTION>
(in thousands) August 31,
- -------------- -----------------------
1998 1997
--------- ---------
<S> <C> <C>
Salaries, wages and commissions $ 32,685 $ 29,330
Advance billings on contracts 15,585 5,306
Pension and profit sharing 21,882 17,028
Insurance 11,202 9,516
Accrual for contract losses 2,379 1,163
Environmental 5,718 4,477
Litigation accrual 6,650 6,650
Freight 4,936 5,593
Taxes other than income taxes 7,558 6,044
Interest 3,348 3,732
Other accrued expenses 38,569 40,197
--------- ---------
$ 150,512 $ 129,036
========= =========
</TABLE>
12. Business Segments
Summarized data for the Company's international operations located outside of
the United States (principally in Europe, Australia and the Far East) are as
follows:
<TABLE>
<CAPTION>
(in thousands) Year ended August 31,
- -------------- ----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues-unaffiliated customers $ 335,036 $ 360,283 $ 505,255
========= ========= =========
Operating profit $ 4,491 $ 3,469 $ 6,731
========= ========= =========
Identifiable assets $ 107,422 $ 95,358 $ 108,492
========= ========= =========
</TABLE>
Export sales from the Company's United States operations are as follows:
<TABLE>
<CAPTION>
(in thousands) Year ended August 31,
- -------------- ----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Far East $ 19,627 $ 39,863 $ 60,008
Canada and Mexico 40,330 38,883 40,565
Other 3,014 4,590 3,414
--------- --------- ---------
Total $ 62,971 $ 83,336 $ 103,987
========= ========= =========
</TABLE>
The Company operates in three business segments, as indicated below.
Intersegment sales generally are priced at prevailing market prices. Certain
corporate administrative expenses are allocated to segments based upon the
nature of the expense.
31
<PAGE> 33
12. Business Segments (Continued):
<TABLE>
<CAPTION>
Adjustments
Marketing and
1998 (in thousands) Manufacturing Recycling and Trading Corporate Eliminations Consolidated
- ---------------------------------- ------------- --------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales - unaffiliated customers $ 1,229,016 $ 386,002 $ 752,501 $ 50 $ -- $ 2,367,569
Intersegment sales 4,925 28,884 35,991 (69,800)
------------- --------- ----------- --------- ------------ ------------
Total sales 1,233,941 414,886 788,492 50 (69,800) 2,367,569
============= ========= =========== ========= ============ ============
Operating profit (loss) 74,766 (1,354) 20,582 (7,870) 86,124
Interest expense (18,055)
Earnings before income taxes 68,069
============= ========= =========== ========= ============ ============
Depreciation and amortization 35,364 10,925 939 232 47,460
============= ========= =========== ========= ============ ============
Capital expenditures 90,036 27,391 1,360 1,128 119,915
============= ========= =========== ========= ============ ============
Identifiable assets $ 622,694 $ 118,905 $ 236,968 $ 24,050 $ -- $ 1,002,617
============= ========= =========== ========= ============ ============
<CAPTION>
1997 (in thousands)
- -------------------
Net sales - unaffiliated customers $ 1,077,296 $ 453,436 $ 727,532 $ 124 $ -- $ 2,258,388
Intersegment sales 5,703 31,182 30,672 (67,557)
------------- --------- ----------- --------- ------------ ------------
Total sales 1,082,999 484,618 758,204 124 (67,557) 2,258,388
============= ========= =========== ========= ============ ============
Operating profit (loss) 54,782 7,615 17,636 (4,441) 75,592
Interest expense (14,637)
Earnings before income taxes 60,955
============= ========= =========== ========= ============ ============
Depreciation and amortization 32,915 9,926 669 210 43,720
============= ========= =========== ========= ============ ============
Capital expenditures 50,773 15,885 4,023 274 70,955
============= ========= =========== ========= ============ ============
Identifiable assets $ 510,951 $ 112,875 $ 192,224 $ 23,011 $ -- $ 839,061
============= ========= =========== ========= ============ ============
<CAPTION>
1996 (in thousands)
- -------------------
Net sales - unaffiliated customers $ 1,008,231 $ 443,825 $ 869,646 $ 661 $ -- $ 2,322,363
Intersegment sales 9,625 20,348 20,394 (50,367)
------------- --------- ----------- --------- ------------ ------------
Total sales 1,017,856 464,173 890,040 661 (50,367) 2,322,363
============= ========= =========== ========= ============ ============
Operating profit (loss) 61,818 12,091 17,680 (2,846) 88,743
Interest expense (15,822)
Earnings before income taxes 72,921
============= ========= =========== ========= ============ ============
Depreciation and amortization 31,319 9,410 614 256 41,599
============= ========= =========== ========= ============ ============
