================================================================================UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549---------------------- FORMForm 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER
(Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 2004 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-4304
COMMERCIAL METALS COMPANY (ExactCommercial 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 No.) 6565 MacARTHUR BLVD. IRVING, TEXAS 75039 (Address of principal executive offices) (Zip Code) (214) 689-4300 (Registrant's
75-0725338 (State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)6565 MacArthur Blvd,
Irving, TX
(Address of principal executive offices)75039
(Zip Code)Registrant’s telephone number, including area
code)code:(214) 689-4300Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ----------------------------------- -----------------------------------------
Title of Each Class Name of Each Exchange on Which Registered Common Stock, $5 par value New York Stock Exchange Rights to Purchase Series A New York Stock Exchange PreferredStock, $5 par valueNew York Stock Exchange Rights to Purchase Series A Preferred Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act:
NoneIndicate 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]þ No[ ]oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K oranyamendment to this Form10-K. [ ]10-K oIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes
[X]þ No[ ]o The aggregate market value of the common stock on November
18, 20031, 2004, held by non-affiliates of the registrant, based on the closing price of$23.72$36.90 per share on November18, 20031, 2004 on the New York Stock Exchange, was approximately$607,042,430.$988,175,616. (For purposes of determination of this amount, only directors, executive officers, and 10% or greater stockholders have been deemed affiliates.)The number of shares outstanding of common stock as of November
18, 20031, 2004, was28,315,855.29,387,327DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following document are incorporated by reference into the listed Part of Form 10-K:
Registrant'sRegistrant’s definitive proxy statement for the annual meeting of stockholders to be held January
22, 2004 --Part27, 2005 — Part III================================================================================COMMERCIAL METALS COMPANY
TABLE OF CONTENTSPART I
ITEM 1. BUSINESS
GENERAL
We manufacture, recycle, market and distribute steel and metal products and related materials and services through a network of locations located throughout the United States and internationally. We consider our business to be organized into
threefive segments:manufacturing,domestic mills, CMCZ, domestic fabrication, recycling and marketing and distribution.We were incorporated in 1946 in the State of Delaware. Our predecessor company, a secondary metals recycling business, has existed since approximately 1915. We maintain our executive offices at 6565 MacArthur Boulevard in Irving, Texas, telephone number (214) 689-4300. Our fiscal year ends August 31 and all references in this Form 10-K to years refer to the fiscal year ended August 31 of that year unless otherwise noted. Financial information for the last three fiscal years concerning our
threefive business segments and the geographic areas of our operations is incorporated herein by reference from"Note 13“Note 14 BusinessSegments"Segments” of the notes to consolidated financial statements which are in Part II, Item 8 of this Form 10-K.Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports will be made available free of charge through the Investor Relations section of our Internet website, http://www.commercialmetals.com, as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.
RECENT DEVELOPMENTS Acquisition of Huta Zawiercie SA. On July 22, 2003,Except as otherwise stated in these reports, the information contained on oursubsidiary Commercial Metals (International) AG enteredwebsite or available by hyperlink from our website is not incorporated intoan agreementthis Annual Report on Form 10-K or other documents we file with, or furnish to,purchase 71% of the shares of Huta Zawiercie S.A., the third largest producer of steel in Poland, from Impexmetal S.A. of Warsaw, Poland. We will pay approximately $50 million for the shares and assume approximately $32 million in debt owed by Huta Zawiercie S.A. We expect to close the acquisition on or before December 15, 2003. Completion of Private Offering of Notes Due 2013. On November 6, 2003, we entered into an agreement with a group of purchasers lead by Goldman, Sachs, & Co. for the sale of $200 million principal amount of our 5.625% notes due 2013. This sale was completed on November 12, 2003. We issued the 2013 notes in a private offering that was exempt from registration underthe SecuritiesAct of 1933. The notes were sold to investors atand Exchange Commission.DOMESTIC MILLS SEGMENT
We conduct our domestic mills operations through a
price equal to 99.856% of their par value, resulting in an effective yield to maturity of 5.644%. The amount of net proceeds that we received from this offering, after giving effect to underwriting discounts, fees and other expenses, was approximately $198 million. We used approximately $96 million of the proceeds from this offering to pay for the 2005 notes that were tendered in connection with the tender offer described below. We plan to use approximately $50.0 million of these proceeds to fund the acquisition of Huta Zawiercie S.A. We will use the remaining portion of the proceeds for general corporate purposes which may include acquisitions or and investments in complementary companies. We are currently participating in negotiations regarding a potential acquisition of another company for a cash purchase price of approximately $50 million. The transaction is subject to the negotiation of definitive agreements and other conditions and approvals. We can give no assurance whether these negotiations will be concluded or whether this transaction will be completed.Completion of Tender Offer for 2005 Notes. On October 31, 2003, we commenced a cash tender offer for any and all of our outstanding 7.20% notes due 2005. The tender offer expired at 12:00 p.m. (noon), New York City time, on November 7, 2003. We received tenders of $89 million principal amount of our 2005 notes from holders in the tender offer, which represents 89% of the original $100 million principal amount of 2005 notes initially outstanding. In exchange, on November 13, 2003, we made aggregate cash payments of approximately $ 96 million for these notes on the terms and conditions specified in our Offer to Purchase dated October 31, 2003. Approximately $ 11 million principal amount of our 2005 notes remain outstanding. As discussed above, we used a portion of the proceeds from the offering of our 2013 notes to pay for the 2005 notes we received in the tender offer. MANUFACTURING SEGMENT Our manufacturing segment is our dominant and most rapidly expanding segment. The manufacturing segment utilizes the most assets, requires the most capital expenditures, generally has the highest operating profit and employs the most employees as compared to the recycling and marketing and distribution segments. Our manufacturing segment consists of the steel group and Howell Metal Company. Howell Metal Company, a subsidiary, manufactures copper tubing. Our steel group is the larger portion of this segment. STEEL GROUP Our steel group operates the following: - 4 steel mills, commonly referred to as "minimills", that produce reinforcing bar, angles, flats, small beams, rounds, fence-post sections and other shapes; - 30 steel plants that bend, cut, weld and fabricate steel, primarily reinforcing bar and angles; - 28 warehouses that sell or rent supplies for the installation of concrete; - 6 plants that produce special sections for floors and ceiling support; - 4 plants that produce steel fence posts; - 1 plant that treats steel with heat to strengthen and provide flexibility; - 1 plant that rebuilds railcars; and - a railroad salvage companynetwork of:
— 4 steel mills, commonly referred to as “minimills”, that produce reinforcing bar, angles, flats, small beams, rounds, fence-post sections and other shapes; — scrap processing facilities that directly support these minimills; and — a copper tube minimill. Minimills. We operate four steel minimills which are located in Texas, Alabama, South Carolina and Arkansas. The minimills produce reinforcing bar, angles, flats, small beams, rounds, fence-post sections and other shapes. We utilize a fleet of trucks that we own and private haulers to transport finished products from the minimills to our customers and our fabricating shops. To minimize the cost of our products, we try to operate all four minimills at full capacity. Market conditions such as increases in quantities of competing imported steel, production rates at domestic competitors or a decrease in construction activity may reduce demand for our products and limit our ability to operate the minimills at full capacity. Through our operations and capital improvements, we strive to increase our capacity and productivity at the minimills and enhance our product mix.
