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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, 2000
_____ 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)
<TABLE>
<S> <C>
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)
</TABLE>
(Registrant's telephone number, including area code) (214) 689-4300
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $5 par value New York Stock Exchange
Rights to Purchase Series A Preferred Stock New York Stock Exchange
</TABLE>
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 13, 2000, HELD BY
NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE OF $25.1875 PER
SHARE ON NOVEMBER 13, 2000, ON THE NEW YORK STOCK EXCHANGE WAS APPROXIMATELY
$301,827,807. (FOR PURPOSES OF DETERMINATION OF THIS AMOUNT, ONLY DIRECTORS,
EXECUTIVE OFFICERS AND 10% OR GREATER STOCKHOLDERS HAVE BEEN DEEMED AFFILIATES).
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF NOVEMBER 13, 2000: COMMON STOCK, $5.00 PAR -- 13,025,272.
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 25, 2001 -- PART III.
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PART I
ITEM 1. BUSINESS
Commercial Metals Company was incorporated in 1946 in Delaware as a
successor to a secondary metals recycling business in existence since
approximately 1915. Commercial Metals maintains executive offices at 7800
Stemmons Freeway, Dallas, Texas 75247, telephone 214/689-4300. The terms
"Commercial Metals," "we," "us," "our," or "Company" as used in this annual
report include Commercial Metals Company and its consolidated subsidiaries. Our
fiscal year ends August 31 and all references to years refer to the fiscal year
ended August 31 of that year unless otherwise noted.
We consider our businesses to be organized into three segments - (i)
manufacturing, (ii) recycling and (iii) marketing and trading. Our activities
are primarily concerned with metals related activities. Financial information
for the last three fiscal years concerning the segments is incorporated herein
by reference from "Note 12 Business Segments," of the notes to consolidated
financial statements at Part II, Item 8.
THE MANUFACTURING SEGMENT
The manufacturing segment is our dominant and most rapidly expanding
segment in terms of assets employed, capital expenditures, operating profit and
number of employees. It consists of two entities, the CMC steel group and the
Howell Metal Company subsidiary, a manufacturer of copper tubing. The steel
group is by far the more significant entity in this segment, with subsidiaries
operating four steel minimills, twenty-six steel fabrication plants, four steel
joist and two castellated and cellular beam manufacturing facilities, four
steel fence post manufacturing plants, a heat treating plant, eight metals
recycling plants, a railcar rebuilding facility, twenty-two concrete related
product warehouses, an industrial products supply facility and a railroad
salvage company.
Subject to market conditions, we endeavor to operate all four
minimills at full capacity to minimize product costs. We emphasize increases in
capacity, productivity and enhancements in product mix through both operating
and capital improvements. The steel minimill business is capital intensive,
with substantial capital expenditures required on a regular basis to remain
competitive as a low cost producer. Over the past three fiscal years,
approximately $207 million, or 62% of our total capital expenditures, have been
for minimill projects. Construction interference and equipment start-up related
to major capital improvement projects at two minimills together with
unprecedented levels of steel imports resulted in decreased minimill production
and shipments in 1999, but the general increase in productivity resumed during
2000.
<TABLE>
<CAPTION>
1998 1999 2000
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<S> <C> <C> <C>
Tons Melted 1,932,000 1,582,000 1,848,000
Tons Rolled 1,693,000 1,410,000 1,765,000
Tons Shipped 2,008,000 1,685,000 1,853,000
</TABLE>
Our largest steel minimill, acquired in 1963, is located at Seguin,
Texas, near San Antonio. Our steel minimill in Birmingham, Alabama, was
acquired in 1983. Our South Carolina minimill, located in Cayce, South
Carolina, was acquired in November 1994 as part of the acquisition of Owen
Steel
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Company, Inc. and affiliates. A fourth, much smaller mill, has been in
operation since 1987 and is located near Magnolia, Arkansas.
The Texas, Alabama and South Carolina mills consist of melt shops with
electric arc furnaces that melt steel scrap, continuous casting facilities to
shape the molten metal into billets, reheating furnaces, rolling mills,
mechanical cooling beds, finishing facilities and supporting facilities. The
mills utilize both a fleet of trucks we own and private haulers to transport
finished products to customers and our fabricating shops. The capacity of our
Texas minimill is approximately 900,000 tons per year melted and 800,000
rolled. Our Alabama mill's annual capacity is approximately 600,000 tons melted
and 575,000 rolled. Our South Carolina mill's annual capacity is approximately
700,000 tons melted and 800,000 tons rolled.
Our Texas minimill manufactures steel reinforcing bars, angles,
rounds, channels, flats, and special sections used primarily in highways,
reinforced concrete structures and manufacturing. Our Texas minimill sells
primarily to the construction, service center, energy, petrochemical, and
original equipment manufacturing industries. Its primary markets are located in
Texas, Louisiana, Arkansas, Oklahoma and New Mexico, although products are
shipped to approximately 30 states and Mexico. Our Texas minimill melted
769,000 tons during 2000, compared to 670,000 tons during the prior year, and
rolled 687,000 tons, an increase of 49,000 tons from 1999.
The Alabama mill recorded 2000 melt shop production of 523,000 tons up
95,000 from the prior year with 414,000 tons rolled, an increase of 122,000 tons
from 1999. Our Alabama minimill primarily manufactures products that are larger
in size than our other three minimills, such as mid-size structural steel
products including angles, channels, up to eight-inch wide flange beams and
special bar quality rounds and flats. Customers include primarily service
centers, as well as the construction, manufacturing, and fabricating industries
in the primary market areas of Alabama, Georgia, Tennessee, North and South
Carolina, and Mississippi.
Our South Carolina minimill manufactures primarily steel reinforcing
bars along with angles, rounds, squares, fence post sections and flats. Its
primary market area includes the Southeast and mid-Atlantic area south through
Florida and north into southern New England. During 2000, the South Carolina
minimill melted 556,000 tons and rolled 532,000 tons compared to 484,000 and
363,000 tons, respectively, during 1999.
The primary raw material for our Texas, Alabama and South Carolina
minimills is secondary, or scrap, ferrous metal purchased primarily from
suppliers generally within a 300 mile radius of each mill. A portion of the
ferrous raw material, generally less than half, is supplied from recycling
plants we own. The supply of scrap is believed to be adequate to meet future
needs but has historically been subject to significant price fluctuations. All
three minimills also consume large amounts of electricity and natural gas, both
of which are believed to be readily available although subject to fluctuating
prices based on overall energy supply and demand.
No melting facilities are located at our Arkansas minimill since this
mill utilizes rail salvaged from abandoned railroads for rerolling and, on
occasion, billets from Company minimills or other suppliers as its raw
materials. The rail or billets are heated in a reheat furnace and processed on
a rolling mill and finished at facilities similar to, but on a smaller scale,
than the other mills. Our Arkansas minimill's finished product is primarily
metal fence post stock, small diameter reinforcing bar, sign posts and bed
frame angles with some high quality bar products being rolled. Fence post stock
is fabricated into studded "T" metal fence posts at our facilities at the
Arkansas mill site, San Marcos, Texas, Brigham City, Utah, and West Columbia,
South Carolina. Because of this mill's lack of melting capacity, it is
dependent on an adequate supply of competitively priced billets or used rail,
the availability of which fluctuates with the pace of railroad abandonments,
rail replacement by railroads and demand for used rail from domestic and
foreign rail rerolling mills. Capacity at our Arkansas minimill is
approximately 150,000 tons rolled per year.
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Our steel group's downstream processing facilities engage in the
fabrication of reinforcing and structural steel, steel warehousing, joist
manufacturing, fence post manufacturing and railcar repair and rebuilding.
Steel fabrication capacity now exceeds 1.1 million tons, with a record 955,000
tons of fabricated steel shipped in 2000, an increase of 114,000 tons from
1999. During 2000 we purchased three additional rebar fabrication facilities,
two in Southern California with operations in Rancho Cucamonga, San Marcos,
Stockton and Fontana and one facility in Naples, Florida. In addition to these
new locations, fabrication activities are also 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. Steel for
fabrication may be obtained from unrelated vendors as well as our own mills.
Secondary metals recycling plants near our minimills in Texas and
South Carolina and in Austin, together with five smaller feeder facilities
nearby, operate as part of the steel group due to the predominance of secondary
ferrous metals sales to the nearby SMI minimills. The South Carolina and Texas
recycling facilities each operate automobile shredders.
Our joist manufacturing operation headquartered in Hope, Arkansas,
manufactures steel joists for roof supports using steel obtained primarily from
the steel group's minimills at locations in Hope, Starke, Florida, Cayce, South
Carolina, and Fallon, Nevada. A new facility located at Iowa Falls, Iowa,
purchased subsequent to fiscal 2000 is being prepared for additional joist
manufacturing capacity. Joist consumers are typically construction contractors
or large chain store owners. Joists are generally made to order and sales, which
may include custom design and fabrication, are primarily obtained on a
competitive bid basis. During 1999, we began limited production and sales of
castellated and cellular steel beams. Two new facilities specifically dedicated
to this product line, one located adjacent to the Hope joist facility and a
second at Farmville, Virginia are being prepared for increased capacity. These
beams, recognizable by their hexagonal or circular pattern of voids, permit
greater design flexibility in steel construction, especially floor structures.
Our facility in Victoria, Texas repairs, rebuilds and provides custom
maintenance with some manufacturing of railroad freight cars owned by railroad
companies and private industry. That work is obtained primarily on a bid and
contract basis and may include maintenance of the cars.
We sell concrete related supplies, including the sale or rental of
equipment to the concrete installation trade, at fourteen warehouse locations
in Texas, six Louisiana locations, and one location each in Mississippi and
Georgia. During 2000 we expanded the Houston, Texas, area operation by
purchasing substantially all of the operating assets of Bell-Barcelona
Accessories, Inc. A smaller operation which emphasizes a broader industrial
product supply is located in Columbia, South Carolina.
Allegheny Heat Treating, Inc., of Chicora, Pennsylvania, is the steel
group's heat treating operation. Allegheny Heat Treating works closely with our
Alabama minimill and other steel mills that sell specialized heat-treated steel
for customer specific use, primarily in original or special equipment
manufacturing. Our operating capacity in this business is approximately 30,000
tons per year.
The copper tube minimill operated by our Howell Metal Company
subsidiary is located in New Market, Virginia. It manufactures primarily copper
water tube as well as air conditioning and refrigeration tubing in straight
lengths and coils for use in commercial, industrial and residential
construction. Its customers, largely equipment manufacturers and wholesale
plumbing supply firms, are located primarily east of the Mississippi River.
Demand for copper tube is dependent mainly on the level of new residential
construction and renovation. High quality copper scrap supplemented
occasionally by virgin copper ingot is the raw material used in the melting and
casting of billets. Copper scrap is readily available, subject to rapid price
fluctuations generally related to the price or supply of virgin copper. A small
portion of the scrap is supplied by our metal recycling yards. Howell's
facilities include melting, casting, piercing, extruding, drawing, finishing
and other departments. Capacity is approximately 55,000,000 pounds per
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year. During 2000, Howell continued construction of an enlarged facility as
part of a two-year expansion project which, when complete in 2001, should
increase capacity by approximately fifty percent.
No single customer purchases ten percent or more of the manufacturing
segment's production. The nature of certain stock products sold in the
manufacturing segment are, with the exception of the steel fabrication and
joist jobs, not characteristic of a long lead time order cycle. Orders for
other stock products are generally filled promptly from inventory or near term
production. As a result, we do not believe backlog levels are a significant
factor in evaluating most operations. Backlog in our steel group at 2000
year-end was approximately $312,389,000. Backlog at 1999 year-end was
approximately $287,164,000. Because most of the segment's sales are to
consumers located in the sunbelt where construction activity generally
continues throughout the year, demand for our products is not considered
seasonal, although adverse weather can slow shipments.
THE RECYCLING SEGMENT
Our recycling segment is engaged in processing secondary, or scrap,
metals for further recycling into new metal products. This segment consists of
thirty three secondary metals processing divisions' recycling plants, which
excludes eight such facilities operated by our steel group as a part of the
manufacturing segment, and two automobile salvage yards located in Florida.
Our metal recycling plants purchase ferrous and nonferrous secondary
or scrap metals, processed and unprocessed, in a variety of forms. Sources of
metals for recycling include manufacturing and industrial plants, metal
fabrication plants, electric utilities, machine shops, factories, railroads,
refineries, shipyards, ordinance depots, demolition businesses, automobile
salvage and wrecking firms. Numerous small secondary metals collection firms
are also, in the aggregate, major suppliers.
These plants processed and shipped approximately 1,670,000 tons of
scrap metal during 2000 and 1,439,000 tons during the prior year. Ferrous
metals comprised the largest tonnage of metals recycled at approximately
1,438,000 tons, which was approximately 195,000 more than the prior year.
Shipments of non-ferrous metals, primarily aluminum, copper and stainless
steel, were approximately 233,000 tons, compared to 196,000 in 1999. We also
purchased and sold an additional 156,000 tons of metals processed by other
metal recycling facilities. With the exception of precious metals, practically
all metals capable of being recycled are processed by these plants. Our steel
group's eight metals recycling facilities processed and shipped an additional
640,000 tons of primarily ferrous scrap metal during 2000.
The metal recycling plants generally consist of an office and
warehouse building equipped with specialized equipment for processing both
ferrous and nonferrous metal. Most of the larger plants are equipped with
scales, shears, baling presses, briquetting machines, conveyors and magnetic
separators. Two locations have extensive equipment for mechanically processing
large quantities of insulated wire to segregate metallic content. All ferrous
processing centers are equipped with either presses, shredders or hydraulic
shears, locomotive and crawler cranes and railway tracks to facilitate shipping
and receiving. The segment operates six large shredding machines capable of
pulverizing obsolete automobiles or other ferrous metal scrap. Two additional
shredders operated by the manufacturing segment's recycling facilities are
located at or near two steel minimills in that segment. A typical recycling
plant includes several acres of land used for receiving, sorting, processing
and storage of metals. Several recycling plants devote a small portion of their
site or a nearby location for display and sales of metal products considered
reusable for their original purpose.
Recycled metals are sold to steel mills and foundries, aluminum sheet
and ingot manufacturers, brass and bronze ingot makers, copper refineries and
mills, secondary lead smelters, specialty steel mills, high temperature alloy
manufacturers and other consumers. Sales of material processed through our
recycling plants are coordinated through the recycling segment's office in
Dallas. Export sales are negotiated through our network of foreign offices as
well as the Dallas office.
