<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------
For quarter ended November 30, 2000
Commission File Number 1-4304
COMMERCIAL METALS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-0725338
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7800 Stemmons Freeway
Dallas, Texas 75247
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 689-4300
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 30, 2000 there were 12,953,472 shares of the Company's common
stock issued and outstanding excluding 3,179,111 shares held in the Company's
treasury.
<PAGE> 2
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
November 30, 2000 and August 31, 2000 2 - 3
Consolidated Statements of Operations
Three months ended November 30, 2000 and
November 30, 1999 4
Consolidated Statements of Cash Flows -
Three months ended November 30, 2000 and
November 30, 1999 5
Consolidated Statement of Stockholders' Equity-
Three months ended November 30, 2000 6
Notes to Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
</TABLE>
Page 1
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands except share data)
<TABLE>
<CAPTION>
November 30, August 31,
2000 2000
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 23,623 $ 20,067
Accounts receivable (less allowance for
collection losses of $6,710 and $7,868) 335,571 357,719
Inventories 293,036 277,455
Other 63,096 59,777
------------ ------------
TOTAL CURRENT ASSETS 715,326 715,018
PROPERTY, PLANT, AND EQUIPMENT:
Land 28,215 27,984
Buildings 97,511 97,566
Equipment 677,263 676,369
Leasehold improvements 31,418 31,507
Construction in process 34,819 22,702
------------ ------------
869,226 856,128
Less accumulated depreciation
and amortization (462,155) (448,616)
------------ ------------
407,071 407,512
OTHER ASSETS 50,747 50,332
------------ ------------
$ 1,173,144 $ 1,172,862
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 2
<PAGE> 4
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands except share data)
<TABLE>
<CAPTION>
November 30, August 31,
2000 2000
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Commercial paper $ 141,000 $ 79,000
Notes payable 17,210 13,466
Accounts payable 157,721 194,538
Accrued expenses and other payables 122,992 142,680
Income taxes payable 1,032 678
Current maturities of long-term debt 8,347 8,828
------------ ------------
TOTAL CURRENT LIABILITIES 448,302 439,190
DEFERRED INCOME TAXES 31,131 31,131
OTHER LONG-TERM LIABILITIES 21,458 20,041
LONG-TERM DEBT 261,884 261,884
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
12,953,472 and 13,172,675 shares 80,663 80,663
Additional paid-in capital 13,731 14,231
Accumulated other comprehensive loss (2,053) (1,591)
Retained earnings 403,180 407,128
------------ ------------
495,521 500,431
Less treasury stock,
3,179,111 and 2,959,908 shares at cost (85,152) (79,815)
------------ ------------
410,369 420,616
------------ ------------
$ 1,173,144 $ 1,172,862
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE> 5
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share data)
<TABLE>
<CAPTION>
Three months ended
November 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET SALES $ 594,540 $ 612,427
COSTS AND EXPENSES:
Cost of goods sold 523,696 534,993
Selling, general and
administrative expenses 51,112 51,132
Employees' retirement plans 4,560 4,170
Interest expense 7,664 5,824
Litigation accrual 10,683 --
------------ ------------
597,715 596,119
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (3,175) 16,308
INCOME TAXES (BENEFIT) (942) 6,075
------------ ------------
NET EARNINGS (LOSS) $ (2,233) $ 10,233
============ ============
Basic earnings (loss) per share $ (0.17) $ 0.71
Diluted earnings (loss) per share $ (0.17) $ 0.70
Cash dividends per share $ 0.13 $ 0.13
Average basic shares outstanding 13,130,257 14,388,037
Average diluted shares outstanding 13,226,680 14,638,104
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE> 6
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
November 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (2,233) $ 10,233
Adjustments to earnings not requiring cash:
Depreciation and amortization 17,052 16,345
Provision for losses on receivables 290 134
Net gain on sale of property (628) (394)
------------ ------------
Cash flows from operations before changes in
operating assets and liabilities 14,481 26,318
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 21,858 (27,779)
Decrease (increase) in inventories (15,581) 4,093
Decrease (increase) in other assets (5,838) (4,092)
Increase (decrease) in accounts payable,
accrued expenses, other payables and income taxes (56,151) (26,673)
Increase (decrease) in other long-term liabilities 1,417
------------ ------------
Net Cash Flows used by Operating Activities (39,814) (28,133)
CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchase of property, plant and equipment (14,969) (11,686)
Sales of property, plant and equipment 628 394
------------ ------------
Net Cash Used by Investing Activities (14,341) (11,292)
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper - net change 62,000 5,000
Notes payable - net change 3,744 13,071
Payments on long-term debt (481) (2,556)
Stock issued under stock option, purchase and bonus plans 675 1,002
Treasury stock acquired (6,512) (2,291)
Dividends paid (1,715) (1,872)
------------ ------------
Net Cash Provided by Financing Activities 57,711 12,354
Increase (Decrease) in Cash and Cash Equivalents 3,556 (27,071)
Cash and Cash Equivalents at Beginning of Year 20,067 44,665
------------ ------------
Cash and Cash Equivalents at End of Period $ 23,623 $ 17,594
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE> 7
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands except share data)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------------------------ Other Add'l
Number of Comprehensive Paid-In
Shares Amount Loss Capital
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance September 1, 2000 16,132,583 $ 80,663 $ (1,591) $ 14,231
Comprehensive loss:
Net loss for three months
ended November 30, 2000
Other comprehensive income (loss)
Unrealized gain on derivatives
net of taxes of $45 83
Foreign currency translation adjustment
net of taxes of $293 (545)
Comprehensive loss
Cash dividends - $.13 a share
Treasury stock acquired
Stock issued under stock option,
purchase and bonus plans (500)
------------ ------------ ------------ ------------
Balance November 30, 2000 16,132,583 $ 80,663 $ (2,053) $ 13,731
============ ============ ============ ============
<CAPTION>
Treasury Stock
------------------------------
Retained Number of
Earnings Shares Amount Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance September 1, 2000 $ 407,128 (2,959,908) $ (79,815) $ 420,616
Comprehensive loss:
Net loss for three months
ended November 30, 2000 (2,233) (2,233)
Other comprehensive income (loss)
Unrealized gain on derivatives
net of taxes of $45 83
Foreign currency translation adjustment
net of taxes of $293 (545)
------------
Comprehensive loss (2,695)
Cash dividends - $.13 a share (1,715) (1,715)
Treasury stock acquired (262,400) (6,512) (6,512)
Stock issued under stock option,
purchase and bonus plans 43,197 1,175 675
------------ ------------ ------------ ------------
Balance November 30, 2000 $ 403,180 (3,179,111) $ (85,152) $ 410,369
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
Page 6
<PAGE> 8
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - QUARTERLY FINANCIAL DATA:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals and, in addition, the litigation accrual discussed in Note E)
necessary to present fairly the financial position as of November 30, 2000, the
results of operations and the cash flows for the three months then ended. The
results of operations for the three month periods are not necessarily indicative
of the results to be expected for a full year.
NOTE B - LONG-TERM DEBT AND EQUITY (in thousands):
<TABLE>
<CAPTION>
Total
Long-Term Current Amount
Debt Maturities Outstanding
------------ ------------ ------------
<S> <C> <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 7,142 7,143 14,285
Other 4,742 1,204 5,946
------------ ------------ ------------
$ 261,884 $ 8,347 $ 270,231
============ ============ ============
</TABLE>
In November 2000, the Company's Board of Directors authorized the
purchase of up to 500,000 additional shares of the Company's common stock. As of
November 30, 2000, 542,881 shares remained authorized for repurchase.
NOTE C - EARNINGS (LOSS) PER SHARE:
In calculating earnings (loss) per share, there were no adjustments to
net earnings (loss) to arrive at income (loss) for the three months ended
November 30, 2000 or 1999. The reconciliation of the denominators of the
earnings (loss) per share calculations are as follows:
<TABLE>
<CAPTION>
Three months ended
November 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Shares outstanding for basic earnings (loss) per share 13,130,257 14,388,037
Effect of dilutive securities-stock options/purchase plans 96,423 250,067
Shares outstanding for diluted earnings (loss) per share 13,226,680 14,638,104
</TABLE>
Stock options with total share commitments of 1,627,344 at November
30, 2000 were anti-dilutive based on the average share price for the quarter of
$26.30 per share, and exercise prices of $26.69 - $31.94 per share. The options
expire by 2007.
NOTE D - DERIVATIVES AND RISK MANAGEMENT
Effective September 1, 2000, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivatives and Hedges (as
amended). SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities measured at fair value.