2Since the steel minimill business is capital intensive, we make substantial capital expenditures on a
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regular basis to remain competitive with other low cost producers. Over the past three fiscal years we have spent approximately
$51$53 million or31%35% of our total capital expenditures on steel minimillprojects.projects not including $8 million spent following our acquisition of CMCZ.The following table compares the amount of steel (in tons) melted, rolled and shipped by our four minimills in the past three fiscal years:
2001 2002 2003 ---- ---- ----Tons Melted 1,796,000 2,100,000 2,081,000 Tons Rolled 1,705,000 2,026,000 1,972,000 Tons Shipped 1,903,000 2,171,000 2,284,000
2002 2003 2004 Tons Melted 2,100,000 2,081,000 2,265,000 Tons Rolled 2,026,000 1,972,000 2,195,000 Tons Shipped 2,171,000 2,284,000 2,401,000 We acquired our largest steel minimill in 1963. It is located in Seguin, Texas, near San Antonio. In 1983, we acquired our minimill in Birmingham, Alabama. As part of the acquisition of Owen Steel Company, Inc. and its affiliates in 1995, we acquired our minimill in Cayce, South Carolina. We have operated our smallest mill since 1987, and it is located near Magnolia, Arkansas.
The Texas, Alabama and South Carolina minimills each consist of:
- melt shop with electric arc furnace that melts ferrous scrap; - continuous casting equipment that shape the molten metal into billets; - reheating furnace that prepares billets for rolling; - rolling mill that form products from heated billets; - mechanical cooling bed that receives hot product from the rolling mill; - finishing facilities that cut, straighten, bundle and prepare products for shipping; and -
— melt shop with electric arc furnace that melts ferrous scrap; — continuous casting equipment that shape the molten metal into billets; — reheating furnace that prepares billets for rolling; — rolling mill that form products from heated billets; — mechanical cooling bed that receives hot product from the rolling mill; — finishing facilities that cut, straighten, bundle and prepare products for shipping; and — supporting facilities such as maintenance, warehouse and office areas. Descriptions of minimill capacity, particularly rolling capacity, are highly dependent on the specific product mix manufactured. Each of our minimills can and do roll
severalmany different types and sizes of products in their range depending on pricing and demand. Therefore our capacity estimates assume a typical product mix and will vary with the products actually produced. Our Texas minimill has annual capacity of approximately 900,000 tons melted and 800,000 tons rolled. Our Alabamaminimill'sminimill’s annual capacity is approximately 650,000 tons melted and 575,000 tons rolled. We have annual capacity at our South Carolina minimill of approximately 700,000 tons melted and 800,000 tons rolled.Our Texas minimill manufactures a full line of bar size products including reinforcing bar, angles, rounds, channels, flats, and special sections used primarily in building highways, reinforcing concrete structures and manufacturing. Our Texas minimill sells primarily to the construction, service center, energy, petrochemical, and original equipment manufacturing industries. The Texas minimill primarily ships its products to customers located in Texas, Louisiana, Arkansas, Oklahoma and New Mexico. It also ships products to approximately 30 other states and to Mexico. Our Texas minimill melted 884,000 tons during 2004 compared to 852,000 tons during 2003,
compared to 838,000 tons during 2002,and rolled708,000792,000 tons,a decreasean increase of5,00084,000 tons from2002. 32003. The Alabama minimill recorded
20032004 melt shop production of612,000660,000 tons, an increase of27,00048,0002
tons from
2002.2003. The Alabama minimill rolled483,000538,000 tons,a decreasean increase of10,00055,000 tons from2002.2003. Our Alabama minimill primarily manufactures products that are larger in size as compared to products manufactured by our other three minimills. Such larger size products include mid-size structural steel products including angles, channels, wide flange beams of up to eight inches and special bar quality rounds and flats. Our Alabama minimill sells primarily to service centers, as well as to the construction, manufacturing, and fabricating industries. The Alabama minimill primarily ships its products to customers located in Alabama, Georgia, Tennessee, North and South Carolina, and Mississippi.Our South Carolina minimill manufactures a full line of bar size products which primarily include steel reinforcing bar. The minimill also manufactures angles, rounds, squares, fence post sections and flats. The South Carolina minimill ships its products to customers located in the Southeast and mid-Atlantic areas which include the states from Florida through southern New England. During
2003,2004, the South Carolina minimill melted617,000721,000 tons and rolled661,000727,000 tons compared to677,000617,000 tons melted and693,000661,000 tons rolled during2002.2003.The primary raw material for our Texas, Alabama and South Carolina minimills is secondary, or scrap, ferrous metal. We purchase the raw material from suppliers generally within a 300 mile radius of each minimill. Ten secondary metals recycling plants located in Texas, South Carolina and Georgia are operated by our steel group due to the predominance of secondary ferrous metals sales to the nearby steel group operated minimills. Two of the
steel group'ssegment’s ten recycling plants operate automobile shredders. The eight smaller facilities assist the two larger locations with shredders and our nearby minimills with the acquisition of ferrous scrap. These metal recycling plants processed and shipped930,0001,168,000 tons of primarily ferrous scrap metals during2003.2004. We believe the supply of scrap is adequate to meet our future needs, but it has historically been subject to significant pricefluctuations with prices having increased during 2003 to near record highs by the end of the year.fluctuations. All three minimills also consume large amounts of electricity and natural gas which have been readily available. Regional andmore recently,national energy supply and demand levels affect the prices we pay for electricity and natural gas.Our Arkansas minimill primarily manufactures metal fence post stock, small diameter reinforcing bar, sign posts and bed frame angles with some flats, angles and squares. At our Arkansas minimill and at our facilities in San Marcos, Texas, Brigham City, Utah, and West Columbia, South Carolina, we fabricate fence post stock into studded
"T"“T” metal fence posts. This minimill utilizes rail salvaged from abandoned railroads and, on occasion, billets from our minimills, or other suppliers, as its raw material. Theminimill'sminimill’s reheat furnace heats the rail or billets and then a rolling mill processes it. The product is finished at facilities similar to, but smaller than, the other minimills. Since our Arkansas minimill does not have melting facilities, the minimill depends on an adequate supply of competitively priced billets or used rail. The availability of these raw materials fluctuates with the pace of railroad abandonments, rail replacement by railroads and the demand for used rail from domestic and foreign rail rerolling mills. We have annual capacity at our Arkansas minimill of approximately 150,000 tons rolled.Steel Fabrication. Our steel group operates a total of 40 facilities that we consider to be engaged in the various related aspects of steel fabrication. Thirty facilities engage in general fabrication of reinforcing and structural steel,, 6 locations specialize in fabricating joists and special beams for floor and ceiling support and 4 facilities fabricate only steel fence post.. We obtain steel for these facilities from our own minimills and unrelated vendors. Our steel fabrication capacity exceeds 1.1 million tons. In 2003, we shipped 1,028,000 tons of fabricated steel, an increase of 44,000 tons from 2002. We conduct these activities in Texas at Beaumont, Buda, Corpus Christi, Dallas, Harlingen, Houston (3), Melissa, San Marcos, San Antonio, Seguin, Victoria, and Waco; Louisiana in Baton Rouge and Slidell; Arkansas in Magnolia and Hope (2); Utah in Brigham City; Florida in Fort Myers, Jacksonville and Starke; Nevada in Fallon; South Carolina in Cayce, Columbia, Eastover, Taylors and West Columbia; in Georgia in