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No single source of material or customer of the recycling segment
represents a material part of purchases or revenues of the Company but one
customer of the recycling segment made purchases aggregating approximately 11%
of segment revenues. The recycling segment competes with other secondary
processors and primary nonferrous metals producers, both domestic and foreign,
for sales of nonferrous materials. Consumers of nonferrous scrap metals often
have the capability to utilize primary or "virgin" ingot processed by mining
companies interchangeably with secondary metals. The prices for nonferrous
scrap metals are normally closely related to but generally less than, the
prices of the primary or "virgin" metal producers. Ferrous scrap is the primary
raw material for electric arc furnaces such as those operated by our steel
minimills. Some minimills supplement purchases of scrap metal with direct
reduced iron and pig iron for certain product lines.
THE MARKETING AND TRADING SEGMENT
The marketing and trading segment buys and sells primary and secondary
metals, fabricated metals and other industrial products through a network of
trading offices located around the globe. Steel, nonferrous metals, specialty
metals, chemicals, industrial minerals, ores, concentrates, ferroalloys, and
other basic industrial materials are purchased primarily from producers in
domestic and foreign markets. On occasion these materials are purchased from
trading companies or industrial consumers with surplus supplies. Long-term
contracts, spot market purchases and trading or barter transactions are all
utilized to obtain materials. A large portion of these transactions involve
fabricated semi-finished or finished product.
Customers for these materials include industrial concerns such as the
steel, nonferrous metals, metal fabrication, chemical, refractory and
transportation sectors. Sales are generally made directly to consumers through
and with coordination of offices in Dallas; Fort Lee and Englewood Cliffs, New
Jersey; Los Angeles; Hurstville near Sydney, Australia; Singapore; Zug,
Switzerland; Hong Kong, and Surrey, and Sandbach, United Kingdom and Bergisch
Gladbach, Germany. We also maintain representative offices in Moscow, Seoul,
and Beijing, as well as agents in other significant international markets.
These offices form a network for the exchange of information on the materials
we market, as well as servicing sources of supply and purchasers. In most
transactions we act as principal and often as a marketing representative. We
utilize agents when appropriate and occasionally act as broker. We participate
in transactions in practically all major markets of the world where trade by
American-owned companies is permitted.
This segment focuses on the marketing of physical products as
contrasted to traders of commodity futures contracts who frequently do not take
delivery of the commodity. Sophisticated global communications and the
development of easily accessible, although not always accurate, quoted market
prices for many products has resulted in our emphasis on creative service
functions for both sellers and buyers. Actual physical market pricing and trend
information, as contrasted with sometimes more speculative metal exchange market
information, technical information and assistance, financing, transportation and
shipping (including chartering of vessels), storage, warehousing, just in time
delivery, insurance, hedging and the ability to consolidate smaller purchases
and sales into larger, more cost efficient transactions are examples of the
services we offer. We attempt to limit exposure to price fluctuations by
offsetting purchases with concurrent sales and entering into foreign exchange
contracts as economic hedges of sales and purchase commitments denominated in
foreign currencies. We do not, as a matter of policy, speculate on changes in
the markets.
During 2000 the segment made investments to acquire approximately
eleven percent of the outstanding stock of a Czech Republic steel mill and
twenty four percent of a Belgium greenfield venture being built to process and
pickle hot rolled steel coil. Both investments have related marketing
activities. During the past year, our marketing and trading segment sold
approximately 1.7 million tons of steel products. The Australian office
maintains three warehousing facilities for just in time delivery of steel and
industrial products and operates a heat treating facility for steel products.
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COMPETITION
Our steel manufacturing, steel fabricating, and copper tube
manufacturing businesses compete with regional, national and foreign
manufacturers and fabricators of steel and copper. Price, quality and service
are the primary methods of competition. During 2000 imports to the United
States of certain steel products, including steel concrete reinforcing bars,
increased substantially. In June, 2000, our minimills joined other steel
manufacturers in an antidumping petition filed with the United States
International Trade Commission (ITC) seeking the imposition of duties on rebar
imported from several countries and sold at less than fair value. In August the
ITC determined that there is a reasonable indication of material or threatened
injury to rebar manufacturers within the United States as a result of unfairly
priced imports of rebar from eight of the countries. The investigation is still
pending with no final determination of what, if any, duties may be imposed.
We do not produce a significant percentage of the total national
output of most of our products but are considered a substantial supplier in the
markets near our facilities. We believe that our joist facilities are the
second largest manufacturer of joists in the United States, although
significantly smaller than the largest joist supplier. We believe that we are
the largest manufacturer of steel fence posts in the United States.
We believe the recycling segment is among the larger entities that
recycle nonferrous secondary metals and is also a major regional processor of
ferrous scrap. Active consolidation occurred in the scrap processing industry in
1997 and 1998, with aggressively priced acquisitions of significant operations
by several relatively new industry members. Poor markets for secondary metals
and poor results for many scrap processors commencing in 1998 and continuing
into 2000 resulted in an abrupt halt to acquisitions by most of these
competitors, with bankruptcy proceedings by three consolidators and attempts to
sell some recently acquired facilities. The secondary metals business is subject
to cyclical fluctuations depending upon the availability and price of
unprocessed scrap metal and the demand in steel and nonferrous metals consuming
industries.
All phases of our marketing and trading business are highly
competitive. Many of the marketing and trading segment's products are standard
commodity items. The principal elements of competition are price, quality,
reliability, financing alternatives, and additional services. This segment
competes with other domestic and foreign trading companies, some of which are
larger and may have access to greater financial resources or be able to pursue
business without regard for the laws and regulations governing the conduct of
corporations subject to the jurisdiction of the United States. We also compete
with industrial consumers who purchase directly from suppliers and importers
and manufacturers of semi-finished ferrous and nonferrous products. The impact
of competition from internet ecommerce sites specializing in metals is not yet
believed to be significant although we are reviewing opportunities for
participation in this rapidly developing area.
ENVIRONMENTAL MATTERS
Compliance with environmental laws and regulations is a significant
factor in our business. We are subject to local, state, federal and
supranational environmental laws and regulations concerning, among other
matters, solid waste disposal, air emissions, waste and storm water effluent
and disposal and employee health. Our manufacturing and recycling operations
produce significant amounts of by-products, some of which are handled as
industrial waste or hazardous waste. For example, the electric arc furnace, or
EAF dust generated by our minimills is classified as a hazardous waste by the
Environmental Protection Agency because of lead, cadmium and chromium content
and requires special handling and recycling for recovery of zinc or disposal.
Additionally, our scrap metal recycling facilities operate eight shredders for
which the primary feed materials are automobile hulks and obsolete household
appliances. Approximately twenty percent of the weight of an automobile hulk
consists of
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material, known as shredder fluff, which remains after the segregation of
ferrous and saleable non-ferrous metals. Federal environmental regulations
require shredder fluff to pass a toxic leaching test to avoid classification as
a hazardous waste. We endeavor to have hazardous contaminants removed from the
feed material prior to shredding and as a result we believe the shredder fluff
generated is properly not considered a hazardous waste. Should the laws,
regulations or testing methods change with regard to EAF dust processing or
shredder fluff disposal, we may incur additional significant expenditures. To
date, we have not experienced difficulty in contracting for recycling of EAF
dust or disposing of shredder fluff in municipal or private landfills.
We may also be required from time to time to clean up or take certain
remediation action with regard to sites formerly used in connection with our
operations. Furthermore, we may be required to pay for a portion of the costs
of clean up or remediation at sites we never owned or on which we never
operated if we are found to have arranged for treatment or disposal of
hazardous substances on the sites. We have been named a potentially responsible
party, or PRP, at several federal Superfund sites because the Environmental
Protection Agency, or EPA, contends that we and other PRP scrap metal suppliers
are liable for the cleanup of those sites solely as a result of having sold
scrap metal to unrelated manufacturers for recycling as a raw material in the
manufacture of new products. Our position is that an arms length sale of
valuable scrap metal for use as a raw material in a manufacturing process over
which we exercise no control should not, contrary to the EPA's assertion,
constitute "an arrangement for disposal or treatment of hazardous substances"
within the meaning of federal law. During 2000 the Superfund Recycling Equity
Act was approved by Congress and signed into law. This new statute should,
subject to satisfaction of certain conditions, provide some relief from
Superfund liability at the federal level for legitimate sellers of scrap metal
for recycling. Despite this clarification of the intent of the law by Congress
various state environmental agencies may still interpret state law and
regulations to impose such liability. We believe this result is contrary to
public policy objectives and legislation encouraging recycling and promoting
the use of recycled materials.
New federal, state and local laws, regulations and changing
interpretations, together with uncertainty regarding adequate control levels,
testing and sampling procedures, new pollution control technology and cost
benefit analysis based on market conditions are all factors which impact our
future expenditures to comply with environmental requirements. It is not
possible to predict the total amount of capital expenditures or increases in
operating costs or other expenses or whether such costs can be passed on to
customers through product price increases. During 2000, we incurred
environmental costs including disposal, permit, license fees, tests, studies,
remediation, consultant fees and environmental personnel expense of
approximately $11.5 million. In addition, we estimate that approximately
$600,000 of capital expenditures put in service during 2000 were for
environmental projects. We believe that our facilities are in material
compliance with currently applicable environmental laws and regulations and do
not presently anticipate material capital expenditures for new environmental
control facilities during 2001.
EMPLOYEES
As of October, 2000, we had approximately 8,378 employees.
Approximately 6,972 were employed by the manufacturing segment, 1,016 by the
recycling segment, 319 by the marketing and trading segment, 36 in general
corporate management and administration, with 35 employees providing service
functions for divisions and subsidiaries. Production employees at one metals
recycling plant and one fabrication operation are represented by unions for
collective bargaining. We believe that our labor relations are generally good
to excellent and our work force is highly motivated.
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ITEM 2. PROPERTIES
Our Texas steel minimill is located on approximately 600 acres of land
we own. Facilities including buildings occupying approximately 760,000 square
feet, are used for manufacturing, storage, office and related uses. Our Alabama
steel mill is located on approximately 36 acres, with buildings occupying
approximately 445,000 square feet used for manufacturing, storage, office and
related use. Our South Carolina minimill is located on approximately 82 acres,
with buildings occupying approximately 660,000 square feet. Our Magnolia,
Arkansas facility is located on approximately 124 acres, with buildings
occupying approximately 200,000 square feet. Approximately 30 acres of the
Alabama mill property and all Arkansas and South Carolina mill property are
leased in conjunction with revenue bond financing or property tax incentives
and may be purchased by us at the termination of the leases or earlier for a
nominal sum. The steel fabricating operations, including the fabrication
plants, fence post and joist operations, own approximately 1,038 acres of land
and lease approximately 16 acres of land at various locations in Texas,
Louisiana, Arkansas, Utah, South Carolina, Florida, Virginia, Georgia, North
Carolina, Nevada, Iowa and California. Our Howell Metal subsidiary owns
approximately 30 acres of land, with buildings occupying about 325,000 square
feet, including construction in process, in New Market, Virginia.
Our recycling plants occupy in the aggregate approximately 450 acres
we own in Austin, Beaumont, Dallas, Galveston, Houston, Lubbock, Midland,
Odessa, Victoria and Vinton, all in Texas; as well as the Jacksonville, Ocala,
Leesburg, Gainesville, Lake City, Orlando, and Tampa, Florida; and Shreveport,
Louisiana; Chattanooga, Tennessee; Springfield and Joplin, Missouri;
Burlington, North Carolina and Frontenac, Kansas plants. It leases the real
estate at Clute and Laredo,Texas; and Ocala, Florida. The smaller of two
locations at Beaumont and Victoria, Texas, 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. One warehouse building in
Australia is owned but located on leased real estate with the other Australian
warehouses being leased.
The leases on the leased properties described above will expire on
various dates within the next ten years. Several of the leases have renewal
options and we have had little difficulty in renewing such leases as they
expire. Our minimum annual rental obligation for real estate operating leases
in effect at August 31, 2000, to be paid during fiscal 2001 is approximately
$5,236,000. We also lease a portion of the equipment used in our plants. Our
minimum annual rental obligation for equipment operating leases in effect at
August 31, 2000, to be paid during fiscal 2001, is approximately $5,736,000.
ITEM 3. LEGAL PROCEEDINGS
Our structural steel fabrication subsidiary, SMI - Owen Steel Company,
Inc., or SMI - Owen, frequently works on large and complex construction
projects, some of which generate significant disputes. SMI - Owen entered into
a fixed price contract with Fluor Daniel, Inc., or F/D, as design/builder
general contractor to furnish, erect and install structural steel, hollow core
pre-cast concrete planks, fireproofing, and certain concrete slabs along with
related design and engineering work for the construction of a large hotel and
casino complex owned by Aladdin Gaming, LLC, or Aladdin. In connection with the
contract, F/D secured insurance from St. Paul Fire & Marine Insurance Company
under a subcontractor/vendor default protection policy which named SMI - Owen
as an insured in lieu of performance and payment bonds. A large subcontractor
to SMI - Owen defaulted, and SMI - Owen incurred unanticipated costs to
complete the work. We have made a claim under the policy for all losses, costs,
and expenses incurred by SMI - Owen arising from or related to the default.
Although St. Paul paid or escrowed partial payment of certain claims resulting
from the default, it has terminated such payments and reserved all rights to
contest the nature and extent of the policy's coverage and may take the
position that the policy is void due to misrepresentations and omissions by
F/D, the insurance broker, J & H Marsh McClennan, Inc. or others. We filed suit
against St. Paul and J & H Marsh McClennan in March, 2000 (C.A. No. G-00-149
United
8
<PAGE> 10
States District Court Southern District of Texas). Management intends to
vigorously pursue recovery of all damages we incur resulting from the default
as well as damages arising from the insurance company's breaches of duties owed
to us under the policy. The project is complete and no material additional
construction costs are anticipated.
Other disputes concerning the Aladdin project have been submitted to
binding arbitration. In August 2000, we filed a claim for $27.4 million against
F/D. The claim seeks recovery of damages to the extent coverage is denied under
the insurance policy discussed above, unpaid contract receivables, amounts for
delay claims and change orders all of which have not been paid by F/D. F/D has
not disputed certain amounts owed under the contract, but contends that other
deductive items reduce the contract balance by approximately $6.3 million which
together with other F/D claims (discussed below) exceed the unpaid contract
balance. We dispute the deductive items and intend to vigorously pursue
recovery of the contract balance in addition to all amounts, if any, not
recovered under the insurance policy as a result of misrepresentations or
omissions by F/D.
Aladdin as project owner and F/D have filed joint claims in the
arbitration proceeding against us, primarily for alleged delay damages, in the
amount of $127 million which includes alleged delay damages in construction of
a retail area adjacent to the project. Management believes the claims are
generally unsubstantiated, we have valid legal defenses against such claims and
intends to vigorously defend these claims.
As of August 31, 2000, we have received notices from the EPA or state
agency with similar responsibility that we and numerous other parties are
considered potentially responsible parties, or PRPs, and may be obligated under
the Comprehensive Environmental Response Compensation and Liability Act of
1980, or CERCLA, or similar state statute to pay for the cost of remedial
investigation, feasibility studies and ultimately remediation to correct
alleged releases of hazardous substances at approximately fourteen locations.