Page 7
<PAGE> 9
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - DERIVATIVES AND RISK MANAGEMENT (continued)
The Company's product lines and its worldwide operations expose it to
risks associated with fluctuations in foreign currency exchange, interest rates
and commodity prices. As part of the Company's risk management program, it uses
or has used financial instruments, including commodity futures or forwards,
foreign currency exchange forward contracts and interest rate swaps. The Company
enters into the foreign currency exchange forwards as economic hedges of trade
commitments or anticipated commitments denominated in currencies other than the
functional currency to mitigate the effects of changes in currency rates.
Pricing of certain sales and purchases commitments is fixed to forward metal
commodity exchange quotes. The Company enters into metal commodity forward
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. Substantially all of the Company's debt is denominated
in U.S. dollars. However, at November 30, 2000, $7 million Australian dollars
notional amount of debt was covered by an interest rate swap. None of the
instruments used are entered into for trading purposes or speculation, and
management believes all are economically effective as hedges of underlying
physical transactions. Certain of the Company's derivative instruments which
management believes are economic hedges and mitigate exposure to fluctuations
in exchange and interest rates and commodity prices, have not been designated as
hedges for accounting purposes. The changes in fair value of these instruments
caused a $205 thousand decrease in cost of goods sold for the quarter ended
November 30, 2000.
The Company, and some of its subsidiaries, use foreign currency
exchange forward contracts to hedge against currency exchange risk when its
purchase or sales agreements are denominated in a currency other than their
functional currency. The Company accounts for these instruments as fair value
hedges when they are hedging qualifying firm commitments. The Company also has
designated some of its foreign currency forward contracts as cash flow hedges of
anticipated purchases and sales. Such financial instruments are marked-to-market
with the offset to other comprehensive income and subsequently recognized as a
component of cost of goods sold when the underlying purchase or sales
transaction is recognized. None of the cash flow hedges were outstanding as of
November 30, 2000. Due to the close match for foreign currency hedges, there was
substantially no ineffectiveness in cost of goods sold or net loss for the
quarter ended November 30, 2000.
ACCUMULATED DERIVATIVE GAINS OR LOSSES:
The following table summarizes activities in other comprehensive income related
to derivatives classified as cash flow hedges held by the Company during the
period of September 1 (the date of the Company's adoption of SFAS 133) through
November 30, 2000 (in thousands):
<TABLE>
<S> <C>
Cumulative effect of adopting SFAS No. 133 as of September 1, 2000, net $ 126
(Gains) losses reclassified into net earnings, net (43)
--------
$ 83
========
</TABLE>
The $83 thousand remaining in other comprehensive income related to the
transition adjustment will be reclassified into earnings in the next quarter as
the related debt matures.
The adoption of SFAS No. 133 did not have a material impact on the
Company's results of operations or financial position, but resulted in
cumulative after tax increases in net earnings of $214 thousand and other
comprehensive income of $83 thousand for the quarter ended November 30, 2000.
The effect of the transition adjustment as of September 1, 2000 was an increase
in net earnings of $315 thousand and other comprehensive income of $126
thousand. As of November 30, 2000, other current assets included $1.2 million
representing the fair value of derivative instruments and $187 thousand of
hedged firm commitments. Also, at November 30, 2000, $393 thousand and $503
thousand, respectively, were included in accrued expenses and other payables for
derivative liabilities and hedged firm commitments.
Page 8
<PAGE> 10
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - REVENUE RECOGNITION:
Effective September 1, 2000, the Company adopted the Securities and
Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. The Company's revenue recognition policies
were in substantial conformity with the SAB, and therefore the effect of
implementation had no material impact on the results of operations for the
current quarter.
NOTE F - CONTINGENCIES:
In late December 2000, the Company received a Court's unanticipated
adverse rulings arising from a trial which concluded in October 1999, involving
the Company and its subsidiary, CMC Steel Fabricators, Inc., in a contractural
dispute with a customer. Accordingly, the Company increased its reserve for the
litigation (included in accrued expenses and other payables) as of November 30,
2000 by $10.7 million. The Company intends to appeal the judgment, which
management anticipates will be entered in January 2001, based on these rulings.
There were no material developments relating to the Company's
construction disputes or other contingencies since August 31, 2000. Refer to
Note 9, Commitments and Contingences included in the notes to the consolidated
financial statements for the year ended August 31, 2000.