the 4cities of Atlanta and Lawrenceville; North Carolina in Gastonia (2); Virginia in Farmville and Fredericksburg; California in Etiwanda, Fresno, Stockton and Fontana; Iowa at Iowa Falls; and in Arizona at Chandler. Fabricated steel products are used primarily in the construction of commercial and non-commercial buildings, hospitals, convention centers, industrial plants, power plants, highways, arenas, stadiums, and dams. Generally, we sell fabricated steel in response to a bid solicitation from a construction contractor or the project owner. Typically, the contractor or owner of the project awards the job based on the competitive prices of the bids and does not individually negotiate with the bidders. During 2003, we purchased the operating assets of the general reinforcing bar fabrication facilities in Chandler, Arizona and Fresno , California and San Antonio, Texas. Our joist manufacturing operations headquartered in Hope, Arkansas, manufacture steel joists for roof supports. The joist manufacturing operations fabricate joists from steel obtained primarily from our steel group's minimills at facilities in Hope, Arkansas; Starke, Florida; Cayce, South Carolina; Fallon, Nevada; and Iowa Falls, Iowa. Our typical joist customer is a construction contractor or large chain store owner. Joists are generally made to order and sales may include custom design, fabrication and painting. We obtain our sales primarily on a competitive bid basis. During 1999, we began production and sales of castellated and cellular steel beams. These beams, recognizable by their hexagonal or circular pattern of voids, permit greater design flexibility in steel construction, especially floor structures. We fabricate these beams at a facility adjacent to our Hope, Arkansas, joist plant. Concrete-Related Products. We sell and rent concrete related supplies and equipment to concrete installation businesses. We have twenty eight warehouse locations in Texas, Louisiana, Mississippi, South Carolina, Florida and Colorado where we store and sell these products which, with the exception of a small portion of steel products, are purchased for resale from unrelated suppliers. During 2003 we purchased the assets, primarily inventory, of the Denver, Colorado location. Heat Treating Operation. Our steel group's heat treating operation is Allegheny Heat Treating, Inc., located in Chicora, Pennsylvania. Allegheny Heat Treating works closely with our Alabama minimill and other steel mills that sell specialized heat-treated steel for customer specific use. Such steel is primarily used in original or special equipment manufacturing. We have annual operating capacity in our heat treating operation of approximately 30,000 tons. Railroad Car Plant And Railroad Dismantling. We have a facility in Victoria, Texas that repairs and rebuilds railroad freight cars. We also provide custom maintenance and some manufacturing of specialized railroad freight cars. Owners of private railcar fleets, railroads and leasing companies are our customers. We primarily obtain this work on a bid and contract basis. We also operate a business that purchases and removes rail and other materials from abandoned railroads. Most of the salvaged rail is utilized by our Arkansas minimill. HOWELL METAL COMPANYHowell Metal Company. Our subsidiary, Howell Metal Company, operates a copper tube minimill in New Market, Virginia. The minimill manufactures copper tube, primarily water tubing, for the plumbing, air conditioning and refrigeration industries. Both high quality secondary copper scrap and virgin copper ingot are melted, cast, extruded and drawn into tubing. The minimill supplies tubing in straight lengths and coils for use in commercial, industrial and residential construction and by original equipment manufacturers. Our customers, largely equipment manufacturers, wholesale plumbing supply firms and large home improvement retailers, are located primarily east of the Mississippi River and supplied directly from the minimill or three warehouses located along the east coast.
Recently Howell has undertaken to expand its marketing territory to the west.The demand for copper tube depends on the level of new apartment, hotel/motel and residential construction and renovation. Copper scrap is readily available, but subject to5rapid price fluctuations. The price or supply of virgin copper causes the price of copper scrap to fluctuate rapidly. Our recycling segment supplies a small portion of the copper scrap. Howell Metal Company'sCompany’s facilities include melting, casting, piercing, extruding, drawing,3
finishing and office facilities. During
2003,2004, the facility produced approximately61,000,00066.3 million pounds of copper tube. Howell has annual manufacturing capacity of approximately80,000,00080 million pounds.No single customer purchases 10% or more of our
manufacturing segment's productiondomestic mills segment’s production. Due to the nature of certain stock products we sell in themanufacturingdomestic mills segment, we do not have a long lead time between receipt of a purchase order anddelivery, with the exception of the steel fabrication and joist jobs.delivery. We generally fill orders forotherstock products from inventory or with products near completion. As a result, we do not believe that backlog levels are a significant factor in the evaluation of our operations. Backloginfor our four domestic steelgroupmills at2003 year-endAugust 31, 2004 was approximately$341,983,000$178.4 million as compared tobacklog$108.9 million at August 31, 2003.CMCZ SEGMENT
On December 3, 2003, our Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), of Zawiercie, Poland for 200 million Polish Zlotys (PLN), $51.9 million on the acquisition date. In connection with the acquisition, we also assumed debt of 176 million PLN ($45.7 million). The Polish State Treasury owns approximately 26.4% of the remaining outstanding shares. CMCZ is a steel minimill with equipment similar to our domestic steel minimills but also includes a second rolling mill which produces wire rod. CMCZ owns a majority interest in several smaller metals related operations, including two scrap processing facilities that directly support CMCZ. CMCZ has annual melting capacity of approximately 1,400,000 tons with annual rolling capacity of approximately 1,100,000 tons. During the approximate nine month period we controlled CMCZ, the facility melted 1,159,000 tons, rolled 863,000 tons and shipped 1,082,000 tons of steel. Principal products manufactured include rebar and wire rod as well as smaller quantities of merchant bar. With this acquisition, we have become a significant manufacturer of rebar and wire rod in Central Europe. We have presented CMCZ and its subsidiaries as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are not similar to that of our domestic minimills.
CMCZ sells rebar primarily to fabricators, distributors and construction companies. Principal customers for wire rod are meshmakers, endusers and distributors. CMCZ’s products are generally sold to customers located within a market area of 400 miles of the mill. The majority of sales are to customers within Poland with the Czech Republic, Slovakia, Hungary and Germany being the major export markets. No single customer purchases 10% or more of CMCZ’s production although approximately 20% of CMCZ’s sales are sold to end users by CMC affiliated marketing and distribution entities. Ferrous scrap is the principal raw material for CMCZ and is generally obtained from scrap processors and generators within 400 miles of the mill. Scrap, electricity, natural gas and other necessary raw materials for the steel manufacturing process are generally readily available although subject to periodic significant price fluctations.
DOMESTIC FABRICATION SEGMENT
On December 23, 2003, we acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) for $48.8 million cash. Lofland is the sole stockholder of the Lofland Company and subsidiaries which operate steel reinforcing bar fabrication and construction-related product sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico, and Mississippi. This acquisition complements our existing Texas rebar fabrication and construction-related product sales operations and expands our service areas in each of the neighboring states. Following our acquisition of Lofland, we changed our internal management reporting structure, which necessitated our reporting domestic fabrication (including Lofland) as a separate segment.