We may contest our designation as a PRP with regard to certain sites, while at
other sites we are participating with other named PRPs in agreements or
negotiations that we expect will result in agreements to remediate the sites.
The locations, none of which involve real estate we ever owned or conducted
operations upon, are commonly referred to by the EPA or state agency as the
Peak Oil Site (Tampa, FL), the NL Industries/Taracorp Site (Granite City, IL),
the Sapp Battery Site (Cottondale, Florida), the Interstate Lead Company
("ILCO") Site (Leeds, Alabama), the Poly-Cycle Industries Site (Techula,
Texas), the Jensen Drive Site (Houston, TX), the SoGreen/Parramore Site
(Tifton, GA), the Stoller Site (Jericho, SC), the RSR Corporation Site (Dallas,
TX), the Sandoval Zinc Company Site (Marion County, IL), the Ross Metals Site
(Rossville, TN), the Li Tungsten Site (Glen Cove, NY), the NL Industries Site
(Pedricktown, NJ) and the Danmark Site (Tampa, FL). We have periodically
received information requests with regard to other sites which are apparently
under consideration for recommendation under CERCLA or similar state statutes.
We do not know if any demand will ultimately be made against us as a result of
those inquiries.
The EPA has notified us and other alleged PRPs that under Sec. 106 of
CERCLA the PRPs could be subject to a maximum penalty fine of $25,000 per day
and the imposition of treble damages if the PRPs refused to clean up the Peak
Oil, Sapp Battery, NL/Taracorp, SoGreen/Parramore and Stoller sites as ordered
by the EPA. We are presently participating in a PRP organization at the Peak
Oil, Sapp Battery, SoGreen/Parramore and Stoller sites and do not believe that
the EPA will pursue any fine against us so long as we continue to participate
in the PRP groups or have adequate defenses to any attempt by the EPA to impose
fines in these matters.
CMC Oil Company (CMC Oil), a wholly-owned subsidiary which has been
inactive since 1985, is subject to a final judgment resulting from an order
entered in 1993 by the Federal Energy Regulatory Commission (the "FERC Order").
Judgment upholding the FERC Order was entered by Federal District Court in
November 1994 and affirmed by the Court of Appeals in November 1995. The FERC
Order found CMC Oil liable for overcharges constituting violations of crude oil
reseller regulations from December 1977 to January 1979, in joint venture
transactions with RFB Petroleum, Inc. The overcharges total approximately
$1,330,000 plus interest from the transaction dates calculated under the
Department of
9
<PAGE> 11
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. We will vigorously contest liability
should any such claim be asserted.
While we are unable to estimate the ultimate dollar amount of exposure
to loss in connection with the above-described legal proceedings, environmental
matters, government proceedings, and disputes that could result in additional
litigation, some of which may have a material impact on earnings and cash flows
for a particular quarter, it is the opinion of our management that the outcome
of the suits and proceedings mentioned, and other miscellaneous litigation and
proceedings now pending, will not have a material adverse effect on our
business or consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The table below summarizes the high and low sales prices reported on
the New York Stock Exchange for Commercial Metals' common stock and cash
dividends paid for the past two fiscal years.
<TABLE>
<CAPTION>
Price Range
2000 of Common Stock
Fiscal ------------------------- Cash
Quarter High Low Dividends
------- ---- --- ---------
<S> <C> <C> <C> <C>
1st $ 33.50 $ 26.56 13c.
2nd 33.94 27.13 13c.
3rd 31.13 22.13 13c.
4th 29.38 24.38 13c.
</TABLE>
<TABLE>
<CAPTION>
Price Range
1999 of Common Stock
Fiscal ------------------------- Cash
Quarter High Low Dividends
------- ---- --- ---------
<S> <C> <C> <C> <C>
1st $ 28.50 $ 21.56 13c.
2nd 27.75 22.56 13c.
3rd 25.44 19.69 13c.
4th 34.19 23.50 13c.
</TABLE>
Since 1982, Commercial Metals' common stock has been listed and traded
on the New York Stock Exchange. From 1959 until the NYSE listing in 1981, the
common stock was traded on the American Stock Exchange. The number of
shareholders of record of Commercial Metals' common stock at November 10, 2000,
was approximately 2,646.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth a summary of selected consolidated
financial information of Commercial Metals for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Sales 2,661,420 2,251,442 2,367,569 2,258,388 2,322,363
Net Earnings 46,255 47,120 42,714 38,605 46,024
Diluted Earnings 3.25 3.22 2.82 2.54 3.01
Per Share
Total Assets 1,172,862 1,079,337 1,002,617 839,061 766,756
Stockholders' Equity 420,616 418,458 381,389 354,872 335,133
Long-term Debt 261,884 265,590 173,789 185,211 146,506
Cash Dividends Per Share .52 .52 .52 .52 .48
</TABLE>
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
Year ended August 31,
-------------------------------------
(in millions except share data) 2000 1999 1998
------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 2,661 $ 2,251 $ 2,368
Net earnings 46.3 47.1 42.7
Cash flows* 116.1 102.9 93.5
International sales 879 760 752
As % of total 33% 34% 32%
LIFO effect on net earnings (3.4) 12.6 5.0
Per diluted share (.24) .86 .33
LIFO reserve 8.2 3.0 22.5
% of inventory on LIFO 71% 72% 72%
</TABLE>
*before changes in operating assets and liabilities
Significant events affecting the Company this year:
1. Best net sales, cash flows and diluted earnings per share ever. 2. Share
repurchase program resulted in 9% decrease in shares issued and
outstanding. 3. Outstanding copper tube profitability, solid steel
fabrication operations, as well as record shipments at SMI-Alabama and
SMI-Arkansas, sustained the manufacturing segment in spite of significant
losses on large structural fabrication contracts and a slower marketing
ramp-up in South Carolina. 4. LIFO expense was $3.4 million after tax,
compared to 1999 LIFO income of $12.6 million. 5. The recycling segment was
profitable each quarter, a major turnaround from the prior year. 6. The
marketing and trading segment continued its profitable performance in spite
of challenging global market conditions, including a strong U.S. dollar.
SEGMENTS
Financial results for the Company's reportable segments have been
prepared using a management approach, which is consistent with the basis
and manner in which management internally disaggregates financial
information for the purposes of assisting in making internal operating
decisions. Using this approach, the Company has three reportable
segments:manufacturing, recycling, and marketing and trading. Net sales
and operating profit (loss) by business segment are shown in the following
table:
<TABLE>
<CAPTION>
Year ended August 31,
-------------------------------------
(in millions) 2000 1999 1998
------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
Manufacturing $ 1,357 $ 1,206 $ 1,234
Recycling 463 302 415
Marketing and Trading 903 802 788
Operating profit (loss):
Manufacturing 74.7 83.8 74.8
Recycling 5.8 (5.0) (1.4)
Marketing and Trading 19.2 22.6 20.6
</TABLE>
12
<PAGE> 14
2000 COMPARED TO 1999
MANUFACTURING The manufacturing segment includes the CMC steel group and Howell
Metal Company.
Net sales for the fiscal year ended August 31, 2000, for the manufacturing
segment increased by 13% from the prior year. This increase was primarily due to
increased tons shipped. Operating profit for the segment decreased by 11% from
the prior year's record earnings. This decrease was caused by an increase in
scrap costs for the steel mills (which was only partially mitigated by
year-to-year mill total sales price increases) and a decline in fabrication
sales prices. Also, losses were sustained at the South Carolina mill and on
several large, complex structural steel fabrication jobs at SMI-Owen. These
factors were partially offset by record earnings at the copper tube mill. The
Company incurred pre-tax LIFO expense of $5.2 million, a substantial difference
from the $15.9 million LIFO income reported in the prior year.
<TABLE>
<CAPTION>
August 31,
-----------
2000 1999
---- ----
<S> <C> <C>
Average mill selling price-total sales $306 $299
Average mill selling price-
finished goods only 314 317
Average fab selling price 647 677
Average scrap purchase price 91 76
</TABLE>
Operating profit for the four steel mills was 26% below fiscal 1999
primarily due to a loss at the South Carolina mill, difficult markets, and
increased depreciation, amortization and interest expenses. Tons melted and
rolled increased 17% and 25%, respectively, while shipments rose by 10% to 1.9
million tons. Production increased substantially at both SMI-Alabama and
SMI-South Carolina, benefiting from the significant capital investments made in
the prior year. For the year ended August 31, 2000, the average mill selling
price for finished goods decreased $3 per ton (1%), and in the fourth quarter
declined by $19 per ton from the third quarter to end the year at an average of
$314. Margins were squeezed as the average scrap purchase cost for the mills
increased $15 per ton (20%) in the current year to $91 per ton. Sales prices
were impacted negatively by unprecedented import levels in some of the major
product lines. Also, higher energy costs impacted mill operating results. The
Company received $2.3 million pre-tax in fiscal 2000 versus $8.1 million in 1999
from graphite electrode antitrust litigation settlements. Excluding the graphite
electrode settlements, operating profit at SMI-Alabama increased 55% from the
prior year and was substantially the same at SMI-Texas. Also, operating profit
at SMI-Arkansas improved 32% from the prior year. Although production at the new
SMI-South Carolina rolling mill was at record levels, marketing was slower than
anticipated while depreciation and amortization expenses increased by $8.9
million. Intercompany interest costs increased by $6.3 million as little
interest was capitalized. The net result was a $9.7 million operating loss at
this location.
The computer migration project was substantially completed during the first
half of fiscal 2000. Computer migration costs were $3.7 million pre-tax,
substantially less than the $10.9 million incurred in the prior year.
Fiscal 2000 was another good year in the Company's downstream steel
fabrication businesses. Net sales increased by 9% from 1999, but operating
profits (excluding the large steel fabrication jobs at SMI-Owen) decreased 7%.
Fabricated steel shipments totaled 955,000, 14% more than the previous record
setting year. This was offset by a decrease in prices of $30 per ton (4%) caused
by competitive pressures, and $21 million of operating losses from some large,
older and complex structural steel jobs fabricated by SMI-Owen. SMI-Owen
realized a net pre-tax gain of $5.5 million from the sale of land and
improvements. In May 2000, the Company
13
<PAGE> 15
acquired substantially all of the assets of two rebar fabrication operations in
Southern California: Fontana Steel, Inc., with operations in Rancho Cucamonga,
San Marcos and Stockton, and C&M Steel, Inc. in Fontana. These acquisitions
expanded the Company's market penetration to the largest rebar market in the
United States. Also, in March 2000, the Company purchased substantially all of
the operating assets of Bell-Barcelona Concrete Accessories, further expanding
its concrete-related products business in the Houston, Texas, area. The purchase
prices for these acquisitions were not significant to the Company. The new
cellular beam facility in Arkansas continued to progress as an adjunct to the
steel joist business.
Fiscal 2000 was a record year for Howell Metal Company, the Company's
copper tube mill in Virginia. Production increased by 12%, and operating profit
increased by nearly 50% from the prior year. Shipments increased by 13% to a
record 58 million pounds. Metal spreads improved by 19%. Residential
construction, the principal economic driver, remained strong during fiscal 2000.
Capital improvements for the Company decreased significantly to $70 million
from the record $142 million spent in 1999, primarily in the manufacturing
segment. The prior year's amount included the completion of the new rolling mill
and ancillary equipment at SMI-South Carolina and a new finishing line at
SMI-Alabama. During fiscal year 2000, significant projects included the planned
expansion in progress at the copper tube mill and the installation of a ladle
metallurgical station at SMI-South Carolina. The copper tube mill expansion will
ultimately increase production by approximately 50%, improve productivity and
expand the product lines.
RECYCLING The recycling segment generated operating profit of $5.8 million for
the year ended August 31, 2000, compared to a $5.0 million operating loss in the
prior year. Fiscal 2000 was a record year for tons processed and shipped, which
increased 16%. With an increase in selling prices of $15 per ton above the
previous depressed period, net sales increased 53%. Ferrous prices, however,
fell consistently during the second half of fiscal 2000. The supply of scrap,
including continued high imports of ferrous raw materials, was plentiful and
more than met demand. Nonferrous markets were relatively firm and supply was
more balanced; consequently, prices were steadier. Nonferrous prices and volumes
were up approximately 19% and 18%, respectively. Processing costs for the
segment decreased from 16.4% of sales in 1999 to 13.2% in fiscal 2000 as a
result of the regional organizational restructuring implemented in 1999.
The total volume of scrap processed and shipped in 2000, including the CMC
steel group operations, increased 17% to 2.4 million tons.
MARKETING AND TRADING The marketing and trading segment's performance was
consistent despite unstable and relatively poor global conditions in many of its
product lines. Net sales increased in fiscal 2000 by 13% to $903 million.
Operating profits were 15% lower than the prior year because most steel prices
denominated in U.S. dollars fell during the latter part of the year, and gross
margins in steel marketing and distribution as well as steel trading were tight.
Anti-dumping activity and other forms of protectionism around the world, as well
as the strong U.S. dollar and weak Euro, continued to affect the regional flow
of products. The Company achieved further market penetration in highly
competitive markets for nonferrous metal products and maintained profitability
through product line expansion. Profits were lower for industrial raw materials
and products although shipments generally were higher. The Company continued to
build its business in the marketing of ferrous raw materials.
During fiscal 2000, the Company added and developed quality people in sales
and administration to provide for long-term growth. This was achieved by
continuing to diversify and build the business in added product and geographic
areas and expanding regional trade. The Company continued to increase its
presence in the processing of the materials and products,
14
<PAGE> 16
which it buys and sells. As marketing and trading functions constantly evolve,
the Company has been a leader in instituting changes. During the fourth quarter,
the Company acquired an 11% stake and executed a long-term marketing and trading
agreement with a Czechoslovakian steel mill, Trinecke Zelezarny, one of its key
European suppliers.
NEAR-TERM OUTLOOK
Despite currently poor market conditions for many of the Company's
products, management anticipates that fiscal year 2001 will be more profitable
than the current year, primarily based on internal improvements. The second half
of the new year should be better than the first half, as the earlier part of the
year will be impacted by the strong U.S. dollar, customer inventory reductions,
high energy prices and a slowing of the global economy. Management expects some
easing of these conditions by mid-year fiscal 2001. Construction markets should
remain firm, especially spending for highways and bridges, institutional
buildings and power plants. Highway construction should accelerate because
projects have been behind schedule. The Company's successes of recent years and
strong financial condition leave it in an excellent position for further growth.