NOTE G - BUSINESS SEGMENTS (in thousands):
The following is a summary of certain financial information by
reportable segment:
<TABLE>
<CAPTION>
Three months ended November 30, 2000
-----------------------------------------------------------------------------------
MANU- MARKETING CORP CONSOL-
FACTURING RECYCLING & TRADING & ELIM IDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales--unaffiliated customers $ 308,900 $ 97,503 $ 187,508 $ 629 $ 594,540
Intersegment sales 1,561 5,744 28,339 (35,644) --
------------ ------------ ------------ ------------ ------------
310,461 103,247 215,847 (35,015) 594,540
Earnings (Loss) before income taxes 3,288 (2,035) 1,223 (5,651) (3,175)
Total assets 775,072 107,518 249,318 41,236 1,173,144
</TABLE>
<TABLE>
<CAPTION>
Three months ended November 30, 1999
-----------------------------------------------------------------------------------
MANU- MARKETING CORP CONSOL-
FACTURING RECYCLING & TRADING & ELIM IDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales--unaffiliated customers $ 311,730 $ 97,855 $ 202,834 $ 8 $ 612,427
Intersegment sales 1,143 4,307 5,248 (10,698) --
------------ ------------ ------------ ------------ ------------
312,873 102,162 208,082 (10,690) 612,427
Earnings (Loss) before income taxes 17,700 585 3,831 (5,808) 16,308
Total assets 712,651 116,957 215,183 29,996 1,074,787
</TABLE>
Page 9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
(in millions)
<TABLE>
<CAPTION>
First Quarter
-------------------------
2001 2000
---------- ----------
<S> <C> <C>
Net sales $ 595 $ 612
Net earnings (loss) (2.2) 10.2
Cash flows 14.5 26.3
EBITDA 21.5 38.5
LIFO reserve 7.5 3.6
</TABLE>
SIGNIFICANT EVENTS AFFECTING THE COMPANY THIS QUARTER:
- Adverse court rulings resulted in first quarter 2001 loss.
- Profitability in copper tube and solid downstream fabrication operations in
the manufacturing segment were not enough to offset the impact of
significantly reduced mill profit margins.
- Steel minimills' sales prices and operating profits declined from the prior
year period due to continuing, historically high levels of low-priced steel
imports, aggressive domestic competition and higher utility costs ($2.8
million after-tax increase).
- Last year's first quarter included after-tax income of $1.2 million for
insurance proceeds from transformer downtime at SMI Texas.
- Plummeting ferrous scrap sales prices led to an unprofitable quarter for
the recycling segment.
- Hampered by the strong U.S. dollar, the marketing and trading segment's
operating profit was considerably lower than the prior year period.
Page 10
<PAGE> 12
CONSOLIDATED DATA -
The LIFO method of inventory valuation increased net earnings for the quarter
$437 thousand (3 cents per diluted share) compared to a decrease of $385
thousand (3 cents per diluted share) last year.
SEGMENT OPERATING DATA -
(in thousands)
Net sales and operating profit (loss) by business segment are shown in the
following table:
<TABLE>
<CAPTION>
Three months ended
November 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET SALES:
Manufacturing $ 310,461 $ 312,873
Recycling 103,247 102,162
Marketing and Trading 215,847 208,082
Corporate and Eliminations (35,015) (10,690)
------------ ------------
$ 594,540 $ 612,427
============ ============
OPERATING PROFIT (LOSS):
Manufacturing $ 3,385 $ 17,720
Recycling (2,027) 595
Marketing and Trading 1,618 4,335
Corporate and Eliminations 1,513 (518)
------------ ------------
$ 4,489 $ 22,132
============ ============
</TABLE>
MANUFACTURING -
The Company's manufacturing segment consists of the steel group and the copper
tube division. Operating profit for the segment decreased $14.3 million (81%)
from last year's first quarter, and net sales decreased 1%. $10.7 million, 75%
of the decrease in operating profit, was due to an increase in the steel group's
litigation reserve for an adverse court ruling. Excluding this item, the steel
group's operating profit was 25% below last year's first quarter. Operating
profit for the copper tube division was 5% below last year's record. Continuing
historically high levels of low-priced steel imports and aggressive domestic
competition resulted in lower mill selling prices in major product lines,
although the underlying demand for steel products resulted in increased tonnage
shipped. Also, margins were pressured by higher utility costs which offset the
benefit of lower steel scrap prices.