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We conduct our fabrication operations through a network of:
— steel plants that bend, cut, weld and fabricate steel, primarily reinforcing bar and angles; — warehouses that sell or rent products for the installation of concrete; — plants that produce special sections for floors and ceiling support; — plants that produce steel fence posts; — plants that treat steel with heat to strengthen and provide flexibility; — a plant that rebuilds railcars; and — a railroad salvage company. Our domestic fabrication segment operates facilities that we consider to be engaged in the various related aspects of steel fabrication. Most of the facilities engage in general fabrication of reinforcing and structural steel with 6 locations specializing in fabricating joists and special beams for floor and ceiling support and 4 facilities fabricating only steel fence post. We obtain steel for these facilities from our own domestic minimills, purchases through our marketing and distribution segment and unrelated vendors. Following the Lofland acquisition our steel fabrication capacity exceeds 1.4 million tons annually. In 2004, we shipped 1,311,000 tons of fabricated steel, an increase of 283,000 tons from 2003. We conduct these activities in facilities located in Texas at Beaumont, Buda, Corpus Christi, Dallas (2), Fort Worth, Harlingen, Houston (3), Melissa, San Marcos, San Antonio, Seguin, Victoria, Waco and Waxahachie; Louisiana at Baton Rouge, Keithville and Slidell; Arkansas at Little Rock, Magnolia, Hope (2) and Springdale; Utah in Brigham City; Florida at Fort Myers, Jacksonville and Starke; Nevada at Fallon; South Carolina at Cayce, Columbia, Eastover, Taylors and West Columbia; in Georgia at Atlanta and Lawrenceville; North Carolina at Gastonia (2); Virginia at Farmville and Fredericksburg; California at Etiwanda, Fresno, Stockton and Fontana; Iowa at Iowa Falls; Arizona at Chandler; Oklahoma at Oklahoma City and Tulsa; New Mexico at Albuquerque; and Mississippi at Lumberton. Fabricated steel products are used primarily in the construction of commercial and non-commercial buildings, hospitals, convention centers, industrial plants, power plants, highways, arenas, stadiums, and dams. Generally, we sell fabricated steel in response to a bid solicitation from a construction contractor or the project owner. Typically, the contractor or owner of the project awards the job based on the competitive prices of the bids and does not individually negotiate with the bidders.
Our joist manufacturing operations headquartered in Hope, Arkansas, manufacture steel joists for roof supports. The joist manufacturing operations fabricate joists from steel obtained primarily from our steel group’s minimills at facilities in Hope, Arkansas; Starke, Florida; Cayce, South Carolina; Fallon, Nevada; and Iowa Falls, Iowa. Our typical joist customer is a construction contractor or large chain store owner. Joists are generally made to order and sales may include custom design, fabrication and painting. We obtain our sales primarily on a competitive bid basis. We also manufacture and sell castellated and cellular steel beams. These beams, recognizable by their hexagonal or circular pattern of voids, permit greater design flexibility in steel construction, especially floor structures. We fabricate these beams at a facility adjacent to our Hope, Arkansas, joist plant.
Construction Related Products. We sell and rent construction related products and equipment to concrete installers and other construction businesses. We have warehouse locations in Texas, Louisiana, Mississippi, South Carolina, Florida and Colorado where we store and sell these products which, with the exception of a small portion of steel products, are purchased for resale from unrelated suppliers.
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Heat Treating Operation. Our heat treating operation is Allegheny Heat Treating, Inc., with locations in Chicora, Pennsylvania and Struthers, Ohio. Allegheny Heat Treating works closely with our Alabama minimill and other steel mills that sell specialized heat-treated steel for customer specific use. Such steel is primarily used in original or special equipment manufacturing. We have annual operating capacity in our
steel group at 2002 year-endheat treating operation of approximately$286,880,000.30,000 tons.Railroad Car Plant And Railroad Dismantling. We have a facility in Victoria, Texas that repairs and rebuilds railroad freight cars. Owners of private railcar fleets, railroads and leasing companies are our customers. We primarily obtain this work on a bid and contract basis. We also operate a business that purchases and removes rail and other materials from abandoned railroads. Most of the salvaged rail is utilized by our Arkansas minimill.
Backlog in our domestic fabrication segment was approximately $489.7 million at August 31, 2004 as compared to $233.1 million at August 31, 2003. No single customer purchases 10% or more of our domestic fabrication segment’s production.
RECYCLING SEGMENT
Our recycling segment processes secondary metals, or scrap metals, for use as a raw material by manufacturers of new metal products. This segment operates thirty four secondary metal processing facilities not including the ten recycling facilities operated
by our steel groupasapart of ourmanufacturingdomestic mills segment.We purchase ferrous and nonferrous secondary or scrap metals, processed and unprocessed, from a variety of sources in a variety of forms for our metal recycling plants. Sources of metal 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. Collectively, small secondary metal collection firms are a major supplier.
In
2003,2004, our metal recyclingsegment'ssegment’s plants processed and shipped approximately1,881,0002,243,000 tons of scrap metal compared to1,741,0001,881,000 tons in2002.2003. Ferrous scrap metals comprised the largest tonnage of metals recycled at approximately1,639,0001,979,000 tons, an increase of approximately145,000340,000 tons as compared to2002.2003. We shipped approximately241,000264,000 tons of nonferrous scrap metals, primarily aluminum, copper and stainless steel,a decreasean increase of approximately6,00023,000 tons as compared to2002.2003. With the exception of precious metals, our metal recycling plants recycle and process practically all types of metal. In additionour steel group'sten metal recycling facilities operated by our domestic mills segment processed and shipped approximately930,0001,168,000 tons of primarily ferrous scrap metals during2003.2004.Our metal recycling plants consist of an office and warehouse building equipped with specialized equipment for processing both ferrous and nonferrous metal. A typical recycling plant also includes several acres of land that we use for receiving, sorting, processing and storing metals. Several of our recycling plants use a small portion of their site or a nearby location to display and sell metal products that may be reused for their original purpose without further processing. We equip our larger plants with scales, shears, baling presses, briquetting machines, conveyors and magnetic separators which enable these plants to efficiently process large volumes of scrap metals. Two plants have extensive equipment that segregates metallic content from large quantities of insulated wire. To facilitate processing, shipping and receiving, we equip our ferrous metal processing centers with either presses, shredders or hydraulic shears to prepare and compress metal scrap for easier handling. Cranes are utilized to handle scrap metals for processing and to load material for shipment. Many facilities have rail access as ferrous scrap is primarily shipped by open gondola railcar or barge when water access is available.
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We operate five large shredding machines, four in Texas with one in Florida, capable of pulverizing obsolete automobiles or other ferrous metal scrap. We have two additional shredders operated by our
manufacturingdomestic mills segment.We sell recycled metals 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. Ferrous scrap metal is the primary raw material for electric arc furnaces such as those operated by our steel minimills. Some minimills periodically supplement purchases of scrap metal with direct reduced iron and pig iron for certain product lines. Our Dallas office coordinates the sales of recycled metals from our metal recycling plants to our customers. We negotiate export sales through our network of foreign offices as well as our Dallas office.