Capital expenditures 37,315 8,727 1,611 329 47,982
============= ========= =========== ========= ============ ============
Identifiable assets $ 457,939 $ 91,885 $ 195,042 $ 21,890 $ -- $ 766,756
============= ========= =========== ========= ============ ============
</TABLE>
32
<PAGE> 34
13. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1998, 1997 and 1996 are as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended 1998
----------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
----------------------------------------------
<S> <C> <C> <C> <C>
Net sales $550,501 $568,178 $606,099 $642,791
Gross profit 63,801 66,284 73,836 80,375
Net earnings 8,053 8,348 11,391 14,922
EPS basic .55 .57 .77 1.01
EPS diluted .54 .56 .75 1.00
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended 1997
----------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
----------------------------------------------
<S> <C> <C> <C> <C>
Net sales $530,961 $525,755 $589,646 $612,026
Gross profit 61,654 58,411 66,009 68,159
Net earnings 9,177 7,201 9,510 12,717
EPS basic .61 .48 .64 .87
EPS diluted .60 .47 .63 .85
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended 1996
----------------------------------------------
Nov. 30 Feb. 28 May 31 Aug. 31
----------------------------------------------
<S> <C> <C> <C> <C>
Net sales $590,219 $518,181 $639,144 $574,819
Gross profit 59,937 60,954 66,238 66,700
Net earnings 10,832 10,010 12,012 13,170
EPS basic .71 .67 .80 .88
EPS diluted .70 .67 .79 .86
</TABLE>
The quantities and costs used in calculating cost of goods sold on a quarterly
basis include estimates of the annual LIFO effect. The actual effect cannot be
known until the year-end physical inventory is completed and quantity and price
indices are developed. The quarterly cost of goods sold above includes such
estimates. Fourth quarter 1998 net earnings increased $3,920,000 after the final
determination of quantities and prices was made.
The net earnings per share (EPS) is on a diluted basis calculated in
accordance with Financial Accounting Standards No. 128.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Commercial Metals Company
Dallas, Texas
We have audited the consolidated balance sheets of Commercial Metals Company and
subsidiaries at August 31, 1998 and 1997 and the related consolidated statements
of earnings, stockholders' equity and cash flows for each of the three years in
the period ended August 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Commercial Metals Company and
subsidiaries at August 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1998, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE, LLP
Dallas, Texas
October 14, 1998
33
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No event reportable herein took place.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required in response to this Item with
regard to directors is incorporated herein by reference from the registrant's
Definitive Proxy Statement for the annual meeting of shareholders to be held
January 28, 1999, which will be filed no later than 120 days after the close of
the Registrant's fiscal year. The following is a listing of employees believed
to be considered "Executive Officers" of the registrant as defined under Rule
3b-7 as of August 31, 1998:
<TABLE>
<CAPTION>
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE
- ---- ------------------------ --- -------------
<S> <C> <C> <C>
Lawrence A. Engels Vice President, Treasurer and 65 1977
Chief Financial Officer
Hugh M. Ghormley Vice President and 69 1981
CMC Steel Group - President
Fabrication Plants
Harry J. Heinkele Vice President and Secondary Metals 66 1981
Processing Division - President
A. Leo Howell Vice President and 77 1977
Howell Metal Company - President;
Director and Chairman of the
Executive Committee
William B. Larson Controller 45 1995
Murray R. McClean Vice President and 50 1995
International Division - President
Stanley A. Rabin President and Chief Executive 60 1974
Officer; Director
</TABLE>
34
<PAGE> 36
<TABLE>
<S> <C> <C> <C>
Bert Romberg Senior Vice President 68 1968
Marvin Selig CMC Steel Group - Chairman 75 1968
and Chief Executive Officer; Director
Clyde P. Selig Vice President and 66 1981
CMC Steel Group - President
and Chief Operating Officer
David M. Sudbury Vice President, Secretary and 53 1976
General Counsel
</TABLE>
The Executive Officers are employed by the Board of Directors of the
registrant or the respective subsidiary usually at its first meeting after the
registrant's Annual Shareholders Meeting and continue to serve for terms set
from time to time by the registrant's Board of Directors in its discretion.