Page 11
<PAGE> 13
Steel and scrap prices per ton are as reflected in the table below:
<TABLE>
<CAPTION>
Three months ended
November 30,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Average mill selling price (total sales) $ 293 $ 303
Average mill selling price (finished goods) 299 312
Average fab selling price 655 668
Average scrap purchase price 77 85
</TABLE>
Operating profit for the Company's four steel minimills was 51% below the prior
year period. Mill shipments increased 1% to 422,000 tons from 416,000 tons, and
tons rolled were up 6% from last year. Tons melted increased 16% as the new
ladle metallurgical station at SMI South Carolina enabled increased production.
During the quarter, particularly at SMI Alabama, output began to be reduced to
control inventories. The average total mill selling price was $10 per ton below
last year, and the average selling price for finished goods dropped $13 per ton.
Merchant bar prices were particularly affected. Average scrap purchase costs
were lower by $8 per ton. However, utility costs increased by approximately $10
per ton resulting in a net increase in expense of $2.8 million (after-tax) over
the prior year quarter. In the prior year's first quarter, the SMI Texas mill
recovered $1.2 million (after-tax) for insurance relating to previously incurred
transformer losses. Net losses at SMI South Carolina decreased significantly
from $2.7 million in the first quarter last year to $900 thousand in the current
year period.
As more fully discussed under Contingencies, the Company increased its
litigation reserve by $10.7 million for the quarter ended November 30, 2000 for
unanticipated adverse rulings against the Company and its subsidiary, CMC Steel
Fabricators, Inc. Excluding this item, operating profit in the fabrication
businesses was 33% lower than the prior year's strong first quarter, while net
sales were 4% more. The biggest decline in profits occurred in steel joist
manufacturing, which was impacted by startup costs of new production lines and a
second cellular beam facility. Fabricated steel shipments totaled 238,000 tons,
a 10% increase due to new capacity from the prior year period. However, same
store shipments were down from the prior year, largely due to wet weather in
November 2000. The average fab selling price decreased $13 per ton. These
conditions more than offset the improvement in performance for large complex
structural jobs at SMI Owen, which lost $1.1 million (after-tax) versus $2.1
million (after-tax) in the prior year's first quarter.
Page 12
<PAGE> 14
Depreciation and amortization expense for the steel group increased by $753
thousand from the prior year first quarter due partially to the new ladle
metallurgical station at the mill in South Carolina and new fabrication
operations. The Company's interest expense increased by $1.8 million from the
prior year primarily because of increased short-term borrowings.
The copper tube division's operating profit decreased 5% from the same period
last year, while net sales increased by 2%. Demand for plumbing and
refrigeration tube continued to be buoyed by the strong housing sector in the
first quarter 2001. Copper tube production and shipments were about the same as
the first quarter last year. Metal spreads were nearly identical, but other
production costs increased slightly.
RECYCLING -
The recycling segment reported an operating loss of $2 million versus a profit
of $595 thousand for the first quarter last year, while net sales increased by
1% to $103 million. Nonferrous prices were relatively steady, but ferrous scrap
prices plummeted, resulting in a $3 million decrease in gross material margin
compared with the previous year period. Although ferrous scrap tonnage processed
and shipped was unchanged, ferrous sales prices were on average $79 per ton or
16% lower than a year ago. Ferrous demand decreased due to reduced steel output,
and scrap prices were adversely affected by imports of steel scrap and virgin
iron into the U.S. Nonferrous shipments increased 9%, and the average nonferrous
scrap price was 4% higher than the prior year period. Total volume of scrap
processed, including the steel group processing plants, was 574,000 tons, an
increase of 3% from the 557,000 tons processed during the prior year period.
Bankruptcies of three competitors resulted in increased flow of scrap into
several of the segment's plants. Additionally, the Company began to increase
purchasing of industrial scrap through national account programs.
MARKETING AND TRADING -
Operating profit of $1.6 million for the marketing and trading segment was 63%
lower than the prior year's first quarter, while net sales increased 4%.The
combination of slowing demand and oversupply caused the prices of numerous of
the company's products to drop sharply to low levels, resulting in reduced gross
margins. The strong U.S. dollar valuation continued to influence regional flows,
particularly in Australia, but also in Europe and Asia. Margins were notably
affected for most steel products, for commodity nonferrous metal products, and
industrial raw materials and products.