Overall, the Company anticipates higher sales, production and shipments
from its steel mills in fiscal 2001. Although several price decreases that were
announced during the fourth quarter 2000 will pressure margins for the first
half of fiscal 2001, a favorable development occurred on August 14, 2000, when
the U.S. International Trade Commission continued the rebar dumping trade cases
against eight of the offending countries which comprise about 80% of rebar
imports. As the new year progresses, rebar and merchant bar prices should
increase moderately, and shipments should accelerate. Management anticipates
that the operating results at SMI-South Carolina will improve with better market
conditions and a product mix balanced with higher value-added products. Also,
the CMC steel group plans to continue its growth in rebar fabrication, joists,
specialty beams, niche applications of structural steel, fence posts,
concrete-related products, heat treating of steel and other related fabricated
steel products and components. For example, the Company is expanding its new
cellular beam product line with a new facility in Virginia. During the latter
part of fiscal 2000, the Company began to show progress in improving the
operations at SMI-Owen. Management expects that this improvement will continue
into the new fiscal year.
Production and shipments are expected to increase during fiscal 2001 with
the commissioning of the 50% expansion of the Company's copper tube mill. Also,
the product line will be broader with this addition.
Both ferrous and nonferrous operations in the recycling segment should be
profitable for fiscal 2001, although the first half of the year will be
difficult because of the poor steel scrap market. The Company is poised to
capitalize on better markets and to continue its turnaround and rationalization
at underperforming facilities.
The marketing and trading segment began the new year with continued
penetration in marketing and distribution while maintaining a strong presence in
the trading or indent side of the business. During 2001, management will further
its focus on value-added businesses whereby the product range is broadened and
more services are provided to both the customer and the supplier.
Following two years of record levels of capital expenditures, spending was
reduced to $70 million in fiscal 2000. The Company plans to increase capital
expenditures by 19% to $83 million for fiscal 2001. The increase is partially
due to several projects that were deferred and
15
<PAGE> 17
carried over from the prior year. There are no major projects planned at the
steel mills for fiscal 2001, rather smaller enhancements and maintenance
expenditures. The Company plans to continue its expansion in downstream
businesses, both acquisitions and greenfield operations. All segments will also
focus on improving or disposing of underperforming operations, especially if
they no longer fit the Company's strategic direction. The Company's business
plan also provides for repurchases of the Company's undervalued shares.
Overall, pricing and volume in the Company's segments should improve as
supply and demand come into better balance in the second half of fiscal 2001.
Additionally, the share repurchases will have an even greater impact on earnings
per share than they did for fiscal 2000.
LONG-TERM OUTLOOK
The Company is poised to move to the next level in net sales and net income
at its steel minimills. The mills are versatile, flexible, highly productive and
produce high quality products. Finished product capacity at the combined mills
has increased to 2.3 million tons. Steel fabrication will continue to be an
essential element of the Company's vertical integration strategy and a growing
part of its overall business. Infrastructure growth in the U.S. and elsewhere
will be a catalyst for increased demand for the Company's steel products. The
Company's strong regional presence in the copper tube industry is a solid
building block for further profitability and expansion. Management believes that
the long-term demand for scrap will continue to grow and that the Company's
regional volume will increase. In the marketing and trading segment, the Company
will continue to diversify and build business in new products and geographic
areas. The segment will build further on strategic alliances among suppliers and
customers.
To achieve profits and return on capital employed, management believes that
consolidation within the steel industry is imperative. The reasons are
compelling, the foremost of which are the depressed equity valuations in the
entire metals sector, the fact that very few companies in the industry earn
their cost of capital, the necessity for the rationalization of non-competitive
capacity and more effective marketing.
The Company is committed to creating long-term growth and building earnings
through continuous internal improvements, a focus on cash flows, strong regional
positions and outstanding people.
The sections regarding segments and near- and long-term outlook contain
forward-looking statements regarding the outlook for the Company's financial
results including product pricing and demand, capacity increases, efficiency
improvements and general market conditions. There is inherent risk and
uncertainty in any forward-looking statements. Variances will occur and some
could be materially different from management's current opinion. Developments
that could impact the Company's expectations include interest rate changes,
construction activity, difficulties or delays in the execution of construction
contracts resulting in cost overruns or contract disputes, metals pricing over
which the Company exerts little influence, increased capacity and product
availability from competing steel minimills and other steel suppliers including
import quantities and pricing, global factors including credit availability,
currency fluctuations, energy prices, and decisions by governments impacting the
level and pace of overall economic activity.
16
<PAGE> 18
1999 COMPARED TO 1998
SEGMENTS
MANUFACTURING Although net sales decreased 2%, operating profit increased 12%
for the year ended August 31, 1999. These were record earnings despite weaker
steel mill prices stemming from low-priced steel imports. Shipments by the four
minimills totaled 1.7 million tons versus 2.0 million tons the prior year. 1999
was another record year in the downstream steel fabrication businesses with
841,000 tons shipped, a slight increase from fiscal year 1998. Copper tube
results were outstanding as the strong housing market and lower copper scrap
prices doubled operating profit. Copper tube annual shipments were comparable at
51 million pounds. Lower prices in the manufacturing segment resulted in pre-tax
LIFO income of $15.9 million, a substantial increase from the $3.2 million
reported in 1998.
<TABLE>
<CAPTION>
August 31,
-----------
1999 1998
---- ----
<S> <C> <C>
Average mill selling price $299 $322
Average fab selling price 677 660
Average scrap purchase price 76 113
</TABLE>
Operating profit for the four steel minimills combined was 13% below 1998.
Although underlying demand was strong, shipments declined 16% to 1.7 million
tons while production levels were down comparably because of construction
interference caused by capital projects in South Carolina and Alabama and the
unprecedented import levels. Conversely, margins were aided by lower scrap
purchase prices. While the average mill selling price was $23 per ton (7%) below
the prior year, average scrap purchase costs were lower by $37 per ton (33%).
The Company received pre-tax $8.1 million in settlements from graphite electrode
antitrust litigation. Primarily as a result of the decline in shipments,
operating profit at SMI-Arkansas, SMI-Alabama, and SMI-South Carolina decreased
by 20%, 59% and 38%, respectively. In spite of transformer downtime, strong
results continued at SMI-Texas, with a 17% increase in operating profit from the
prior year.
Computer migration costs were $10.9 million in 1999 compared to $8.6
million in 1998.
The Company had a record $142 million in capital spending for fiscal 1999,
primarily at the steel minimills. The major capital projects for 1999 were the
completion of the new rolling mill and ancillary equipment at SMI-South Carolina
and a new finishing line at SMI-Alabama. Commissioning was in April and June
1999, respectively.
Fiscal year 1999 was another record year in the CMC steel group's
downstream fabrication businesses. Net sales increased by 8% from 1998, and
operating profits increased 39%. This strong performance was in spite of $13.1
million in operating losses sustained on some large and complex structural steel
jobs. While fabricated steel shipments totaled 841,000 tons, only marginally
increased from the prior year, the average fab selling price rose $17 per ton
(3%), partially due to product mix. Additionally, a new castellated beam and
cellular beam product line was developed as an adjunct to the steel joist
business.
During the third quarter 1999, the Company acquired substantially all of
the assets of Construction Materials, Inc., headquartered in Baton Rouge,
Louisiana, which complements the Shepler's group concrete-related products
business. The purchase price was not significant to the Company.
17
<PAGE> 19
Production increased by 3%, and earnings more than doubled for the
Company's copper tube mill for 1999. Although shipments only increased by 1%,
spreads increased by 34% benefiting from lower copper scrap prices. The
principal economic driver remained housing starts and renovation, as residential
construction remained strong during fiscal year 1999.
RECYCLING The recycling segment continued to be hampered by difficult market
conditions during 1999. The secondary metals processing division reported an
operating loss of $5.0 million compared with an operating loss of $1.4 million
for the prior year. However, cash flows from operations (before changes in
operating assets and liabilities) were positive for the year. Together with very
weak market conditions for ferrous and nonferrous scrap, the failed
consolidation of the industry had a major negative influence on profitability in
1999. The poor markets were reflected in a 27% drop in net sales, from $415
million for 1998 to $302 million for 1999. Processing costs also decreased, but
margins fell even further.
The average price of steel scrap fell by $33 per ton to $90, and ferrous
scrap volume was 3% lower. Consequently, ferrous scrap operations were
unprofitable even though costs were reduced. Nonferrous prices, on the other
hand, stabilized in a trading range, shipments increased by 4% and nonferrous
operations were slightly profitable. The division's regional management
restructuring which occurred in the prior year resulted in lower operating costs
and inventories.
In fiscal year 1999, a number of operational improvements continued to be
made including installation of a new shear in Houston which started up during
late August 1999.
The total volume of scrap processed in 1999, including the CMC steel group
operations, increased 5% to 2.0 million tons.
MARKETING AND TRADING During 1999, the marketing and trading segment continued
its remarkable performance in the face of crises in Asia, Russia and Latin
America. Net sales increased by 2% to $802 million, and operating profit was 10%
higher for 1999 than the prior year. Steel prices were substantially lower in
1999 than the prior year, and gross margins in steel marketing and distribution
as well as steel trading remained tight. Anti-dumping activity and other forms
of protectionism around the world continued to affect the flow of products.
Nevertheless, sales into the United States and Europe increased and compensated
for the decreased sales into Asia. The segment achieved further market
penetration in highly competitive markets for nonferrous metal products and
maintained profitability through product line expansion. Profits were moderately
lower for industrial raw materials and products, but shipments generally were
higher. Participation in the marketing of ferrous raw materials continued to
grow.
During 1999, the segment continued to diversify and build business in new
product and geographic areas, and added key personnel. The marketing and trading
segment's international division reaped the rewards from a 1998 joint venture
with a large European mill giving the Company exclusive rights to sell steel to
the German market. Resulting net sales from this endeavor were significantly
more than anticipated. Regional trade continued to grow, as well as increased
presence in the processing of the materials and products which are bought and
sold.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations (before changes in operating assets and
liabilities) for the year ended August 31, 2000, were a record $116 million
compared to $103 million for fiscal year 1999. However, increases in operating
assets reduced the cash flows from operating activities from the prior year's
record levels. Accounts receivable significantly increased in all segments
mostly due to increased sales volumes and prices. Also, accounts receivable in
the steel group was higher
18
<PAGE> 20
due to acquisitions during fiscal 2000. Inventories increased in the steel group
due to higher scrap purchase prices as well as the new operations acquired in
fiscal 2000. Other assets increased due to refundable federal income taxes,
increased funding for the Company's nonqualified employee benefits plan, and
increased claims receivable on a large structural steel job in the steel group.
Also depreciation and amortization expenses increased primarily due to the
fiscal 1999 capital projects at South Carolina and Alabama.
Cash flows from operating activities were invested in new equipment,
primarily in the manufacturing segment (particularly at the South Carolina mill
for a new ladle metallurgical station and at Howell Metal Company's plant
expansion). During fiscal 2000, the steel group sold land and improvements
grossing $8.4 million after which costs related to the sale and escrows resulted
in a net gain of $5.5 million (pre-tax).
Net working capital was $276 million as of August 31, 2000, compared to
$288 million last year. The current ratio decreased slightly to 1.6 versus 1.8
at the prior year end.
The Company's sources of short-term funds include a commercial paper
program of $200 million, an increase of $100 million from the prior year. The
Company's commercial paper is rated in the second highest category by Moody's
Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch (F-2).
Formal bank credit lines equal to 100% of the amount of all commercial paper
outstanding are maintained.
In 1999 the Company filed a shelf registration of $200 million of long- and
medium-term notes, of which $100 million were sold in February 1999. The
proceeds were then used to retire short-term borrowings.
The Company's $250 million long-term notes issued in February 1999 ($100
million), July 1997 ($50 million) and July 1995 ($100 million) are rated
investment grade by Standard & Poor's Corporation and Fitch (BBB+) and by
Moody's Investors Service (Baa1).
The Company has numerous informal credit facilities available from domestic
and international banks. These credit facilities are priced at bankers'
acceptance rates or on a cost of funds basis.
Management believes it has adequate capital resources available from
internally generated funds and from short-term and long-term capital markets to
meet anticipated working capital needs, 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 $70 million in
2000 compared to a record $142 million the prior year. Capital spending for
fiscal 2001 is projected to be $83 million. The most important planned projects
are the expansion of the downstream businesses in steel fabrication, both
through acquisition and greenfield operations.
Total capitalization was $714 million at the end of fiscal 2000, slightly
up from the prior year. The ratio of long-term debt to capitalization was 36.7%,
down from 37.5% last year. Stockholders' equity was $421 million or $31.93 per
share. During the fiscal year, the Company repurchased 1,465,100 shares of
Company stock at an average cost of $28.62 per share. At year end, the Company
had remaining an additional 305,281 shares authorized for repurchase. On August
31, 2000, 2,959,908 treasury shares were held by the Company. There were
13,172,675 shares outstanding at year end.
19
<PAGE> 21
CONTINGENCIES
CONSTRUCTION CONTRACT DISPUTES A subsidiary of the Company entered into a fixed
price contract with the design/builder general contractor (D/B) to furnish,
erect and install structural steel, hollow core pre-cast concrete planks,
fireproofing, and certain concrete slabs along with related design and
engineering work for the construction of a large hotel and casino complex
(Project). In connection with the contract, the D/B secured insurance under a
subcontractor/vendor default protection policy (Policy) which named the Company
as an insured in lieu of performance and payment bonds. A large subcontractor to
the Company defaulted, and the Company incurred unanticipated costs to complete
the work. The Company has made a claim under the Policy for all losses, costs,
and expenses incurred by the Company arising from or related to the default, of
which $6.6 million was recorded in other assets at August 31, 2000. Although the
insurance company paid or escrowed partial payment of certain claims resulting
from the default, it is now contesting the nature and extent of the Policy's
coverage and may take the position that the Policy is void due to
misrepresentations and omissions by the D/B and the insurance broker. The
Company filed suit against the insurance company and broker in March 2000.
Management intends to vigorously pursue recovery of all damages incurred by the
Company resulting from the default as well as damages arising from the insurance
company's breaches of duties owed to the Company under the Policy. The Project
is complete and no material additional construction costs are anticipated.
Disputes between the Company and the D/B have been submitted to binding
arbitration. In August 2000, the Company filed a claim for $27.4 million against
the D/B. The claim seeks recovery of damages to the extent coverage is denied
under the Policy discussed above, unpaid contract receivables, amounts for delay
claims and change orders all of which have not been paid by the D/B. At August
31, 2000 and 1999, the Company maintained contract receivables of $7.2 million
and $6.4 million, respectively, from the D/B. Such amounts are included within
other assets on the accompanying balance sheets. The D/B has not disputed
certain amounts owed under the contract, but contends that other deductive
items, disputed by the Company, reduce the contract balance by approximately
$6.3 million which together with other D/B claims (discussed below) exceed the
unpaid contract balance. The Company disputes the deductive items in the D/B's
claim and intends to vigorously pursue recovery of the contract balance in
addition to all amounts, if any, not recovered under the Policy as a result of
misrepresentations or omissions of the D/B.