All of the Executive Officers of the Company have served in the
positions indicated above or in positions of similar responsibility for more
than five years except for Mr. Larson. Mr. Larson was employed by the Company in
June, 1991 as Assistant Controller and was named Controller in March, 1995.
Marvin Selig is the brother of Clyde P. Selig. There are no other family
relationships among the officers of the registrant or among the Executive
Officers and Directors.
ITEM 11. EXECUTIVE COMPENSATION
Information required in response to this Item is incorporated herein by
reference from the Registrant's Definitive Proxy Statement for the annual
meeting of shareholders to be held January 28, 1999, which will be filed no
later than 120 days after the close of the Registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated
herein by reference from the Registrant's Definitive Proxy Statement for the
annual meeting of shareholders to be held January 28, 1999, which will be filed
no later than 120 days after the close of the Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, information required in response to this Item
is incorporated herein by reference from the Registrant's Definitive Proxy
Statement for the annual meeting of shareholders to be held January 28, 1999,
which will be filed no later than 120 days after the close of the Registrant's
fiscal year.
35
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. All financial statements are included at Item 8 above.
2. Commercial Metals Company and Subsidiaries Consolidated Financial
Statement Schedules
Independent Auditors' Report as to Schedules
Valuation and qualifying accounts (Schedule VIII)
All other schedules have been omitted because they are not applicable,
are not required, or the required information is shown in the financial
statements or notes thereto.
3. The following is a list of the Exhibits and Index required to be filed
by Item 601 of Regulation S-K:
(3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i)
to the Company's Form 10-K for the fiscal year ended August 31,
1993 and incorporated herein by reference).
(3)(i)a- Certificate of Amendment of Restated Certificate of
Incorporation dated February 1, 1994 (Filed as Exhibit 3(i)a to
the Company's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
(3)(i)b- Certificate of Amendment of Restated Certificate of
Incorporation dated February 17, 1995 (Filed as Exhibit 3(i)b to
the Company's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
(3)(ii) By-Laws (Filed as Exhibit (3)(ii) to the Company's Form 10-K
for the fiscal year ended August 31, 1993 and incorporated
hereby by reference).
(4) Indenture between the Company and Chase Manhattan Bank dated as of
July 31, 1995 (Filed as Exhibit 4.1 to the Company's Registration
Statement No. 33-60809 on July 18, 1995 and
incorporated herein by reference).
(21) Subsidiaries of Registrant...................................E1
(23) Independent Auditors' consent to incorporation by reference of
report dated October 14, 1998 accompanying the consolidated financial
statements of Commercial Metals Company and subsidiaries for the year
ended August 31, 1997 into previously filed Registration Statements No.
033-61073, No. 033-61075, and 333-27967
on Form S-8 and Registration Statements No. 33-60809 and 333-61379 on
Form S-3............................................................E2
36
<PAGE> 38
(27) Financial Data Schedules......................................E3
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
37
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMMERCIAL METALS COMPANY
/s/ Stanley A. Rabin
--------------------------------------
By: Stanley A. Rabin
President and
Chief Executive Officer
Date: November 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Albert A. Eisenstat /s/ Dorothy G. Owen
- -------------------------------------- --------------------------------------
Albert A. Eisenstat, November 23, 1998 Dorothy G. Owen, November 23, 1998
Director Director
/s/ Moses Feldman /s/ Charles B. Peterson
- -------------------------------------- --------------------------------------
Moses Feldman, November 23, 1998 Charles B. Peterson, November 23, 1998
Director Director
/s/ Stanley A. Rabin
- -------------------------------------- --------------------------------------
Laurence E. Hirsch, November 23, 1998 Stanley A. Rabin, November 23, 1998
Director President, Chief Executive Officer
and Director
/s/ A. Leo Howell /s/ Marvin Selig
- -------------------------------------- --------------------------------------
A. Leo Howell, November 23, 1998 Marvin Selig, November 23, 1998
Vice President and Director Chairman and Chief Executive Officer
Steel Group and Director
/s/ Walter F. Kammann /s/ Lawrence A. Engels
- -------------------------------------- --------------------------------------
Walter F. Kammann, November 23, 1998 Lawrence A. Engels, November 23, 1998
Director Vice President and
Chief Financial Officer
/s/ Ralph E. Loewenberg /s/ William B. Larson
- -------------------------------------- --------------------------------------
Ralph E. Loewenberg, November 23, 1998 William B. Larson November 23, 1998
Director Controller
38
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Commercial Metals Company
Dallas, Texas
We have audited the consolidated financial statements of Commercial Metals
Company and subsidiaries as of August 31, 1998 and 1997, and for each of the
three years in the period ended August 31, 1998, and have issued our report
thereon dated October 14, 1998; such financial statements and report are
included in Item 8 herein. Our audits also included the consolidated financial
statement schedule of Commercial Metals Company listed in Item 14. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE, LLP
Dallas, Texas
October 14, 1998
<PAGE> 41
SCHEDULE VIII
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(In thousands)
Allowance for collection
losses deducted from notes
and accounts receivable:
<TABLE>
<CAPTION>
Charged to Charged Deductions
Balance, profit and to other from Balance
beginning loss or accounts reserves end
Year of year income (A) (B) of year
- ----- --------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
1996 4,743 2,535 269 2,046 5,501
1997 5,501 1,433 354 1,172 6,116
1998 6,116 2,898 261 1,155 8,120
</TABLE>
(A) Recoveries of accounts written off.