Page 13
<PAGE> 15
OTHER -
During the current year quarter, the Company sold land which was no longer being
utilized, recognizing a gain of $600 thousand in the corporate segment. Net book
value was minimal.
CONTINGENCIES -
In late December 2000, the Company received a Court's unanticipated adverse
rulings arising from a trial which concluded in October 1999 involving the
Company and its subsidiary, CMC Steel Fabricators Inc., in a contractual dispute
with a customer. Accordingly, the Company increased its reserve for the
litigation (included in accrued expenses and other payables) as of November 30,
2000 by $10.7 million. The Company intends to appeal the judgment, which
management anticipates will be entered in January 2001, based on these rulings.
Additional information regarding this matter is presented on page 18 at Part II
- Item 1. Legal Proceedings.
There were no material developments relating to the Company's construction
disputes or other contingencies since August 31, 2000. Refer to Note 9,
Commitments and Contingencies included in the notes to the consolidated
financial statements for the year ended August 31, 2000.
In the ordinary course of conducting its business, the Company becomes involved
in litigation, administrative proceedings, governmental investigations,
including environmental matters, and contract disputes. Some of these matters
may result in settlements, fines, penalties or judgments being assessed against
the Company. While the Company is unable to estimate precisely the ultimate
dollar amount of exposure to loss in connection with the above-referenced
matters, it makes accruals as warranted. Due to evolving remediation technology,
changing regulations, possible third-party contributions, the inherent
shortcomings of the estimation process, the uncertainties involved in litigation
and other factors, amounts accrued could vary significantly from amounts paid.
Accordingly, it is not possible to estimate a meaningful range of possible
exposure. Management believes that adequate provision has been made in the
financial statements for the estimable potential impact of these contingencies,
and that the outcomes will not significantly impact the long-term results of
operations or the financial position of the Company, although they may have a
material impact on earnings for a particular period.
The Company is subject to federal, state and local pollution control laws and
regulations in all locations where it has operating facilities. It anticipates
that compliance with these laws and regulations will involve continuing capital
expenditures and operating costs.
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OUTLOOK -
Management believes that the second quarter also will be weak. However, the
second half of fiscal year 2001 is expected to be considerably stronger than the
first half, due to both internal and external factors. The Company's operating
performance should improve during the year, and markets should strengthen.
Although the economic slowdown appears to be gathering force, management
anticipates that interest rates and energy costs will decline, and that the U.S.
dollar has peaked. If so, these factors as well as reduced inventories, should
mitigate much of the caution currently being exercised by purchasers. In the
U.S., nonresidential construction continues to be strong, and contracting for
new construction remains at high levels. New home sales have declined, but
remain strong.
The manufacturing sector of the economy has been harder hit but should improve
when inventories correct. Momentum in Europe and Asia has slowed, but economic
growth continues except for in Japan. On the supply side, given the prevailing
price levels, management expects to see more production cuts by primary
producers and mills, accelerated by the currently high power prices and
shortages in some regions of the U.S. and world. Consequently, global supply and
demand in the steel and nonferrous markets should become better balanced,
positively affecting both the Company's prices and shipments. Finally, the U.S.
Department of Commerce is scheduled to make its preliminary dumping
determination on rebar in mid-January 2001.
Longer term, the Company expects stronger demand for construction related
products and services. Authorized funding under the Federal Transportation
Program increased 16% for the U.S. government's fiscal 2001. Consequently,
management anticipates relatively high consumption of steel bar and structural
steel in the public sector during the next few years. Also, various end use
markets around the world should improve steel, and nonferrous metal consumption
should continue to grow.
Strategically, management's focus remains on participating in industry
consolidation, forming strategic alliances, growing added value businesses,
redeploying assets and increasing the Company's earnings and cash flows.
This outlook section contains forward-looking statements regarding the outlook
for the Company's financial results including product, pricing and demand,
production rates, energy expenses, interest rates, inventory levels, 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
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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 growth.
LIQUIDITY -
Cash flows from operations before changes in operating assets and liabilities
for the three months ended November 30, 2000 were $14.5 million compared to
$26.3 million last year due to lower earnings. Depreciation and amortization
increased during the first quarter of 2001 primarily due to the capital projects
at South Carolina and investments in new fabrication operations and facilities.
Net cash flows used by operating activities increased to $39.8 million from
$28.1 million in the prior year period due primarily to more inventories and
payments of operating liabilities, net of more cash from accounts receivable.