We do not purchase a material amount of scrap metal from one source. One
customer'scustomer’s purchases represented approximately10%11% of our recyclingsegment'ssegment’s revenues. Our 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 metalsoftentimesfrequently can utilize primary or"virgin"“virgin” ingot processed by mining companies instead of secondary metals. The prices of nonferrous scrap metals are closely related to but generally less than, the prices of primary or"virgin"“virgin” ingot.MARKETING AND DISTRIBUTION SEGMENT
Our marketing and distribution segment buys and sells primary and secondary metals, fabricated metals and other industrial products. During the past year, our marketing and distribution segment sold approximately
2.12.5 million tons of steel products. We market and distribute these products through a network of15offices,4processing facilities and joint venture offices located around the world. We purchase steel, nonferrous metals including copper and aluminum coil, sheet and tubing, chemicals, industrial minerals, ores, metal concentrates and ferroalloys from producers in domestic and foreign markets. Occasionally, we purchase these materials from suppliers, such as trading companies or industrial consumers, who have a surplus of these materials. We utilize long-term contracts, spot market purchases and trading or barter transactions to purchase materials. A majority of the products we purchase are either fabricated semi-finished product or finished product.We sell our products to customers, primarily manufacturers, in the steel, nonferrous metals, metal fabrication, chemical, refractory and transportation businesses. We sell directly to our customers through and with the assistance of our offices in Irving, Texas; Fort Lee and Englewood Cliffs, New Jersey; Arcadia, California; Sydney, Perth, Melbourne, Brisbane and Adelaide, Australia; Singapore; Zug, Switzerland; Hong Kong; Sandbach, United
Kingdom:Kingdom; Kohl, Germany, andas of November, 2003,Guangzhou, China. We have representatives in offices in Moscow and Beijing. We have agents or joint venture partners intwenty twoadditional offices located in significant international markets. Our network of offices shares information regarding demand for our materials, assists with negotiation and performance of contracts and other services for our customers, and identifies and maintains relationships with our sources of supply.In most transactions, we act as principal by taking title and ownership of the products. We are also designated as a marketing representative, sometimes exclusively, by product suppliers. We utilize agents when appropriate, and on occasion we act as a broker for these products. We buy and sell these products in almost all major markets throughout the world where trade by American-owned companies is permitted.
We market physical products as compared to companies that trade commodity futures contracts and frequently do not take delivery of the commodity. As a result of sophisticated global communications, our
7customers and suppliers often have easy access to quoted market prices, although such pricesprice quotes are7
not always
accurate.indicative of actual transaction prices. Therefore, to distinguish ourselves we focus on creative service functions for both sellers and buyers. Our services include actual physical market pricing and trend information, as compared to more speculative metal exchange futures 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. We attempt to limit exposure to price fluctuations by offsetting purchases with concurrent sales. We also enter into currency exchange contracts as economic hedges of sales and purchase commitments denominated in currencies other than the United States dollar or, if the transaction involves our Australian, United Kingdom or German subsidiaries, their local currency. We do not, as a matter of policy, speculate on changes in the markets.We have previously made investments to acquire approximately 11% of the outstanding stock of a Czech Republic steel mill and 24% of a Belgium business that processes and pickles hot rolled steel coil.
Additionally, as described under "Recent Developments" above, we have made arrangements to acquire 71% of the shares of Huta Zawiercie SA, a Polish steel producer.These investments allow us to expand our marketing and distribution activities.Our Australian operations have eleven warehousing facilities for just-in-time delivery of steel and industrial products. We also have a heat treating facility for steel products at our Australian operations. In 2002, our Australian operations acquired the remaining 78% interest of Coil Steels Group that we did not own. Coil Steels Group is the third largest distributor of steel sheet and coil products in Australia and has processing facilities in Brisbane, Sydney and Melbourne and warehouses in Adelaide and Perth.
SEASONALITY
Many of our
manufacturing segment'sdomestic mills, CMCZ and domestic fabrication segments’ customers are in the construction business. Due to the increase in construction during the spring and summer months, our sales inthe manufacturing segmentthese segments are generally higher in the third and fourth quarters than in the first and second quarters of our fiscal year.COMPETITION
Manufacturing Segment.Our
steel manufacturing, steel fabricating and copper tube manufacturing businessesdomestic mills compete with regional, national and foreign manufacturersand fabricatorsof steel and copper.We compete primarily on the price and quality of our products and our service. See "Risk Factors- Risks Related to Our Industry". If recently imposed tariffs and duties are relaxed or substantial exemptions to the tariffs are created, then steel imports into the U.S. may again rise or domestic prices may fall, which would adversely affect our sales, margins and profitability" below.We do not produce a significant percentage of the totalnationaldomestic output of most of our products. However, we are considered a substantial supplier in the markets near our facilities. We compete primarily on the price and quality of our products and our service. See “Risk Factors — Risks Related to Our Industry”.CMCZ is believed to be the largest supplier of wire rod and the third largest supplier of reinforcing bar in the Polish market. It competes with several large manufacturers of rebar and wire rod in central and eastern Europe, primarily on the basis of price and product availability.
Our domestic fabrication businesses compete with regional and national suppliers. We believe that we are the largest fabricator of reinforcing bar in the United States and 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.
Recycling Segment.We believe our recycling segment is one of the
largerlargest entitiesthat recyclesengaged in the recycling of nonferrous secondarymetals.metals in the United States. We are also a major regional processor of ferrous scrap metal. The secondary metals recycling business is subject to cyclical fluctuations based upon the availability and price of unprocessed scrap metal and the demand for steel and nonferrous metals. Buying prices and service to scrap suppliers are the principal competitive factors for the segment. The price offered for scrap metal is the principal competitive factor in acquiring material from smaller secondary metals collection firms while industrial8sourcesgenerators of scrap may also consider the importance of other factors such as8
supplying
adequateappropriate collection containers, timely removal, reliable documentation including accurateinformationand detailed purchase records with customized reports, the ability to service multiple locations, insurance coverage, and the buyer’s financialability. Marketing and Distribution Segment.strength.Our marketing and distribution business is highly competitive. Our products in the marketing and distribution segment are standard commodity items. We compete primarily on the price, quality and reliability of our products, our financing alternatives and our additional services. In this segment, we compete with other domestic and foreign trading companies, some of which are larger and may have access to greater financial resources. In addition, some of our competitors may be able to pursue business without being restricted by the laws 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.
Internet ecommerce sites specializingOur Coil Steels Group, a distributor of steel sheet and coil inmetals beganAustralia, is believed todevelopbe the third largest distributor of those products inthe late 1990's but during the past year most have terminated or scaled back operations. We do not believe they have had a significant impact on our business.Australia.ENVIRONMENTAL MATTERS
A significant factor in our business is our compliance with environmental laws and regulations. See
"Risk“Risk Factors- Risks Related to OurIndustry".Industry” below. Compliance with and changes in various environmental requirements and environmental risks applicable to our industry may adversely affect our results of operations and financialcondition" below.condition.Occasionally, we may be required to clean up or take certain remediation action with regard to sites we formerly used in our operations. We may also 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 treated or disposed of hazardous substances on the sites. The EPA has named us a potentially responsible party, or PRP, at several federal Superfund sites. The EPA alleges that we and other PRP scrap metal suppliers are responsible for the cleanup of those sites solely because we sold scrap metal to unrelated manufacturers for recycling as a raw material in the manufacturing of new products. We contend that an arms length sale of valuable scrap metal for use as a raw material in a manufacturing process that we have no control of should not constitute
"an“an arrangement for disposal or treatment of hazardoussubstances"substances” as defined under Federal law. In 2000Congress approved and signed into lawthe Superfund Recycling EquityAct. This statuteAct was signed into law which should, subject to the satisfaction of certain conditions, provide legitimate sellers of scrap metal for recycling with some relief from Superfund liabilityat theunder Federallevel.law. DespiteCongress'Congress’ clarification of the intent of the Federal law,varioussome state laws and environmental agencies still seek to impose such liability. We believeimposingefforts to impose such liabilityisare contrary to public policy objectives and legislationthat encourageencouraging recycling andpromotepromoting the use of recycled materials and we continue to support clarification of state laws and regulations consistent withCongress'sCongress’s action.New Federal, state and local laws, regulations and the varying interpretations of such laws by regulatory agencies and the judiciary impact how much money we spend on environmental compliance. In addition, uncertainty regarding adequate control levels, testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions impact our future expenditures in order to comply with environmental requirements. We cannot predict the total amount of capital expenditures or increases in operating costs or other expenses that may be required as a result of environmental compliance. We also do not know if we can pass such costs on to our customers through product price increases. During
2003,2004, we incurred environmental costs including disposal, permits, license fees, tests, studies, remediation, consultant fees and environmental personnel expense of approximately$11.8$18.2 million. In addition, we estimate that we spent approximately$4.2$5.8 million during20032004 on capital expenditures for environmental projects. We believe that our facilities are in material compliance with currently applicable environmental laws and regulations. We anticipate capital expenditures for new environmental control facilities during20042005 of approximately$4.1$6.9 million.9
EMPLOYEES
As of
October 2003,September 2004, we had approximately7,87310,604 employees. Ourmanufacturingdomestic mills segment employed approximately6,3432,434 people, our CMCZ segment employed approximately 2,142 people, and our fabrication segment employed approximately 4,354 people. Our recycling segment employed9871,076 people, and our marketing and distribution segment employed472523 people. We have3536 employees in general corporate management and administration and3639 employees who provide service to our divisions and subsidiaries. Production employees at one metals recycling plant and one fabrication facility are represented by unions for collective bargaining purposes. Approximately one half of CMCZ’s employees are represented by unions. We believe that our labor relations are generally good to excellent and our work force is highly motivated.RISK FACTORS
Before making an investment in our company, you should be aware of various risks, including those described below. You should carefully consider these risk factors together with all of the other information included in this annual report on Form 10-K. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations or cash flows. If any of these risks actually occur, our business, financial condition, results of operations or cash flows could be materially adversely affected and you may lose all or part of your investment.