(B) Write-off of uncollectible accounts.
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
(3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i)
to the Company's Form 10-K for the fiscal year ended August 31,
1993 and incorporated herein by reference).
(3)(i)a -- Certificate of Amendment of Restated Certificate of
Incorporation dated February 1, 1994 (Filed as Exhibit 3(i)a to
the Company's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
(3)(i)b -- Certificate of Amendment of Restated Certificate of
Incorporation dated February 17, 1995 (Filed as Exhibit 3(i)b to
the Company's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
(3)(ii) By-Laws (Filed as Exhibit (3)(ii) to the Company's Form 10-K
for the fiscal year ended August 31, 1993 and incorporated
hereby by reference).
(4) Indenture between the Company and Chase Manhattan Bank dated as
of July 31, 1995 (Filed as Exhibit 4.1 to the Company's
Registration Statement No. 33-60809 on July 18, 1995 and
incorporated herein by reference).
(21) Subsidiaries of Registrant ........................................E1
(23) Independent Auditors' consent to incorporation by reference of
report dated October 14, 1998 accompanying the consolidated
financial statements of Commercial Metals Company and
subsidiaries for the year ended August 31, 1997 into previously
filed Registration Statements No. 033-61073, No. 033-61075, and
333-27967 on Form S-8 and Registration Statements No. 33-60809
and 333-61379 on Form S-3 .........................................E2
(27) Financial Data Schedules ..........................................E3
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
AS OF AUGUST 31, 1998
<TABLE>
<CAPTION>
JURISDICTION OF PERCENTAGE
NAME OF SUBSIDIARY INCORPORATION OWNED
------------------ --------------- ----------
<S> <C> <C>
AHT, Inc. Pennsylvania 100
CMC (Australia) Pty., Limited Australia 100
CMC Comercio de Metias, Ltda Brazil 100
CMC Concrete Accessories, Inc. Texas 100
CMC Fareast Limited Hong Kong 100
CMC International (S.E. Asia) Pte., Limited Singapore 100
CMC Oil Company Texas 100
CMC Steel Holding Company Delaware 100
CMC Steel Fabricators, Inc. Texas 100
CMC Steel IPH Company Delaware 100
CMC Trading A.G Switzerland 100
CMC Trinec GmbH Germany 50
CMC (UK) Limited England 100
Cometals China, Inc. Texas 100
Cometals Far East, Inc. Texas 100
Commercial Metals - Austin Inc. Texas 100
Commercial Metals Deutschland GmbH Germany 100
Commercial Metals (International) AG Switzerland 100
Commercial Metals Overseas Export (FSC) Corp. US Virgin Islands 100
Commercial Metals Railroad Salvage Company Texas 100
Commercial Metals SF/JV Company Tennessee 100
Daltrading Limited Switzerland 100
Howell Metal Company Virginia 100
Mini-Mill Consultants, Inc. Texas 100
Owen Electric Steel Company of South Carolina South Carolina 100
Owen Industrial Products, Inc. South Carolina 100
Owen Joist Corporation South Carolina 100
Owen Joist of Florida, Inc. Florida 100
Owen of Georgia, Inc. Georgia 100
Owen Steel Company of Florida Florida 100
Owen Steel Company of N.C., Inc. North Carolina 100
Owen Supply Company, Inc. South Carolina 100