The owner of the Project and the D/B have filed joint claims in the
arbitration proceeding against the Company, primarily for alleged delay damages,
in the amount of $127 million which includes alleged delay damages in
construction of a retail area adjacent to the Project. Management believes the
claims are generally unsubstantiated, and the Company has valid legal defenses
against such claims and intends to vigorously defend these claims. Management is
unable to determine a range of potential loss related to such claims, and
therefore no losses have been accrued; however, it believes the ultimate
resolution will not have a material effect on the Company's consolidated
financial statements. Due to the uncertainties inherent in the estimating
process, it is at least reasonably possible that a change in the Company's
estimate of its collection of accounts receivable and possible liability could
occur in the near term.
The Company is involved in various other claims and lawsuits incidental to
its business. In the opinion of management, these claims and suits in the
aggregate will not have a material adverse effect on the results of operations
or the financial position of the Company.
ENVIRONMENTAL AND OTHER MATTERS In the ordinary course of conducting its
business, the Company becomes involved in litigation, administrative proceedings
and governmental investigations, including environmental matters.
20
<PAGE> 22
The Company's origin and one of its core businesses for over eight decades
has been metals recycling. In the present era of conservation of natural
resources and ecological concerns, the Company has a continuing commitment to
sound ecological and business conduct. Certain governmental regulations
regarding environmental concerns, however well intentioned, are presently at
odds with goals of greater recycling and expose the Company and the industry to
potentially significant risks. Such exposures are causing the industry to
shrink, leaving fewer operators as survivors to face the challenge.
The Company believes that materials that are recycled are commodities that
are neither discarded nor disposed. They are diverted by recyclers from the
solid waste streams because of their inherent value. Commodities are materials
that are purchased and sold in public and private markets and commodities
exchanges every day around the world. They are identified, purchased, sorted,
processed and sold in accordance with carefully established industry
specifications.
Environmental agencies at various federal and state levels would classify
certain recycled materials as hazardous substances and subject recyclers to
material remediation costs, fines and penalties. Taken to extremes, such actions
could cripple the recycling industry and undermine any national goal of material
conservation. Enforcement, interpretation, and litigation involving these
regulations are not well developed.
The Company has received notices from the U.S. Environmental Protection
Agency (EPA) or equivalent state agency that it is considered a potentially
responsible party (PRP) at fourteen 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 liability at the sites. 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 2000, the Company incurred environmental expense of $11.5
million. This included the cost to staff environmental personnel at various
divisions, permit and license fees, accruals and payments for studies, tests,
assessment, remediation, consultant fees, baghouse dust removal and various
other expenses. The Company estimates that approximately $600 thousand of its
capital expenditures for fiscal 2000 related to costs directly associated with
environmental compliance. At August 31, 2000, $5.0 million remained accrued for
environmental liabilities, of which $2.0 million was in other long-term
liabilities.
21
<PAGE> 23
DIVIDENDS
Quarterly cash dividends have been paid in each of the past 36 consecutive
years. The annual dividend in 2000 was 52 cents a share paid at the rate of 13
cents each quarter.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, (as amended) is effective for the
Company as of September 1, 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. Adoption of these new accounting standards will result in
cumulative after-tax increases in net earnings of $315 thousand and other
comprehensive income of $126 thousand in the first quarter of fiscal 2001. The
adoption will also impact associated assets and liabilities. Certain of the
Company's derivative instruments will not be designated as hedges for accounting
purposes. Management believes that the changes in fair value of these
instruments will not significantly impact the results of operations or financial
position of the Company.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December,
1999, and it is effective for the Company beginning in the first quarter of
fiscal 2001. The SAB (as amended) summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Management believes that its revenue recognition policies
are in substantial compliance with the SAB and the effect of implementation will
not be material.
EURO
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the Euro as their common legal currency and established
fixed conversion rates between their existing sovereign currencies and the Euro.
The existing sovereign currencies remain legal tender in the participating
countries during the transition period ending on January 1, 2002. The Company
has adequate information systems for compliance with the requirements of this
new currency. The Company does not anticipate that the adoption of the Euro will
have a material impact on its results of operations, financial position or
liquidity.
22
<PAGE> 24
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 economically effective as hedges of underlying
physical transactions. The accompanying information mandated by the
Securities and Exchange Commission should be read in conjunction with
footnotes 1 and 4 to the annual financial statements.
FOREIGN EXCHANGE The Company enters into foreign exchange contracts as
economic hedges of trade commitments or anticipated commitments 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. Certain
information in the accompanying chart assumes that the foreign exchange
contracts were settled at August 31, 2000; this would defeat their purpose
as economic 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, 2000, $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 6.59% and the fixed rate 5.5%. At August 31,
2000, it had a fair value of $128,000.
COMMODITY PRICES Pricing of certain sales and purchase commitments is fixed
to forward metal commodity exchange quotes. The Company enters into metal
commodity contracts for copper, aluminum, and zinc to mitigate the risk of
unanticipated declines in gross margins on these commitments due to the
volatility of the metal commodity indexes. Of these, copper is the most
predominant. The derivative instruments 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. 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.
23
<PAGE> 25
FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS AS OF AUGUST 31, 2000:
<TABLE>
<CAPTION>
Range of U.S. $
Amount Currency Hedge Rates Equivalent
---------- ----------------- ------------- ------------
<S> <C> <C> <C>
6,519,000 German mark 1.8601-2.2105 $ 3,134,000
15,011,000 ECU .944-1.111 13,823,000
5,500,000 Swiss franc 1.646-1.718 3,381,000
1,300,000 Singapore dollar 1.7155-1.7225 757,000
4,631,000 British pound .6592-.6910 6,846,000
29,235,000 Australian dollar .5698-.6666 17,429,000
1,140,000 Canadian dollar .6727-.6917 776,000
---------- ----------------- ------------- ------------
46,146,000
Revaluation as of August 31, 2000, at quoted market 44,727,000
--------------------------------------------------- ------------
Settlement gain $ 1,419,000
</TABLE>
o Substantially all foreign currency exchange contracts mature within one year.
o As of August 31, 2000, foreign currency exchange contracts had no book
carrying value until maturity. They were considered reductions in otherwise
available bank credit lines.
<TABLE>
<S> <C>
AS OF AUGUST 31, 1999:
Revaluation at quoted market $ 65,388,000
Settlement gain $ 356,000
</TABLE>
METAL COMMODITY CONTRACT COMMITMENTS AS OF AUGUST 31, 2000:
<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 55 25 MT 1375 MT $ 1540-1885 $ 2,424,000
Copper Short 65 25 MT 1625 MT 1582-1876 2,863,000
Zinc Long 10 25 MT 250 MT 1077-1135 278,000
Aluminum Long 16 25 MT 400 MT 1517-1586 619,000
Aluminum Short 27 25 MT 675 MT 1555-1617 1,075,000
New York Mercantile Per 100/wt.
Exchange Copper Long 208 25,000 lbs. 5.2 MM lbs. 69.10-89.50 4,451,000
Commodities Division
(Comex) Copper Short 178 25,000 lbs. 4.5 MM lbs. 86.25-89.70 3,915,000
-------------------- ------ ----- ---- ----------- ----------- ----------- -----------
15,625,000
Revaluation as of August 31, 2000, at quoted market 15,491,000
--------------------------------------------------- -----------
Settlement gain $ 134,000
</TABLE>
o Three lots mature after one year
o MT = Metric Tons
o MM = Millions
o As of August 31, 2000, metal commodity contracts had no book carrying value
until maturity. A two million dollar letter of credit stands as margin
requirement for Comex transactions.
<TABLE>
<S> <C>
AS OF AUGUST 31, 1999:
Revaluation at quoted market $10,101,000
Settlement gain $ 288,000
</TABLE>
24
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year ended August 31,
------------------------------------
(in thousands, except share data) 2000 1999 1998
--------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net sales $2,661,420 $2,251,442 $2,367,569
Costs and expenses:
Cost of goods sold 2,333,930 1,948,596 2,083,036
Selling, general and administrative
expenses 208,808 192,233 178,961
Interest expense 27,319 19,650 18,055
Employees' retirement plans 18,108 15,933 19,448
---------- ---------- ----------
2,588,165 2,176,412 2,299,500
---------- ---------- ----------
Earnings before income taxes 73,255 75,030 68,069
Income taxes 27,000 27,910 25,355
---------- ---------- ----------
Net earnings $ 46,255 $ 47,120 $ 42,714
========== ========== ==========
Basic earnings per share $ 3.30 $ 3.25 $ 2.88
========== ========== ==========
Diluted earnings per share $ 3.25 $ 3.22 $ 2.82
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 27
Commercial Metals Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
------------------------
(in thousands, except share data) 2000 1999
--------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 20,067 $ 44,665
Accounts receivable (less allowance for collection
losses of $7,868 and $7,714) 357,719 297,849
Inventories 277,455 249,688
Other 59,777 53,894
---------- ----------
Total current assets 715,018 646,096
Property, plant and equipment:
Land 27,984 25,927
Buildings 97,566 87,796
Equipment 676,369 635,054
Leasehold improvements 31,507 30,119
Construction in process 22,702 25,351
---------- ----------
856,128 804,247
Less accumulated depreciation and amortization (448,616) (401,975)
---------- ----------
407,512 402,272
Other assets 50,332 30,969
---------- ----------
$1,172,862 $1,079,337
========== ==========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 28
<TABLE>
<CAPTION>
August 31,
---------------------------
(in thousands, except share data) 2000 1999
--------------------------------- ------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 79,000 $ 10,000
Notes payable 13,466 4,382
Accounts payable 194,538 191,508
Other payables and accrued expenses 142,680 139,977
Income taxes payable 678 2,025
Current maturities of long-term debt 8,828 9,873
----------- -----------
Total current liabilities 439,190 357,765
Deferred income taxes 31,131 23,263
Other long-term liabilities 20,041 14,261
Long-term debt 261,884 265,590
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 13,172,675 and 14,406,260
shares 80,663 80,663
Additional paid-in capital 14,231 14,131
Accumulated other comprehensive loss (1,591) (774)
Retained earnings 407,128 368,177
----------- -----------
500,431 462,197
Less treasury stock 2,959,908 and 1,726,323 shares
at cost (79,815) (43,739)
----------- -----------
420,616 418,458
----------- -----------
$ 1,172,862 $ 1,079,337
=========== ===========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 29
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
August 31,
------------------------------------
(in thousands) 2000 1999 1998
-------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 46,255 $ 47,120 $ 42,714
Adjustments to earnings not requiring cash:
Depreciation and amortization 66,583 52,054 47,460
Provision for losses on receivables 948 1,877 2,898
Deferred income taxes 7,868 1,887 542
Gain on sale of property and other (5,570) (68) (164)
--------- --------- ---------
Cash Flows from Operations Before Changes in
Operating Assets and Liabilities 116,084 102,870 93,450
Changes in Operating Assets and Liabilities:
Decrease (increase) in accounts receivable (60,818) 18,929 (33,104)
Decrease (increase) in inventories (27,767) 7,543 (36,587)
Decrease (increase) in other assets (29,046) (5,809) (30,457)
Increase (decrease) in accounts payable,
accrued expenses, and income taxes 4,385 29,155 42,968
Increase (decrease) in other long-term
liabilities 5,780 5,606 4,161
--------- --------- ---------
Net Cash Flows from Operating Activities 8,618 158,294 40,431
CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (69,627) (141,752) (119,915)
Sales of property, plant and equipment 9,323 4,247 1,418
Other investments (2,966) -- --
--------- --------- ---------
Net Cash Used by Investing Activities (63,270) (137,505) (118,497)
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:
Commercial paper-net change 69,000 (30,000) 40,000
Notes payable-net change 9,084 (56,427) 60,809
New long-term debt -- 100,000 --
Payments on long-term debt (4,750) (9,809) (11,441)
Stock issued under stock option,
purchase, and bonus plans 5,958 3,679 9,134
Treasury stock acquired (41,934) (7,012) (14,732)
Dividends paid (7,304) (7,540) (7,717)
--------- --------- ---------
Net Cash Provided (Used) by Financing Activities 30,054 (7,109) 76,053
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents (24,598) 13,680 (2,013)
Cash and Cash Equivalents at Beginning of Year 44,665 30,985 32,998
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 20,067 $ 44,665 $ 30,985
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 30
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Accumulated
------------------------------ Additional Other
Number of Paid-In Comprehensive
(in thousands, except share data) Shares Amount Capital Loss
--------------------------------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, September 1, 1997 16,132,583 $ 80,663 $ 13,627
Comprehensive Income:
Net earnings
Other comprehensive loss--
Foreign currency translation
adjustment, net of taxes of $859 $ (1,596)
Comprehensive Income
Cash dividends--$.52 per share
Treasury stock acquired
Stock received from
escrow upon settlement
of Owen lawsuit
Stock issued under stock option,
purchase and bonus plans (237)
Tax benefits related to stock
option plan 895
---------- ---------- ---------- ----------
Balance, August 31, 1998 16,132,583 80,663 14,285 (1,596)
---------- ---------- ---------- ----------
Comprehensive Income:
Net earnings
Other comprehensive income--
Foreign currency translation
adjustment, net of taxes of $442 822
Comprehensive Income
Cash dividends--$.52 per share
Treasury stock acquired
Stock issued under stock option,
purchase and bonus plans (560)
Tax benefits related to stock
option plan 406
---------- ---------- ---------- ----------
Balance, August 31, 1999 16,132,583 80,663 14,131 (774)
---------- ---------- ---------- ----------
Comprehensive Income:
Net earnings
Other comprehensive loss--
Foreign currency translation
adjustment, net of taxes of $440 (817)
Comprehensive Income
Cash dividends--$.52 per share
Treasury stock acquired
Stock issued under stock option,
purchase and bonus plans (174)
Tax benefits related to stock
option plan 274
---------- ---------- ---------- ----------
Balance, August 31, 2000 16,132,583 $ 80,663 $ 14,231 $ (1,591)
========== ========== ========== ==========
<CAPTION>
Treasury Stock
--------------------------------
Retained Number of
(in thousands, except share data) Earnings Shares Amount Total
--------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, September 1, 1997 $ 293,600 (1,371,653) $ (33,018) $ 354,872
Comprehensive Income:
Net earnings 42,714 42,714
Other comprehensive loss--
Foreign currency translation
adjustment, net of taxes of $859 (1,596)
---------
Comprehensive Income 41,118
Cash dividends--$.52 per share (7,717) (7,717)
Treasury stock acquired (496,000) (14,732) (14,732)
Stock received from
escrow upon settlement
of Owen lawsuit (47,316) (1,286) (1,286)
Stock issued under stock option,
purchase and bonus plans 351,997 8,476 8,239
Tax benefits related to stock
option plan 895
---------- ---------- ---------- ---------
Balance, August 31, 1998 328,597 (1,562,972) (40,560) 381,389
---------- ---------- ---------- ---------
Comprehensive Income:
Net earnings 47,120 47,120
Other comprehensive income--
Foreign currency translation
adjustment, net of taxes of $442 822
---------
Comprehensive Income 47,942
Cash dividends--$.52 per share (7,540) (7,540)
Treasury stock acquired (314,400) (7,012) (7,012)
Stock issued under stock option,
purchase and bonus plans 151,049 3,833 3,273
Tax benefits related to stock
option plan 406
---------- ---------- ---------- ---------
Balance, August 31, 1999 368,177 (1,726,323) (43,739) 418,458
---------- ---------- ---------- ---------
Comprehensive Income:
Net earnings 46,255 46,255
Other comprehensive loss--
Foreign currency translation
adjustment, net of taxes of $440 (817)
---------
Comprehensive Income 45,438
Cash dividends--$.52 per share (7,304) (7,304)
Treasury stock acquired (1,465,100) (41,934) (41,934)
Stock issued under stock option,
purchase and bonus plans 231,515 5,858 5,684
Tax benefits related to stock
option plan 274
---------- ---------- ---------- ---------
Balance, August 31, 2000 $ 407,128 (2,959,908) $ (79,815) $ 420,616
========== ========== ========== =========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 31
Commercial Metals Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS The Company manufactures, recycles and markets steel
and metal products and related materials. Its manufacturing and recycling
facilities and primary markets are located in the Sunbelt from the
mid-Atlantic area through the West. Through its global marketing offices,
the Company trades steel and nonferrous metal products and other industrial
products worldwide. As more fully discussed in footnote 12, the
manufacturing segment is the most dominant in terms of capital assets and
operating profit.