Accounts receivable decreased primarily due to lower sales in the first quarter
2001 than in the fourth quarter 2000. Inventories increased from prior year-end
in the steel group due to reduced shipments from the fourth quarter 2000,
without a requisite decrease in production. Accounts payable decreased $36.8
million due primarily to timing of shipments in the marketing and trading
segment. Accrued expenses and other payables and taxes decreased $19.3 million
due to the payment of incentive compensation and the funding of employee benefit
plans accrued at August 31, 2000, net of the litigation accrual.
Notes payable and commercial paper increased $65.7 million to supplement current
cash flows for funding working capital and capital expenditures. The Company
invested $15.0 million in property and equipment primarily in the steel group to
further expand its joist operations and at the minimills.
At November 30, 2000, there were 12,953,472 common shares issued and outstanding
with 3,179,111 held in the Company's treasury. Stockholders' equity was $410
million or $31.68 per share. During the first quarter, the Company repurchased
262,400 shares of common stock at an average price of $24.82.
Net working capital was $267 million at November 30, 2000 compared to $276
million at August 31, 2000. The decrease was primarily due to the litigation
accrual. The current ratio was 1.6, unchanged from August 31, 2000. The Company
reported a tax benefit for the three months ended November 30, 2000, which it
believes is substantially recoverable based on its long-term history of
consistent profitability. The Company's effective tax rate for the current
period was a 29.7% benefit versus a
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37.3% expense for the first quarter last year. The rate varied due to a
different tax rate applied to the current period litigation accrual.
Long-term debt as a percent of total capitalization was 37.2% at November 30,
2000, up from 36.7% at August 31, 2000. The ratio of total debt to total
capitalization plus short-term debt stood at 49.2%, higher than the 2000 year
end ratio of 44.6%. These ratios increased primarily due to capital expenditures
and working capital requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Company is not significantly
different from the information set forth in Item 7a. Quantitative and
Qualitative Disclosures About Market Risk included in the Company's Annual
Report on Form 10-K for the year ended August 31, 2000, filed November 21, 2000,
with the Securities and Exchange Commission, and is therefore not presented
herein.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 22, 2000, the Company was advised that a United States
District Court Judge entered findings of fact and conclusions of law adverse to
the Company resulting from a trial that concluded in October, 1999. The lawsuit
was filed in January, 1996 by the subsidiary against a contractor for failure to
pay for steel supplied to three construction jobs. (United States of America For
The Use And Benefit of CMC Steel Fabricators, Inc., d/b/a Safety Steel Service,
Inc., vs. Harrop Construction Company, Inc., and The Glens Falls Insurance
Company Case No. C-96-38 United States District Court, Southern District of
Texas, Corpus Christi Division) This lawsuit involved a former customer
("Harrop") that contracted with CMC Steel Fabricators' Safety Steel Service
division ("Safety Steel"), located in Victoria, Texas for supply and fabrication
of structural and reinforcement steel on three jobs. The Court ruled that Safety
Steel was owed approximately $333,000 by Harrop, but also found that Harrop was
entitled to recover compensatory damages for breach of contract delays related
to the jobs and loss of value of the business totaling approximately $2.2
million. The Court found that prejudgment interest should be awarded on both
amounts. The Court further awarded Harrop exemplary damages of approximately
$6.6 million based on tort claims of fraud and violations of the Texas Deceptive
Trade Practices Act. The judgment, when entered, will apply to CMC Steel
Fabricators, Inc. and Commercial Metals Company. CMC Steel Fabricators, Inc.,
and Commercial Metals Company have announced their intent to appeal the
judgment.
Reference is made to the information incorporated by reference from
Item 3. Legal Proceedings in the Company's Annual Report on Form 10-K for the
year ending August 31, 2000, filed November 21, 2000, with the Securities and
Exchange Commission.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits required by Item 601 of Regulation S-K.
None
B. The Registrant did not file any report on Form 8-K
during the three-month period ended November 30,
2000. A report on Form 8-K was filed December 27,
2000, to report Item 5. Other Information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL METALS COMPANY
/s/ WILLIAM B. LARSON
-----------------------------------
January 12, 2001 William B. Larson
Vice President
& Chief Financial Officer
/s/ MALINDA G. PASSMORE
-----------------------------------
January 12, 2001 Malinda G. Passmore
Controller
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