Pyrosteel Limited, Sydney Australia 50
Regency Advertising Agency, Inc. Texas 100
SMI-Owen Steel Company, Inc. South Carolina 100
SMI Rebar Coating JV, Inc. North Carolina 100
SMI Steel Inc. Alabama 100
Structural Metals, Inc. Texas 100
Zenith Finance and Construction Company Texas 100
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
033-60809 and 333-61379 on Form S-3 and Registration Statement Nos. 033-61073,
033-61075 and 333-27967 on Form S-8 of Commercial Metals Company of our reports
dated October 14, 1998, appearing in the Annual Report on Form 10-K of
Commercial Metals Company for the year ended August 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
November 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 30,985
<SECURITIES> 0
<RECEIVABLES> 326,775
<ALLOWANCES> 8,120
<INVENTORY> 257,231
<CURRENT-ASSETS> 673,500
<PP&E> 680,401
<DEPRECIATION> 361,939
<TOTAL-ASSETS> 1,002,617
<CURRENT-LIABILITIES> 426,063
<BONDS> 173,789
0
0
<COMMON> 80,663
<OTHER-SE> 300,726
<TOTAL-LIABILITY-AND-EQUITY> 1,002,617
<SALES> 2,367,569
<TOTAL-REVENUES> 2,367,569
<CGS> 2,083,036
<TOTAL-COSTS> 2,083,036
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,898
<INTEREST-EXPENSE> 18,055
<INCOME-PRETAX> 68,069
<INCOME-TAX> 25,355
<INCOME-CONTINUING> 42,714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,714
<EPS-PRIMARY> 2.88
<EPS-DILUTED> 2.82
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> AUG-31-1997 AUG-31-1997 AUG-31-1997 AUG-31-1997
<PERIOD-START> SEP-01-1996 SEP-01-1996 SEP-01-1996 SEP-01-1996
<PERIOD-END> NOV-30-1996 FEB-28-1997 MAY-31-1997 AUG-31-1997
<CASH> 11,986 15,331 14,447 32,998
<SECURITIES> 0 0 0 0
<RECEIVABLES> 308,256 313,831 310,256 295,851
<ALLOWANCES> 5,803 5,786 6,040 6,116
<INVENTORY> 191,194 205,229 211,603 220,644
<CURRENT-ASSETS> 540,606 571,876 577,130 585,276
<PP&E> 523,641 540,871 556,683 570,604
<DEPRECIATION> 294,641 304,830 315,382 323,343
<TOTAL-ASSETS> 776,084 814,773 825,034 839,061
<CURRENT-LIABILITIES> 267,951 304,386 326,633 278,144
<BONDS> 144,415 137,389 135,228 185,211
0 0 0 0
0 0 0 0
<COMMON> 80,663 80,663 80,663 80,663
<OTHER-SE> 262,011 271,291 261,466 274,209
<TOTAL-LIABILITY-AND-EQUITY> 766,084 814,773 825,034 839,061
<SALES> 530,961 1,056,716 1,646,362 2,258,388
<TOTAL-REVENUES> 530,961 1,056,716 1,646,362 2,258,388
<CGS> 469,307 936,651 1,460,288 2,004,155
<TOTAL-COSTS> 469,307 936,651 1,460,288 2,004,155
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 268 616 1,087 1,433
<INTEREST-EXPENSE> 3,471 7,157 11,055 14,637
<INCOME-PRETAX> 14,509 25,955 40,875 60,955
<INCOME-TAX> 5,332 9,577 14,987 22,350
<INCOME-CONTINUING> 9,177 16,378 25,888 38,605
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 9,177 16,378 25,888 38,605
<EPS-PRIMARY> .61 1.09 1.71 2.58
<EPS-DILUTED> .60 1.07 1.68 2.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> AUG-31-1996 AUG-31-1996 AUG-31-1996 AUG-31-1996
<PERIOD-START> SEP-01-1995 SEP-01-1995 SEP-01-1995 SEP-01-1995
<PERIOD-END> NOV-30-1995 FEB-28-1996 MAY-31-1996 AUG-31-1996
<CASH> 10,872 10,987 19,055 24,260
<SECURITIES> 0 0 0 0
<RECEIVABLES> 289,307 299,329 316,234 300,112