CONSOLIDATION The consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany transactions
and balances are eliminated in consolidation.
REVENUE RECOGNITION Generally, sales are recognized when title passes to
the customer based on customary industry practice. Certain revenues related
to the steel fabrication operations are recognized on the percentage of
completion method. Due to uncertainties inherent in the estimation process,
it is at least reasonably possible that completion costs for certain
projects will be further revised in the near-term.
INVENTORIES Inventories are stated at the lower of cost or market.
Inventory cost for most domestic inventories is determined by the last-in,
first-out (LIFO) method; cost of international and remaining inventories is
determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at
cost and is depreciated at annual rates based upon the estimated useful
lives of the assets. Substantially all depreciation is calculated using the
straight-line method. Provision for amortization of leasehold improvements
is made at annual rates based upon the estimated useful lives of the assets
or terms of the leases, whichever is shorter.
ASSETS HELD FOR SALE Included within other assets is equipment which is no
longer used for manufacturing operations and is being held for sale. The
assets are recorded at management's best estimate of the amounts expected
to be realized upon sale. The amounts the Company will ultimately realize
could differ substantially from management's estimates.
START-UP COSTS Start-up costs associated with the acquisition and expansion
of manufacturing and recycling facilities are expensed as incurred.
INCOME TAXES Deferred income taxes are provided for temporary differences
between financial and tax reporting. The principal differences are
described in footnote 5. Benefits from tax credits are reflected currently
in earnings.
FOREIGN CURRENCY The functional currency of the Company's international
subsidiaries in Australia, the United Kingdom, and Germany is the local
currency. The remaining international subsidiaries' functional currency is
the United States dollar. Translation adjustments are reported as a
component of accumulated other comprehensive loss.
Gain or loss on foreign currency exchange contracts designated as
economic 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.
30
<PAGE> 32
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 1999 and 1998
financial statements to conform to the classifications used in the current year.
ACCOUNTING STANDARDS The Company adopted the American Institute of Certified
Public Accountants' (AICPA)Accounting Standards Executive Committee Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," on September 1, 1999. This SOP requires that
entities capitalize certain internal-use software costs once specific criteria
are met. The adoption of this SOP did not have a significant impact on the
Company's consolidated financial position or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities (as amended) is effective for the
Company as of September 1, 2000. SFAS No. 133 requires that an entity recognize
all derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. Adoption of these new accounting standards will result in
cumulative after-tax increases in net earnings of $315 thousand and other
comprehensive income of $126 thousand in the first quarter of fiscal 2001. The
adoption will also impact associated assets and liabilities. Certain of the
Company's derivative instruments will not be designated as hedges for accounting
purposes. Management believes that the changes in fair value of these
instruments will not significantly impact the results of operations or financial
position of the Company.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, in
December, 1999, and is effective for the Company beginning in the first quarter
of fiscal 2001. The SAB (as amended) summarizes certain of the SEC staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. Management believes that its revenue recognition policies
are in substantial conformity with the SAB and the effect of implementation will
not be material.
NOTE 2. INVENTORIES
Before deduction of LIFO reserves of $8,218,000 and $2,993,000 at August
31, 2000 and 1999, respectively, inventories valued under the first-in,
first-out method approximated replacement cost.
At August 31, 2000 and 1999, 71% and 72%, respectively, of total
inventories were valued at LIFO. The remainder of inventories, valued at FIFO,
consisted mainly of material dedicated to international business.
NOTE 3. CREDIT ARRANGEMENTS
The Company is active in the commercial paper market with a program that
permits borrowings up to $200 million. It is the Company's policy to maintain
formal bank credit lines equal to 100% of the amount of all commercial paper
outstanding.
On August 15, 1996, the Company arranged a five-year, $40 million unsecured
revolving credit loan facility with a group of four banks. On October 29, 1998,
an additional five-year, $60
31
<PAGE> 33
million facility was finalized with three banks. On July 14, 2000, the Company
arranged an additional 364 day, $100 million unsecured revolving credit loan
facility with a group of four banks. The agreements provide for borrowing in
United States dollars indexed to the reference rate or to the offshore dollar
interbank market rate. Commitment fees of 0.1125%, 0.1800% and 0.1000% per annum
are payable on the 1996, 1998 and 2000 credit lines, respectively. No
compensating balances are required.
The Company has numerous informal credit facilities available from domestic
and international banks. These credit facilities are priced at bankers'
acceptance rates or on a cost of funds basis. No compensating balances or
commitment fees are required under these credit facilities.
The Company filed a shelf registration for $200 million of long- and
medium-term notes, of which $100 million of investment grade, unsecured notes
were sold in February 1999 with a coupon rate of 6.75%, and an effective rate of
6.76% due in February 2009. The proceeds from the notes were used to retire
short-term borrowings. The remaining $100 million securities included in the
shelf registration can be issued until February 2001.
Long-term debt and amounts due within one year as of August 31, are as
follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
-------------- --------- ---------
<S> <C> <C>
6.75% notes due 2009 $ 100,000 $ 100,000
7.20% notes due 2005 100,000 100,000
6.80% notes due 2007 50,000 50,000
8.49% notes due 2001 14,285 21,428
8.75% notes due 1999 -- 2,141
Other 6,427 1,894
--------- ---------
270,712 275,463
Less current maturities 8,828 9,873
--------- ---------
$ 261,884 $ 265,590
========= =========
</TABLE>
All interest on these notes is payable semiannually. The 6.75% notes are
due in February 2009; the 7.20% notes are due in July 2005; the 6.80% notes in
August 2007. The 8.49% notes provide for annual principal repayments that began
in December 1995.
Certain of the note agreements include various covenants. The most
restrictive of these requires maintenance of consolidated net current assets of
$75 million and net worth (as defined) of $150 million. At August 31, 2000,
approximately $221 million 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, 2000 are (in thousands): 2001 -- $8,828; 2002 -- $9,028;
2003 -- $882; 2004 -- $879; 2005 and thereafter -- $251,095.
Interest expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended August 31,
--------------------------------
(in thousands) 2000 1999 1998
-------------- -------- -------- --------
<S> <C> <C> <C>
Long-term debt $ 18,419 $ 12,013 $ 11,568
Commercial paper 4,816 2,257 1,547
Notes payable 4,084 5,380 4,940
-------- -------- --------
$ 27,319 $ 19,650 $ 18,055
</TABLE>
32
<PAGE> 34
Interest of $808,000, $4,547,000, and $2,290,000 was capitalized in the
cost of property, plant and equipment constructed in 2000, 1999, and 1998,
respectively. Interest of $27,536,000, $24,334,000, and $20,691,000 was paid in
2000, 1999, and 1998, respectively.
NOTE 4. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISK
Management believes that the historical financial statement presentation is
the most useful for displaying the Company's financial position. However,
generally accepted accounting principles require disclosure of an estimate of
the fair value of the Company's financial instruments as of year end. These
estimated fair values disregard management intentions concerning these
instruments and do not represent liquidation proceeds or settlement amounts
currently available to the Company. Differences between historical presentation
and estimated fair values can occur for many reasons including taxes,
commissions, prepayment penalties, make-whole provisions and other restrictions
as well as the inherent limitations in any estimation technique. Because of
this, management believes this information may be of limited usefulness in
understanding the Company and minimal value in making comparisons between
companies.
Due to near-term maturities, allowances for collection losses, investment
grade ratings and security provided, the following financial instruments'
carrying amounts are considered equivalent to fair value:
o Cash and temporary investments
o Accounts receivable/payable
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) 2000 1999
-------------- -------- --------
<S> <C> <C>
Long-Term Debt:
Carrying amount $270,712 $275,463
Estimated fair value $248,208 $264,715
======== ========
</TABLE>
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 6.59% and the fixed
rate 5.5%. At August 31, 2000, it had a fair value of $128,000.
The Company does not have significant risk from off-balance-sheet financial
instruments. It enters into foreign exchange and commodity contracts to mitigate
risk when trade commitments or anticipated commitments are denominated in
currencies other than the functional currency. Effects of changes in currency
rates are therefore minimized. The notional amount of foreign currency exchange
contracts outstanding at year end was $46,146,000. The fair value of these
contracts effective as hedges if settled at August 31, 2000, would result in a
gain of $1,419,000. The Company does not hold financial instruments for trading
purposes.
Pricing of certain sales and purchase commitments is fixed to forward metal
commodity exchange quotes. The Company enters into metal commodity contracts
(predominantly copper) to mitigate the risk of unanticipated declines in gross
margins on these commitments due to the volatility of the metal commodity
indices. The derivative instruments are generally closed when
33
<PAGE> 35
the underlying sales and purchase commitments are priced, and gain or loss is
recognized when the sale or purchase is recorded. The notional amount of forward
commodity contracts outstanding at year-end was $15,625,000. The fair value of
these contracts effective as hedges if settled at August 31, 2000 would result
in a gain of $134,000.
The Company maintains both corporate and divisional credit departments.
Limits are set for customers and countries. Credit insurance is used for a
number of the Company's divisions. Letters of credit issued or confirmed through
sound financial institutions are obtained to further ensure prompt payment in
accordance with terms of sale; generally, collateral is not required.
In the normal course of its marketing activities, the Company transacts
business with substantially all sectors of the metals industry. Customers are
internationally dispersed, cover the spectrum "of manufacturing and
distribution, deal with various types and grades of metal, and have a variety of
end markets in which they sell. The Company's historical experience in
collection of accounts receivable falls within the recorded allowances. Due to
these factors, no additional credit risk beyond amounts provided for collection
losses is believed inherent in the Company's accounts receivable.
NOTE 5. INCOME TAXES
The provisions for income taxes include the following:
<TABLE>
<CAPTION>
Year ended August 31,
---------------------------
(in thousands) 2000 1999 1998
-------------- ------- ------- -------
<S> <C> <C> <C>
Current:
United States $15,661 $22,443 $21,651
Foreign 573 672 782
State and local 2,637 2,689 2,558
------- ------- -------
18,871 25,804 24,991
Deferred 8,129 2,106 364
------- ------- -------
$27,000 $27,910 $25,355
======= ======= =======
</TABLE>
Taxes of $26,363,000, $32,515,000 and $21,444,000 were paid in 2000, 1999
and 1998, 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 deferred tax liabilities (assets) associated with these differences
are:
<TABLE>
<CAPTION>
August 31,
--------------------
(in thousands) 2000 1999
-------------- -------- --------
<S> <C> <C>
Tax on difference between tax
and book depreciation $ 30,665 $ 23,388
U.S. taxes provided on foreign
income and foreign taxes 11,542 11,497
Net operating losses (less allow-
ances of $1,200 and $660) (1,090) (2,671)
Alternative minimum tax credit (1,713) (1,713)
Other accruals (2,559) (2,878)
Other (5,714) (4,360)
-------- --------
Total $ 31,131 $ 23,263
======== ========
</TABLE>
34
<PAGE> 36
The Company uses substantially the same depreciable lives for tax and book
purposes. Changes in deferred taxes relating to depreciation are mainly
attributable to differences in the basis of underlying assets recorded under the
purchase method of accounting. As noted above, the Company provides United
States taxes on unremitted foreign earnings. Net operating losses consist of $63
million of state net operating losses that expire during the tax years ending
from 2006 to 2020. These assets will be reduced as tax expense is recognized in
future periods. The $1.7 million alternative minimum tax credit is available
indefinitely.
The Company's effective tax rates were 36.9% for 2000, and 37.2% for both
1999 and 1998. Reconciliations of the United States statutory rates to the
effective rates are as follows:
<TABLE>
<CAPTION>
Year ended August 31,
--------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State and local taxes 2.3 2.3 2.6
Other (.4) (.1) (.4)
---- ---- ----
Effective tax rate 36.9% 37.2% 37.2%
==== ==== ====
</TABLE>
NOTE 6. CAPITAL STOCK
STOCK PURCHASE PLAN Substantially all employees may participate in the Company's
employee stock purchase plan. The Directors have authorized the annual purchase
of up to 200 shares per employee at a discount of 25% from the stock's price.
Annual activity of the stock purchase plan was as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Shares subscribed 165,000 187,460 161,130
Price per share $ 23.49 $ 19.50 $ 24.59
Shares purchased 136,990 39,810 138,640
Price per share $ 19.50 $ 24.59 $ 23.80
Shares available 337,891
</TABLE>
The Company recognized compensation expense for this plan of $890,000,
$326,000 and $1,053,000 in 2000, 1999 and 1998, respectively.
STOCK OPTION PLANS The 1986 Stock Incentive Plan (1986 Plan) terminated November
23, 1996, except as to awards outstanding. Under the 1986 Plan, stock options
were awarded to full-time salaried employees. The option price was the fair
market value of the Company's stock at the date of grant, and the options are
exercisable two years from date of grant. The outstanding awards under this Plan
are 100% vested and expire through 2006.
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. The outstanding awards under the
1996 Plan vest 50% after one year and 50% after two years from date of grant and
will expire seven years after grant. In 1999, the shareholders of the Company
authorized an amendment to the 1996 Plan resulting in additional authorized
shares of 743,994 in 1999 and 26,063 in 2000.