RISKS RELATED TO OUR INDUSTRY
EXCESS CAPACITY IN OUR INDUSTRY COULD INCREASE THE LEVEL OF STEEL IMPORTS INTO THE U.S. RESULTING IN LOWER DOMESTIC PRICES WHICH WOULD ADVERSELY
AFFECTS PRICESAFFECT OUR SALES, MARGINS ANDMARGINS. GlobalPROFITABILITY.In certain international steel markets, steel-making capacity exceeds
globaldemand for steelproducts. In many foreignproducts requiring certain countriessteel production greatly exceeds domestic demand and these countries mustto export substantial amounts of steel in order to maintain high employment and production levels. Accordingly, steel manufacturers in these countries have traditionally periodically exported steel at prices that are significantly below their home marketprices. The high levelprices and which may not reflect their costs ofimports into the United States over the last few years has severely depressed domestic steel prices. Furthermore, this vastproduction or capital. This supply of imports can decrease the sensitivity of domestic steel prices to increases in demand.This surgeA SHARP REDUCTION IN CHINA’S PACE OF ECONOMIC EXPANSION COULD REDUCE DEMAND FOR STEEL PRODUCTS.
Chinese economic expansion has affected the availability and heightened the volatility of
low priced imports, coupled with increasesmany commodities that we market and use inthe cost of ferrous scrap and the rise in energy prices, has resulted in an erosion ofourgross margins. IF RECENTLY IMPOSED DUTIES AND TARIFFS ARE RELAXED OR SUBSTANTIAL EXEMPTIONS TO THE TARIFFS ARE CREATED, THEN STEEL IMPORTS INTO THE U.S. MAY AGAIN RISE OR DOMESTIC PRICES MAY FALL, WHICH WOULD ADVERSELY AFFECT OUR SALES, MARGINS AND PROFITABILITY. In recent history, the United States has been an importer of steel products. From 1987 until 1998, less than 20%manufacturing process, including steel. It is reported that China now accounts for one fourth of thedomestic supply was imported. However, with the cumulative effect of various economic crises, including economic weakness in Asia, Russia and Latin America, foreign producers have looked to the United States as the country with the healthiest economy, the strongest currency and as the buyer of first resort. In addition, foreign governments that ownworld’s raw steel productionfacilitiesand one fourth of the world’s steel consumption. Expansions and contractions in China’s economy can havesought to increase output. Consequently, commencing in 1997 foreign steel products began to floodmajor effects on thedomestic market. As a result, imports accounted for approximately 26%pricing ofdomestic steel consumption in 1998 and remained above 20% through 2002. In 2000, our minimills joined other steel manufacturers in an antidumping petition filed with the United States International Trade Commission, called the ITC. The ITC determinedmany commodities thatthere was a reasonable indication of material or threatened injury to U.S. rebar manufacturers,affect us such asus, due to unfairly priced imports of rebar from several foreign countries. In the spring of 2001, the U.S. Department 10of Commerce determined that dumping of rebar from eight countries had occurredsecondary metal prices, energy, marine freight rates, steel making supplies such as ferroalloys andthe ITC reached a final determination that dumped imports were causing material injury to our industry. As a result, penalty duties, initially ranging from 17% to 232%, were imposed. Although adjusted annuallygraphite electrodes, materials we market such asa result of review investigations by the Department of Commerce, dumping duties are normally in effect for five yearsiron ore andmay be extended if, after five years, the ITC determines that removal of the duties would lead to a recurrence of injury. We benefit from these duties. If these duties are subsequently modified or reduced by the Department of Commerce, our sales, margins and profitability may decrease. In 2001, President Bush instituted an investigation under Section 201 of the Trade Act of 1974 to determine if increased imports of selected steel products into the United States were an actual or threatened cause of serious injury to domestic manufacturers of steel products. The ITC, in October 2001, found that U.S. steel producers had been seriously injured by these imports and, in December 2001, recommended remedies to President Bush. In March 2002, President Bush announced three-year tariffs that cover the majority of our minimills' products, ranging from 15% to 30% for the first year and declining over the next two years. Excluded from the tariffs were imports from Mexico and Canadacoke as well asimports from developing countries identified bytheWorld Trade Organization. These tariffs, which are applied in addition to the antidumping duties, will be further strengthened by an import licensing and monitoring system and an anti-surge mechanism that have been implemented to monitor foreign trade activities in the applicableprice of finished steel products.We benefit from President Bush's decision. However, several foreign governments have appealed President Bush's decision to the World Trade Organization. In response, the World Trade Organization ruled against these tariffs. While the United States government has stated that it will further appeal this adverse ruling, we cannot predict whether the U.S. appeal will be successful. If the U.S. appeal is not successful, the U.S. may modify the tariffs or could be subject to retaliatory sanctions from other countries. Some countries are engaging in retaliatory tariffs on products other than steel which may cause the affected U.S. exporters to pressure the Bush Administration toShould Chinese demand weaken, thesteel tariffs. Foreign governments have also requested that the United States Department of Commerce grant exemptionspricing forspecific products subject to the tariffs. Since March 5, 2002, the Department of Commerce and the Officemany of theUnited States Trade Representative have announced the exclusion of over 1,000products that we both sell to and export fromthe tariff remedies. Relatively few ofChina may fall causing erosion in ourproducts are adversely affected by these exclusions. However, other exclusion requests will be considered in the future. Granting exclusions that affect our products could undermine the relief that these tariffs give us. The intent of the Section 201 remedies is to give the United States steel industry an opportunity to reorganize and consolidate into stronger more competitive companies. A lack of progress in this area, or pressure from steel consuming industries, may cause President Bush to change the remedy. A U.S. decision to lessen or adversely change the amount, scope or duration of the tariffs could lead to a resurgence of steel imports. This result would put downward pressure on steel prices, which would have a negative impact on our sales,gross margins andprofitability. In any event, without further action by the President, the Section 201 tariffs will expiresubjecting us to possible renegotiation of contracts or increases inMarch 2005.bad debts.10
OUR INDUSTRY IS AFFECTED BY CYCLICAL AND REGIONAL FACTORS.