<ALLOWANCES> 4,965 5,221 5,395 5,501
<INVENTORY> 200,813 215,539 192,584 186,201
<CURRENT-ASSETS> 529,836 552,491 554,418 539,483
<PP&E> 474,144 483,991 494,925 506,969
<DEPRECIATION> 257,124 265,974 275,773 284,259
<TOTAL-ASSETS> 751,073 775,386 778,381 766,756
<CURRENT-LIABILITIES> 273,036 293,444 287,557 264,073
<BONDS> 155,840 148,676 146,519 146,506
0 0 0 0
0 0 0 0
<COMMON> 80,663 80,663 80,663 80,663
<OTHER-SE> 220,141 231,210 242,249 254,470
<TOTAL-LIABILITY-AND-EQUITY> 751,073 775,386 778,381 766,756
<SALES> 590,219 1,108,400 1,747,544 2,322,363
<TOTAL-REVENUES> 590,219 1,108,400 1,747,544 2,322,363
<CGS> 530,282 987,509 1,560,415 2,068,534
<TOTAL-COSTS> 530,282 987,509 1,560,415 2,068,534
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 256 882 1,414 2,535
<INTEREST-EXPENSE> 3,697 7,857 12,072 15,822
<INCOME-PRETAX> 17,126 32,951 51,734 72,921
<INCOME-TAX> 6,294 12,109 18,880 26,897
<INCOME-CONTINUING> 10,832 20,842 32,854 46,024
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 10,832 20,842 32,854 46,024
<EPS-PRIMARY> .71 1.38 2.18 3.06
<EPS-DILUTED> .70 1.37 2.15 3.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 19,603
<SECURITIES> 0
<RECEIVABLES> 284,234
<ALLOWANCES> 6,534
<INVENTORY> 208,383
<CURRENT-ASSETS> 547,503
<PP&E> 592,236
<DEPRECIATION> 334,045
<TOTAL-ASSETS> 812,229
<CURRENT-LIABILITIES> 246,374
<BONDS> 183,123
0
0
<COMMON> 80,663
<OTHER-SE> 281,235
<TOTAL-LIABILITY-AND-EQUITY> 812,229
<SALES> 550,501
<TOTAL-REVENUES> 550,501
<CGS> 486,700
<TOTAL-COSTS> 486,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 507
<INTEREST-EXPENSE> 4,179
<INCOME-PRETAX> 12,722
<INCOME-TAX> 4,669
<INCOME-CONTINUING> 8,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,053
<EPS-PRIMARY> .54
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 25,856
<SECURITIES> 0
<RECEIVABLES> 309,291
<ALLOWANCES> 6,730
<INVENTORY> 240,509
<CURRENT-ASSETS> 616,437
<PP&E> 613,918
<DEPRECIATION> 343,021
<TOTAL-ASSETS> 894,298
<CURRENT-LIABILITIES> 327,197
<BONDS> 175,960
0
0
<COMMON> 80,663
<OTHER-SE> 289,644
<TOTAL-LIABILITY-AND-EQUITY> 894,298
<SALES> 1,118,679
<TOTAL-REVENUES> 1,118,679
<CGS> 988,594
<TOTAL-COSTS> 988,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,011
<INTEREST-EXPENSE> 8,397
<INCOME-PRETAX> 25,910
<INCOME-TAX> 9,509
<INCOME-CONTINUING> 16,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,401
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-1-1997
<PERIOD-END> MAY-31-1998
<CASH> 29,793
<SECURITIES> 0
<RECEIVABLES> 349,885
<ALLOWANCES> 7,507
<INVENTORY> 256,668
<CURRENT-ASSETS> 673,050
<PP&E> 654,438
<DEPRECIATION> 354,230
<TOTAL-ASSETS> 985,115
<CURRENT-LIABILITIES> 409,428
<BONDS> 173,798
0
0
<COMMON> 80,663
<OTHER-SE> 300,392
<TOTAL-LIABILITY-AND-EQUITY> 985,115
<SALES> 1,724,778
<TOTAL-REVENUES> 1,724,778
<CGS> 1,520,857
<TOTAL-COSTS> 1,520,857
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,957
<INTEREST-EXPENSE> 13,117
<INCOME-PRETAX> 43,905
<INCOME-TAX> 16,113
<INCOME-CONTINUING> 27,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,792
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.84
</TABLE>