In January 2000, the Company's stockholders approved the 1999 Non-Employee
Director Stock Option Plan and authorized 200,000 shares to be made available
for grant. Under this Plan, each outside director of the Company will receive
annually an option to purchase 1,500 shares of the Company's stock. In addition,
any outside director may elect to receive all or part of fees otherwise payable
in the form of a stock option. The price of these options is the fair market
value of the Company's stock at the date of the grant. The options granted
automatically vest 50% after one year and 50% after two years from the grant
date. Options granted in lieu of fees are immediately vested. All options expire
seven years from the date of grant.
35
<PAGE> 37
Combined share information for the three plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average Price
Exercise Range
Number Price Per Share
---------- -------- -----------
<S> <C> <C> <C>
September 1, 1997
Outstanding 1,919,308 $23.99 $8.72-28.00
Exercisable 1,108,337 21.32 8.72-27.61
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
---------
August 31, 1998
Outstanding 2,045,013 $25.56 $12.61-29.81
Exercisable 1,454,626 24.14 12.61-28.00
Granted 7,000 24.01 21.94-26.69
Exercised (118,587) 18.44 12.61-29.81
Forfeited (22,665) 28.59 13.64-29.81
Increased Authorized 743,994
---------
August 31, 1999
Outstanding 1,910,761 $25.96 $12.61-29.81
Exercisable 1,712,318 25.56 12.61-29.81
Granted 386,900 30.90 30.88-31.94
Exercised (100,866) 22.98 12.61-29.81
Forfeited (21,365) 29.69 24.50-30.88
Increased Authorized 226,063
---------
August 31, 2000
Outstanding 2,175,430 $26.94 $12.61-31.94
Exercisable 1,779,655 26.11 12.61-30.88
Authorized
Shares Remaining 619,386
=========
</TABLE>
Share information for options at August 31, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Yrs) Price Outstanding Price
-------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$12.61-18.42 150,697 1.5 $17.54 150,697 $17.54
20.20-24.50 382,337 3.5 22.54 380,363 22.54
26.25-29.81 1,265,021 4.5 28.21 1,248,495 28.22
30.88-31.94 377,375 6.1 30.91 100 30.88
--------- ---------
$12.61-31.94 2,175,430 4.4 $26.94 1,779,655 $26.11
</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.
36
<PAGE> 38
The Black-Scholes option pricing model used requires the following
assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate 6.34% 4.80% 5.44%
Expected life 4.06 years 4.15 years 4.60 years
Expected volatility .248 .214 .170
Expected dividend yield 1.9% 1.7% 1.8%
</TABLE>
Management believes that the results have limited relevance 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 2000 pro forma information includes options granted in
preceding years.
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net earnings (in thousands)
As reported $46,255 $47,120 $42,714
Pro forma 44,762 45,598 41,120
Net earnings per diluted share
As reported $ 3.25 $ 3.22 $ 2.82
Pro forma 3.14 3.12 2.72
</TABLE>
The weighted-average fair value of options granted in 2000, 1999 and 1998
was $7.77, $5.07 and $6.06, respectively.
PREFERRED STOCK Preferred stock has a par value of $1.00 a share, with 2,000,000
shares authorized. It may be issued in series, and the shares of each series
shall have such rights and preferences as fixed by the Board of Directors when
authorizing the issuance of that particular series. There are no shares of
preferred stock outstanding.
STOCKHOLDER RIGHTS PLAN On July 28, 1999, the Company's Board of Directors
adopted a stockholder rights plan pursuant to which stockholders were granted
preferred stock rights (Rights) to purchase one one-thousandth of a share of the
Company's Series A Preferred Stock for each share of common stock held. In
connection with the adoption of such plan, the Company designated and reserved
100,000 shares of preferred stock as Series A Preferred Stock and declared a
dividend of one Right on each outstanding share of the Company's common stock.
Rights were distributed to stockholders of record as of August 9, 1999.
The Rights are represented by and traded with the Company's common stock.
The Rights do not become exercisable or trade separately from the common stock
unless at least one of the following conditions are met: a public announcement
that a person has acquired 15% or more of the common stock of the Company, or a
tender or exchange offer is made for 15% or more of the common stock of the
Company. Should either of these conditions be met and the Rights become
exercisable, each Right will entitle the holder (other than the acquiring person
or group) to buy one one-thousandth of a share of the Series A Preferred Stock
at an exercise price of $150.00. Each fractional share of the Series A Preferred
Stock will essentially be the economic equivalent of one share of common stock.
Under certain circumstances, each Right would entitle its holder to purchase the
Company's stock or shares of the acquirer's stock at a 50% discount. The
Company's Board of Directors may choose to redeem the Rights (before they become
exercisable) at $0.001 per Right. The Rights expire July 28, 2009.
37
<PAGE> 39
NOTE 7. EMPLOYEES' RETIREMENT PLANS
Substantially all employees of the Company and its subsidiaries are covered
by defined contribution profit sharing and savings plans. Company contributions,
which are discretionary, to all plans were $18,108,000, $15,933,000, and
$19,448,000, for 2000, 1999 and 1998, respectively.
During 1998 the Company settled its only remaining defined benefit plan,
which it had terminated in 1997. Included in 1998 is pension expense of
$3,310,000, substantially all of which was a settlement liability.
NOTE 8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS/POSTEMPLOYMENT BENEFITS
The Company has no significant postretirement obligations. The Company's
historical costs for postemployment benefits have not been significant and are
not expected to be in the future.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments payable by the Company and its consolidated
subsidiaries for noncancelable operating leases in effect at August 31, 2000,
are as follows for the fiscal periods specified:
<TABLE>
<CAPTION>
Real
(in thousands) Equipment Estate
-------------- --------- -------
<S> <C> <C>
2001 $ 5,736 $ 5,236
2002 3,786 4,101
2003 2,534 3,522
2004 1,192 1,706
2005 and thereafter 517 1,635
------- -------
$13,765 $16,200
======= =======
</TABLE>
Total rental expense was $10,664,000, $9,100,000 and $9,634,000 in 2000,
1999 and 1998, respectively.
CONSTRUCTION CONTRACT DISPUTES A subsidiary of the Company entered into a fixed
price contract with the design/builder general contractor (D/B) to furnish,
erect and install structural steel, hollow core pre-cast concrete planks,
fireproofing, and certain concrete slabs along with related design and
engineering work for the construction of a large hotel and casino complex
(Project). In connection with the contract, the D/B secured insurance under a
subcontractor/vendor default protection policy (Policy) which named the Company
as an insured in lieu of performance and payment bonds. A large subcontractor to
the Company defaulted, and the Company incurred unanticipated costs to complete
the work. The Company has made a claim under the Policy for all losses, costs,
and expenses incurred by the Company arising from or related to the default, of
which $6.6 million was recorded in other assets at August 31, 2000. Although the
insurance company paid or escrowed partial payment of certain claims resulting
from the default, it is now contesting the nature and extent of the Policy's
coverage and may take the position that the Policy is void due to
misrepresentations and omissions by the D/B and the insurance broker. The
Company filed suit against the insurance company and broker in March 2000.
Management intends to vigorously pursue recovery of all damages incurred by the
Company resulting from the default as well as damages arising from the insurance
company's breaches of duties owed to the
38
<PAGE> 40
Company under the Policy. The Project is complete and no material additional
construction costs are anticipated.
Disputes between the Company and the D/B have been submitted to binding
arbitration. In August 2000, the Company filed a claim for $27.4 million against
the D/B. The claim seeks recovery of damages to the extent coverage is denied
under the Policy discussed above, unpaid contract receivables, amounts for delay
claims and change orders all of which have not been paid by the D/B. At August
31, 2000 and 1999, the Company maintained contract receivables of $7.2 million
and $6.4 million, respectively, from the D/B. Such amounts are included within
other assets on the accompanying balance sheets. The D/B has not disputed
certain amounts owed under the contract, but contends that other deductive
items, disputed by the Company, reduce the contract balance by approximately
$6.3 million which together with other D/B claims (discussed below) exceed the
unpaid contract balance. The Company disputes the deductive items in the D/B's
claim and intends to vigorously pursue recovery of the contract balance in
addition to all amounts, if any, not recovered under the Policy as a result of
misrepresentations or omissions of the D/B.
The owner of the Project and the D/B have filed joint claims in the
arbitration proceeding against the Company, primarily for alleged delay damages,
in the amount of $127 million which includes alleged delay damages in
construction of a retail area adjacent to the Project. Management believes the
claims are generally unsubstantiated, and the Company has valid legal defenses
against such claims and intends to vigorously defend these claims. Management is
unable to determine a range of potential loss related to such claims, and
therefore no losses have been accrued; however, it believes the ultimate
resolution will not have a material effect on the Company's consolidated
financial statements. Due to the uncertainties inherent in the estimating
process, it is at least reasonably possible that a change in the Company's
estimate of its collection of accounts receivable and possible liability could
occur in the near term.
The Company is involved in various other claims and lawsuits incidental to
its business. In the opinion of management, these claims and suits in the
aggregate will not have a material adverse effect on the results of operations
or the financial position of the Company.
ENVIRONMENTAL AND OTHER MATTERS In the ordinary course of conducting its
business, the Company becomes involved in litigation, administrative proceedings
and governmental investigations, including environmental matters. Management
believes that adequate provision has been made in the financial statements for
the potential impact of these issues, and that the outcomes will not
significantly impact the results of operations or the financial position of the
Company, although they may have a material impact on earnings for a particular
quarter.
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 fourteen 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 liability at the sites. In addition, the
Company has received information requests with regard to other sites which may
be under consideration by the EPA as potential CERCLA sites.
Some of these environmental matters or other proceedings may result in
fines, penalties or judgments being assessed against the Company. While the
Company is unable to estimate
39
<PAGE> 41
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 results of operations or the financial position of the
Company.
NOTE 10. EARNINGS PER SHARE
In calculating earnings per share, there were no adjustments to net
earnings to arrive at income for any years presented. The stock options granted
May 12, 1997, June 11, 1998, October 22, 1999 and January 27, 2000, with total
outstanding share commitments of 1,062,178 at year end, are antidilutive.
<TABLE>
<CAPTION>
August 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Shares outstanding
for basic
earnings per share 14,018,026 14,510,882 14,829,515
Effect of dilutive securities:
Stock options/
purchase plans 232,059 115,658 291,271
---------- ---------- ----------
Shares outstanding for
dilutive earnings
per share 14,250,085 14,626,540 15,120,786
</TABLE>
NOTE 11. OTHER PAYABLES AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
August 31,
--------------------
(in thousands) 2000 1999
-------------- -------- --------
<S> <C> <C>
Salaries, wages and commissions $ 42,281 $ 33,609
Employees' retirement plans 18,741 15,327
Freight 10,726 10,280
Insurance 9,778 10,755
Taxes other than income taxes 9,413 7,704
Litigation accrual 7,650 7,650
Accrual for contract losses 5,327 7,132
Advance billings on contracts 4,548 15,130
Environmental 3,088 3,338
Interest 2,830 3,412
Other accrued expenses 28,298 25,640
-------- --------
$142,680 $139,977
======== ========
</TABLE>
NOTE 12. BUSINESS SEGMENTS
The Company's reportable segments are based on strategic business areas,
which offer different products and services. These segments have different lines
of management responsibility as each business requires different marketing
strategies and management expertise.
40
<PAGE> 42
The Company has three reportable segments consisting of manufacturing,
recycling, and marketing and trading. Manufacturing consists of the CMC steel
group's minimills, steel and joist fabrication operations, fence post
manufacturing plants, heat treating, railcar rebuilding and concrete-related
products, as well as Howell Metal Company's copper tube manufacturing facility.
The manufacturing segment's business operates primarily in the southern and
western United States. recycling consists of the secondary metals processing
division's scrap processing and sales operations primarily in Texas, Florida and
the southern United States. Marketing and trading includes both domestic and
international operations for the sales and distribution of both ferrous and
nonferrous metals and other industrial products. The segment's activities
consist only of physical transactions and not speculation.
The Company uses operating profit, profit before tax and return on net
assets to measure segment performance. Intersegment sales are generally priced
at prevailing market prices. Certain corporate administrative expenses are
allocated to segments based upon the nature of the expense. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies.