Many of our products are commodities subject to cyclical fluctuations in supply and demand in metal consuming industries. Periods of economic slowdown or a recession in the United States, or the public perception that a slowdown or recession may occur, could decrease the demand for our products and adversely affect our business. Our overall financial results will be dependent substantially upon the extent to which conditions in both the United States and global economies improve. A slower than expected recovery or another recession will further adversely affect our financial results. Our geographic concentration in the southern and southwestern United States as well as
areas ofCentral EuropeAustraliaandChinaAustralia exposes us to the local market conditions in these regions. Economic downturns in these areas or11decisions by governments that have an impact on the level and pace of overall economic activity could adversely affect our sales and profitability. Our business supports cyclical industries such as commercial and residential construction, energy, service center, petrochemical and original equipment manufacturing. These industries experience significant fluctuations in demand for our products based on economic conditions, energy prices, consumer demand and decisions by governments to fund infrastructure projects such as highways, schools, energy plants and airports. Many of these factors are beyond our control. As a result of the volatility in the industries we serve, we may have difficulty increasing or maintaining our level of sales or profitability. If the industries we serve suffer a prolonged downturn, then our business may be adversely affected.
Our industry is characterized by low backlogs, which means that our results of operations are promptly affected by short-term economic fluctuations.
COMPLIANCE WITH AND CHANGES IN VARIOUS ENVIRONMENTAL REQUIREMENTS AND ENVIRONMENTAL RISKS APPLICABLE TO OUR INDUSTRY MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations, may have a material adverse effect on our results of operations and financial condition. Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state, federal and international environmental laws and regulations concerning, among other matters, 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, our minimills generate electric arc furnace dust, or EAF dust, which the United States Environmental Protection Agency, or the EPA, and other regulatory authorities classify as hazardous waste. EAF dust requires special handling, recycling or disposal.
In addition, the primary feed materials for the eight shredders operated by our scrap metal recycling facilities are automobile hulks and obsolete household appliances. Approximately 20% of the weight of an automobile hulk consists of unrecyclable material known as shredder fluff. After the segregation of ferrous and saleable non-ferrous metals, shredder fluff remains. We, along with others in the recycling industry, interpret Federal
and state environmentalregulations to require shredder fluff to meet certain criteria and pass a toxic leaching test to avoid classification as a hazardous waste. We also endeavor to remove hazardous contaminants from the feed material prior to shredding. As a result, we believe the shredder fluff we generate is not normally considered or properly classified as hazardous waste. If the laws, regulations or testing methods change with regard to EAF dust or shredder fluff, we may incur additional significant expenditures.11
Although we believe that we are in substantial compliance with all applicable laws and regulations, legal requirements are changing frequently and are subject to interpretation. New laws, regulations and changing interpretations by regulatory authorities, together with uncertainty regarding adequate pollution control levels, testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions are all factors that may increase our future expenditures to comply with environmental requirements. Accordingly, we are unable to predict the ultimate cost of future compliance with these requirements or their effect on our operations. We cannot predict whether such costs can be passed on to customers through product price
increases.increases or whether competitors in various regions or countries would likewise be required to incur such increased costs.We may also be required to clean up additional sites than we already are or take certain remediation action with regard to sites formerly used in connection with our operations. We may be required to pay
12for 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. RISKS RELATED TO OUR COMPANY
WE MAY HAVE DIFFICULTY COMPETING WITH COMPANIES THAT HAVE A LOWER COST STRUCTURE THAN OURS.
We compete with regional, national and foreign manufacturers and traders. Some of these competitors are larger, have greater financial resources and more diverse businesses than us. Some of our foreign competitors may be able to pursue business opportunities without regard for the laws and regulations with which we must comply, such as environmental regulations. These companies may have a lower cost structure, more operating flexibility and consequently they may be able to offer better prices and more services than we can. We cannot assure you that we will be able to compete successfully with these companies.
Furthermore, over the past few years, many integrated domestic steel producers and secondary metal recyclers have entered bankruptcy proceedings. While in bankruptcy proceedings, these companies can forgo certain costs, giving them a competitive advantage. The companies that reorganize and emerge from bankruptcy often have more competitive capital cost structures. In addition, asset sales by these companies during the reorganization process tend to be at depressed prices, which enable the purchasers to acquire greater capacity at lower cost.
FLUCTATIONS IN THE
STRENGTHVALUE OF THE UNITED STATES DOLLAR RELATIVE TO OTHER CURRENCIES MAY ADVERSELY AFFECT OUR BUSINESS.Fluctuations in the value of the dollar can be expected to affect our business. A strong U.S. dollar makes imported metal products less expensive, resulting in more imports of steel products into the U.S. by our foreign competitors.
Weakening of certain foreign economies, such asPast economic difficulties in Eastern Europe, Asia and Latin Americahas greatly increased competition from foreign producers. The economic difficulties in these regionshave resulted in lower local demand for steel products and have encouraged greater steel exports to the U.S. at depressed prices. As a result, our products, which are made in the U.S.,havemay become relatively more expensive as compared to imported steel, which has had and in the future could have a negative impact on our sales, revenues and profitability.A strong U.S. dollar hampers our international marketing and distribution business. Weak local currencies limit the amount of U.S. dollar denominated products that we can import for our international operations and limits our ability to be competitive against local producers selling in local currencies.
12
OUR STEEL
MINI-MILLMINIMILL BUSINESS REQUIRES CONTINUOUS CAPITAL INVESTMENTS THAT WE MAY NOT BE ABLE TO SUSTAIN.We must make regular substantial capital investments in our steel minimills to lower production costs and remain competitive. We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary substantial capital expenditures in the future. The availability of external financing depends on many factors outside of our control, including capital market conditions and the overall performance of the economy. If funding is insufficient, we may be unable to develop or enhance our minimills, take advantage of business opportunities and respond to competitive pressures.
13SCRAP AND OTHER SUPPLIES FOR OUR BUSINESSES ARE SUBJECT TO SIGNIFICANT PRICE FLUCTUATIONS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
We depend on obsolete ferrous scrap, the primary feedstock for our steel
and non-ferrous metals, called scrap,minimills and other supplies such as graphite electrodes and ferroalloys for ourbusinesses. Although the scrap and other supplies may be sufficient to meet our future needs, the prices of scrap and other supplies have historically fluctuated greatly. Our future profitability will be adversely affected if we are unable to pass on higher material costs to our customers. We may not be able to adjust our product prices, especially in the short-term, to recover the costs of increases in material prices. For example, we depend on the ready availability of scrap as feedstock for our minimills.steel minimill operations. Although we believe that the supply of scrap is adequate to meet future needs, the price of scraphasand other supplies have historically been subject to significant fluctuation.Also,Our future profitability will be adversely affected if we are unable to pass on to our customers increased raw material and supplies costs. We may not be able to adjust our product prices to recover the costs of rapid increases in material prices, especially over the short-term and in our domestic fabrication segment’s fixed price fabrication contracts.The raw material used in manufacturing copper tubing is copper scrap, supplemented occasionally by virgin copper ingot. Copper scrap has generally been readily available, and a small portion of our copper scrap comes from our metal recycling yards. However, copper scrap is subject to rapid price fluctuations related to the price and supply of virgin copper. Price increases for high quality copper scrap could adversely affect our business. Finally, our Arkansas mill does not have melting capacity, so it is dependent on an adequate supply of competitively priced used rail. The availability of used rail fluctuates with the pace of railroad abandonments, rail replacement by railroads and demand for used rail from other domestic and foreign rail rerolling mills. Price increases for used rail could adversely affect our business.