The following presents information regarding the Company's domestic
operations and operations outside of the United States:
<TABLE>
<CAPTION>
External Net Sales for the
Year ended August 31,
------------------------------------
(in thousands) 2000 1999 1998
-------------- ---------- ---------- ----------
<S> <C> <C> <C>
United States $1,782,189 $1,491,371 $1,615,893
Non United States 879,231 760,071 751,676
---------- ---------- ----------
Total $2,661,420 $2,251,442 $2,367,569
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Long-Lived Assets
as of August 31,
---------------------------------
(in thousands) 2000 1999 1998
-------------- -------- -------- --------
<S> <C> <C> <C>
United States $447,580 $426,476 $322,620
Non United States 10,264 6,765 6,497
-------- -------- --------
Total $457,844 $433,241 $329,117
======== ======== ========
</TABLE>
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>
Year ended August 31,
------------------------------
(in thousands) 2000 1999 1998
-------------- -------- -------- --------
<S> <C> <C> <C>
Net sales-unaffiliated customers $343,805 $306,279 $330,772
======== ======== ========
Operating profit $ 5,627 $ 5,521 $ 4,491
======== ======== ========
Total assets $ 68,178 $101,434 $107,422
======== ======== ========
</TABLE>
41
<PAGE> 43
NOTE 12. BUSINESS SEGMENTS (CONTINUED):
The following is a summary of certain financial information by reportable
segment:
<TABLE>
<CAPTION>
Adjustments
Marketing and
2000 (dollars in thousands) Manufacturing Recycling and Trading Corporate Eliminations Consolidated
--------------------------- ------------- --------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales-unaffiliated
customers $1,348,994 $ 432,115 $ 881,238 $ (927) $ -- $ 2,661,420
Intersegment sales 7,732 30,496 22,055 -- (60,283) --
---------- --------- --------- -------- -------- -----------
Net sales 1,356,726 462,611 903,293 (927) (60,283) 2,661,420
========== ========= ========= ======== ======== ===========
Operating profit 74,731 5,841 19,244 758 -- 100,574
========== ========= ========= ======== ======== ===========
Profit (loss) before income taxes 74,525 5,806 17,017 (24,093) -- 73,255
========== ========= ========= ======== ======== ===========
Interest expense 11,007 2,811 1,741 12,568 (808) 27,319
========== ========= ========= ======== ======== ===========
Capital expenditures 61,538 6,220 1,260 609 -- 69,627
========== ========= ========= ======== ======== ===========
Depreciation and amortization 52,688 12,152 1,061 682 -- 66,583
========== ========= ========= ======== ======== ===========
Total assets $ 772,306 $ 115,532 $ 242,568 $ 42,456 $ -- $ 1,172,862
========== ========= ========= ======== ======== ===========
Operating profit return on net assets 13.1% 6.2% 14.9% -- -- 12.7%
========== ========= ========= ======== ======== ===========
<CAPTION>
1999 (dollars in thousands)
---------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales-unaffiliated
customers $1,202,057 $ 283,635 $ 765,673 $ 77 $ -- $ 2,251,442
Intersegment sales 3,948 18,300 35,941 -- (58,189) --
---------- --------- --------- -------- -------- -----------
Net sales 1,206,005 301,935 801,614 77 (58,189) 2,251,442
========== ========= ========= ======== ======== ===========
Operating profit (loss) 83,796 (5,024) 22,606 (6,698) -- 94,680
========== ========= ========= ======== ======== ===========
Profit (loss) before income taxes 83,710 (5,074) 19,956 (23,562) -- 75,030
========== ========= ========= ======== ======== ===========
Interest expense 4,068 2,373 2,115 15,641 (4,547) 19,650
========== ========= ========= ======== ======== ===========
Capital expenditures 130,098 6,468 1,291 3,895 -- 141,752
========== ========= ========= ======== ======== ===========
Depreciation and amortization 38,841 11,767 1,050 396 -- 52,054
========== ========= ========= ======== ======== ===========
Total assets $ 683,910 $ 114,807 $ 242,547 $ 38,073 $ -- $ 1,079,337
========== ========= ========= ======== ======== ===========
Operating profit return on net assets 16.7% -- 17.2% -- -- 14.1%
========== ========= ========= ======== ======== ===========
<CAPTION>
1998 (dollars in thousands)
---------------------------
<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) --
---------- --------- --------- -------- -------- -----------
Net sales 1,233,941 414,886 788,492 50 (69,800) 2,367,569
========== ========= ========= ======== ======== ===========
Operating profit (loss) 74,766 (1,354) 20,582 (7,870) -- 86,124
========== ========= ========= ======== ======== ===========
Profit (loss) before income taxes 74,753 (1,358) 17,660 (22,986) -- 68,069
========== ========= ========= ======== ======== ===========
Interest expense 5,375 1,614 1,688 11,668 (2,290) 18,055
========== ========= ========= ======== ======== ===========
Capital expenditures 90,036 27,391 1,360 1,128 -- 119,915
========== ========= ========= ======== ======== ===========
Depreciation and amortization 35,364 10,925 939 232 -- 47,460
========== ========= ========= ======== ======== ===========
Total assets $ 622,694 $ 118,905 $ 236,968 $ 24,050 $ -- $ 1,002,617
========== ========= ========= ======== ======== ===========
Operating profit return on net assets 17.6% -- 18.0% -- -- 15.1%
========== ========= ========= ======== ======== ===========
</TABLE>
42
<PAGE> 44
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 2000, 1999 and 1998 are as follows
(in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended 2000
---------------------------------------
Nov. 30 Feb. 29 May 31 Aug. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $612,427 $637,624 $701,209 $710,160
Gross profit 77,434 79,132 87,076 83,848
Net earnings 10,233 10,358 12,961 12,703
Basic EPS .71 .72 .93 .95
Diluted EPS .70 .70 .92 .94
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended 1999
---------------------------------------
Nov. 30 Feb. 29 May 31 Aug. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $548,831 $ 550,065 $583,171 $569,375
Gross profit 73,775 69,799 76,848 82,424
Net earnings 11,011 8,386 11,002 16,721
Basic EPS .76 .57 .76 1.16
Diluted EPS .75 .57 .76 1.15
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended 1998
---------------------------------------
Nov. 30 Feb. 29 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
Basic EPS .55 .57 .77 1.01
Diluted EPS .54 .56 .75 1.00
</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 2000 net earnings decreased $1,203,000 after the
final determination of inventory quantities and prices was made.
In recording accruals for workers' compensation expense, management relies
on prior year experience in making estimates. The actual amounts were not known
until year end reports were received from the third party administrator. Actual
results at the end of fiscal year 2000 indicated a decline in the number of
claims from the prior year resulting in a $2.6 million reduction in the accrual
during the fourth quarter of 2000.
During 2000, the Company's Board of Directors authorized the purchase of up
to 1,500,000 shares of the Company's common stock, 500,000 of which was
authorized in the fourth quarter. As of August 31, 2000, 305,281 shares remained
authorized for repurchase.
43
<PAGE> 45
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, 2000 and 1999, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended August 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 13, 2000
44
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No reportable event took place.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Some of the information required in response to this item with regard
to directors is incorporated by reference into this annual report from
Commercial Metals' definitive proxy statement for the annual meeting of
shareholders to be held January 25, 2001, which will be filed no later than 120
days after the close of Commercial Metals' fiscal year. The following is a
listing of employees believed to be considered "Executive Officers" of
Commercial Metals as of August 31, 2000, as defined under Rule 3b-7:
<TABLE>
<CAPTION>
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE
---- ------------------------ --- -------------
<S> <C> <C> <C>
Louis A. Federle Treasurer 51 1979
Hugh M. Ghormley Vice President and 71 1981
CMC Steel Group - President
Fabrication Plants
Harry J. Heinkele Vice President and Secondary Metals 68 1981
Processing Division - President
A. Leo Howell Vice President and 79 1977
Howell Metal Company - President;
Director and Chairman of the
Executive Committee
William B. Larson Vice President and 47 1995
Chief Financial Officer
Murray R. McClean Vice President and Marketing and 52 1995
Trading Segment - President
Malinda G. Passmore Controller 41 1999
Stanley A. Rabin Chairman of the Board, 62 1974
President and Chief Executive
Officer; Director
</TABLE>
45
<PAGE> 47
<TABLE>
<S> <C> <C> <C>
Marvin Selig CMC Steel Group - Chairman 77 1968
and Chief Executive Officer; Director
Clyde P. Selig Vice President and 68 1981
CMC Steel Group - President
and Chief Operating Officer
David M. Sudbury Vice President, Secretary and 55 1976
General Counsel
</TABLE>
The executive officers are employed by the board of directors of
Commercial Metals or a subsidiary, usually at its first meeting after Commercial
Metals' annual stockholders meeting, and continue to serve for terms set from
time to time by the board of directors in its discretion.
All of the executive officers of Commercial Metals have been employed
by Commercial Metals in the positions indicated above or in positions of similar
responsibility for more than five years, except for Ms. Passmore. Ms. Passmore
was employed in April 1999 as Controller, having formerly been President and CEO
of System Health Providers, Inc. since January 1998, and Chief Financial Officer
from January 1997, until January 1998. Prior to 1997, Ms. Passmore was a
consultant and employed as Executive Director of Financial Services and
Controller with Kaiser Foundation Health Plan of Texas from 1991 to September
1996. Mr. Federle was named Treasurer in April 1999, having been employed since
1977 and Assistant Treasurer since 1979. Mr. Larson was employed in June 1991 as
Assistant Controller, named Controller in March 1995, and elected Vice President
and Chief Financial Officer in April 1999. Mr. McClean was elected to the newly
created position of President of the Marketing and Trading Segment as of
September 1, 1999, having been employed since 1985 and President of the
International Division of that segment since 1995. Mr. Rabin was elected to the
additional position of Chairman of the Board in March 1999. Marvin Selig is the
brother of Clyde P. Selig. There are no other family relationships among the
officers of the registrant or among the executive officers and directors.
ITEM 11. EXECUTIVE COMPENSATION
Information required in response to this Item is incorporated by
reference into this annual report from Commercial Metals' definitive proxy
statement for the annual meeting of shareholders to be held January 25, 2001,
which will be filed no later than 120 days after the close of Commercial Metals'
fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by
reference from Commercial Metals' definitive proxy statement for the annual
meeting of shareholders to be held January 25, 2001, which will be filed no
later than 120 days after the close of Commercial Metals' fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, information required in response to this item
is incorporated by reference into this annual report from Commercial Metals'
definitive proxy statement for the annual meeting of shareholders to be held
January 25, 2001, which will be filed no later than 120 days after the close of
Commercial Metals' fiscal year.
46
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. All financial statements are included at Item 8 above.
2. Commercial Metals Company and Subsidiaries Consolidated Financial
Statement Schedule
Independent Auditors' Report as to Schedule
Valuation and qualifying accounts (Schedule VIII)
All other schedules have been omitted because they are not applicable,
are not required, or the required information is shown in the financial
statements or notes thereto.
3. The following is a list of the Exhibits and Index required to be filed
by Item 601 of Regulation S-K:
(3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i)
to the Company's Form 10-K for the fiscal year ended August 31,
1993 and incorporated herein by reference).
(3)(i)a- Certificate of Amendment of Restated Certificate of
Incorporation dated February 1, 1994 (Filed as Exhibit 3(i)a to
the Company's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
(3)(i)b- Certificate of Amendment of Restated Certificate of
Incorporation dated February 17, 1995 (Filed as Exhibit 3(i)b to
the Company's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
(3)(i)c- Certificate of Designation, Preferences and Rights of Series
A Preferred Stock (Filed as Exhibit 2 to the Company's Form 8-A
filed August 3, 1999 and incorporated herein by reference).
(3)(ii)By-Laws (Filed as Exhibit (3)(ii) to the Company's Form 10-K
for the fiscal year ended August 31, 1993 and incorporated
hereby by reference).
(4)(i)a- Indenture between Commercial Metals and Chase Manhattan Bank
dated as of July 31, 1995 (Filed as Exhibit 4.1 to Commercial
Metals' Registration Statement No. 33-60809 on July 18, 1995 and
incorporated herein by reference).
(4)(i)b- Rights Agreement dated July 28, 1999 by and between the
Company and ChaseMellon Shareholder Services, LLC, as Rights
Agent (Filed as Exhibit 1 to the Company's Form 8-A filed August
3, 1999 and incorporated herein by reference).
(10)(iii) Material Contracts - Employment Agreement of
Murray R. McClean as amended..............................E1-E17
(21) Subsidiaries of Registrant..................................E-18
47
<PAGE> 49
(23) Independent Auditors' consent to incorporation by reference of
report dated October 13, 2000, accompanying the consolidated
financial statements of Commercial Metals Company and
subsidiaries for the year ended August 31, 2000, into previously
filed Registration Statements No. 033-61073, No. 033-61075,
333-27967 and 333-42648 on Form S-8 and Registration Statements
No. 33-60809 and 333-61379
on Form S-3................................................E-19
(27) Financial Data Schedule
(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.
48
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMERCIAL METALS COMPANY
/s/ Stanley A. Rabin
-----------------------------------
By: Stanley A. Rabin
Chairman of the Board, President
and Chief Executive Officer
Date: November 20, 2000
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:
--------------------------------------
Albert A. Eisenstat, November 20, 2000
Director
/s/ Moses Feldman
--------------------------------------
Moses Feldman, November 20, 2000
Director
/s/ A. Leo Howell
--------------------------------------
A. Leo Howell, November 20, 2000
Vice President and Director
/s/ Ralph E. Loewenberg
--------------------------------------
Ralph E. Loewenberg, November 20, 2000
Director
/s/ Anthony A. Massaro
--------------------------------------
Anthony A. Massaro, November 20, 2000
Director
/s/ Dorothy G. Owen
--------------------------------------
Dorothy G. Owen, November 20, 2000
Director
/s/ Stanley A. Rabin
--------------------------------------
Stanley A. Rabin, November 20, 2000
Chairman of the Board, President,
And Chief Executive Officer
/s/ Marvin Selig
--------------------------------------
Marvin Selig, November 20, 2000
Chairman and Chief Executive Officer
CMC Steel Group and Director
/s/ Robert R. Womack
--------------------------------------
Robert R. Womack, November 20, 2000
Director
/s/ William B. Larson
--------------------------------------
William B. Larson, November 20, 2000
Vice President and
Chief Financial Officer
/s/ Malinda G. Passmore
--------------------------------------
Malinda G. Passmore, November 20, 2000
Controller
49
<PAGE> 51
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders of
Commercial Metals Company
Dallas, Texas
We have audited the consolidated financial statements of Commercial Metals
Company and subsidiaries as of August 31, 2000 and 1999, and for each of the
three years in the period ended August 31, 2000, and have issued our report
thereon dated October 13, 2000; such financial statements and report are
included in Item 8 herein. Our audits also included the consolidated financial
statement schedule of Commercial Metals Company listed in Item 14. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 13, 2000
<PAGE> 52
SCHEDULE VIII
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
(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>
1998 6,116 2,898 261 1,155 8,120
1999 8,120 1,877 332 2,615 7,714
2000 7,714 948 567 1,361 7,868
</TABLE>
(A) Recoveries of accounts written off.
(B) Write-off of uncollectible accounts.
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1. All financial statements are included at Item 8 above.
2. Commercial Metals Company and Subsidiaries Consolidated Financial
Statement Schedule
Independent Auditors' Report as to Schedule
Valuation and qualifying accounts (Schedule VIII)
All other schedules have been omitted because they are not applicable,
are not required, or the required information is shown in the financial
statements or notes thereto.
3. The following is a list of the Exhibits and Index required to be filed
by Item 601 of Regulation S-K:
(3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i)
to the Company's Form 10-K for the fiscal year ended August 31,
1993 and incorporated herein by reference).
(3)(i)a- Certificate of Amendment of Restated Certificate of
Incorporation dated February 1, 1994 (Filed as Exhibit 3(i)a to
the Company's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
(3)(i)b- Certificate of Amendment of Restated Certificate of
Incorporation dated February 17, 1995 (Filed as Exhibit 3(i)b to
the Company's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
(3)(i)c- Certificate of Designation, Preferences and Rights of Series
A Preferred Stock (Filed as Exhibit 2 to the Company's Form 8-A
filed August 3, 1999 and incorporated herein by reference).
(3)(ii) By-Laws (Filed as Exhibit (3)(ii) to the Company's Form 10-K
for the fiscal year ended August 31, 1993 and incorporated
hereby by reference).
(4)(i)a- Indenture between Commercial Metals and Chase Manhattan Bank
dated as of July 31, 1995 (Filed as Exhibit 4.1 to Commercial
Metals' Registration Statement No. 33-60809 on July 18, 1995 and
incorporated herein by reference).
(4)(i)b- Rights Agreement dated July 28, 1999 by and between the
Company and ChaseMellon Shareholder Services, LLC, as Rights
Agent (Filed as Exhibit 1 to the Company's Form 8-A filed August
3, 1999 and incorporated herein by reference).
(10)(iii) Material Contracts - Employment Agreement of
Murray R. McClean as amended..............................E1-E17
(21) Subsidiaries of Registrant..................................E-18
</TABLE>
<PAGE> 54
<TABLE>
<S> <C>
(23) Independent Auditors' consent to incorporation by reference of
report dated October 13, 2000, accompanying the consolidated
financial statements of Commercial Metals Company and
subsidiaries for the year ended August 31, 2000, into previously
filed Registration Statements No. 033-61073, No. 033-61075,
333-27967 and 333-42648 on Form S-8 and Registration Statements
No. 33-60809 and 333-61379
on Form S-3................................................E-19
(27) Financial Data Schedule
</TABLE>