OUR MINIMILLS CONSUME LARGE AMOUNTS OF ELECTRICITY AND NATURAL GAS, AND SHORTAGES OR INCREASES IN THE PRICE OF ELECTRICITY AND NATURAL GAS COULD ADVERSELY AFFECT OUR BUSINESS.
The successful operation of our minimills depends on an uninterrupted supply of electricity. Accordingly, we are at risk in the event of an energy disruption. The electricity industry recently has been adversely affected by shortages and price volatility in regions outside of the locations of our minimills. Prolonged black-outs or brown-outs would substantially disrupt our production. Any such disruptions could adversely affect our operating results. Electricity prices can be volatile and increases would have an adverse effect on the costs of operating our minimills.
Demand for natural gas depends primarily upon the worldwide number of natural gas wells being drilled, completed and re-worked and the depth and drilling conditions of these wells. The level of these activities is primarily dependent on current and anticipated natural gas prices. Many factors, such as the supply and demand for natural gas, general economic conditions, political instability or armed conflict in worldwide natural gas producing regions and global weather patterns affect these prices.
We purchase most of our electricity and natural gas requirements in local markets for relatively short periods of time. As a result, fluctuations in energy prices can have an adverse effect on the costs of operating our minimills.
13
UNEXPECTED EQUIPMENT FAILURES MAY LEAD TO PRODUCTION CURTAILMENTS OR SHUTDOWNS.
Interruptions in our production capabilities will adversely affect our production costs, steel available for sales and earnings for the affected period. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our manufacturing processes are dependent upon critical pieces of steel-making equipment, such as our furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of
14unanticipated failures. We have experienced and may in the future experience material plant shutdowns or periods of reduced production as a result of such equipment failures. THE AVAILABILITY OF INSURANCE COVERAGE AND INCREASED COST MAY ADVERSELY AFFECT PROFITABILITY. After the events of September 11, 2001, several high profile corporate bankruptcies and the downturn in the investment markets, insurance companies tightened coverages and dramatically increased premium costs. Many insurers no longer offer certain coverages and the remaining carriers have in many instances reduced the liability they are willing to insure while raising costs. Our profitability could be adversely affected when we renew our insurance policies due to the additional insurance expense as well as the greater exposure to risk caused by reduced coverage.HEDGING TRANSACTIONS MAY LIMIT OUR POTENTIAL GAINS OR EXPOSE US TO LOSS.
Our product lines and worldwide operations expose us to risks associated with fluctuations in foreign currency exchange, commodity prices and interest rates. As part of our risk management program, we use financial instruments, including commodity futures or forwards, foreign currency exchange forward contracts and interest rate swaps. While intended to reduce the effects of the fluctuations, these transactions may limit our potential gains or expose us to loss.
We enter 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. Although we do not enter into these instruments for trading purposes or speculation, and although our management believes all of these instruments are economically effective as hedges of underlying physical transactions, these foreign exchange commitments are dependent on timely performance by our counterparties. Their failure to perform could result in our having to close these hedges without the anticipated underlying transaction and could result in losses if foreign currency exchange rates have changed.
RISING INTEREST RATES MAY INCREASE OUR BORROWING COSTS AND DAMPEN ECONOMIC ACTIVITY RESULTING IN LOWER SALES, MARGINS AND PROFITABILITY.
Our short term financing sources include primarily the
short-termcommercial paper market, the sale of certain of our accounts receivable and borrowings from banks.We also have swapped our fixed-rate interest obligation on $100 million of debt due in 2005 for a floating rate obligation.If interest rates rise, our cost of borrowing will increase and lower our profitability. Higher interest rates may also adversely affect some of the markets for our products, such as housing and commercial construction, resulting in a lower level of sales, margins and profitability.WE ARE INVOLVED AND MAY IN THE FUTURE BECOME INVOLVED IN VARIOUS ENVIRONMENTAL MATTERS THAT MAY RESULT IN FINES, PENALTIES OR JUDGMENTS BEING ASSESSED AGAINST US OR LIABILITY IMPOSED UPON US WHICH WE CANNOT PRESENTLY ESTIMATE OR REASONABLY FORESEE AND WHICH MAY HAVE A MATERIAL IMPACT ON OUR EARNINGS AND CASH FLOWS.
Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, called CERCLA, or similar state statutes, we may have obligations to conduct investigation and remediation activities associated with alleged releases of hazardous substances or to reimburse the EPA (or state agencies as applicable) for such activities and to pay for natural resource damages associated with alleged releases. We have been named a potentially responsible party at
fourteenfifteen federal and state Superfund sites because the EPA or an equivalent state agency contends that we and other potentially responsible scrap14
metal suppliers are liable for the cleanup of those sites as a result of having sold scrap metal to unrelated
15manufacturers for recycling as a raw material in the manufacture of new products. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time may contest, our liability at the sites. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Although we are unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with various environmental matters or the effect on our consolidated financial position, we make accruals as warranted. Due to inherent uncertainties, including evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors, the amounts we accrue could vary significantly from the amounts we ultimately are required to pay.
AN INABILITY TO FULLY AND EFFECTIVELY INTEGRATE
PENDINGRECENT AND FUTURE ACQUISITIONSINCLUDING THE HUTA ZAWIERCIE S.A. ACQUISITION,COULD RESULT IN INCREASED COSTS WHILE DIVERTINGMANAGEMENT'SMANAGEMENT’S ATTENTION FROM OUR CORE OPERATIONS, AND WE CANNOT ASSURE YOU THAT WE WILL REALIZE THEIR FULL BENEFITS OR SUCCESSFULLY MANAGE OUR COMBINED COMPANY, AND FUTURE ACQUISITIONS MAY RESULT IN DILUTIVE EQUITY ISSUANCES OR INCREASES IN DEBT.On
July 22,December 3, 2003, our Swiss subsidiaryCommercial Metals (International) AG entered into an agreement to purchase 71%acquired 71.1% of the outstanding shares ofHuta Zawiercie S.A., the third largest producer of steel in Poland, from Impexmetal S.A. of Warsaw, Poland. We expect to close the acquisitionCMCZ, and onor beforeDecember15,23, 2003,and will use approximately $50.0 million of the net proceeds from this offering to fund this acquisition. In connection with the acquisition,wewill assume approximately $32 million in debt.acquired Lofland. Also, as part of our ongoing business strategy we regularly evaluate and may pursue acquisitions of and investments in complementary companies. We cannot assure you that we will be able to fully or successfully integrateany pendingrecent or future acquisitions in a timely manner or at all. If we are unable to successfully integrateany pending or futureacquisitions, we may incur costs and delays or other operational, technical or financial problems, any of which could adversely affect our business. In addition,management'smanagement’s attention may be diverted from core operations which could harm our ability to timely meet the needs of our customers and damage our relationships with those customers. To finance future acquisitions, we may need to raise funds either by issuing equity securities or incurring or assuming debt. If we incur additional debt, the related interest expense may significantly reduce our profitability.WE ARE SUBJECT TO LITIGATION WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY.
We are involved in various litigation matters, including regulatory proceedings, administrative proceedings, governmental investigations, environmental matters and construction contract disputes. The nature of our operations also expose us to possible litigation claims in the future. Although we make every effort to avoid litigation, these matters are not totally within our control. We will contest these matters vigorously and have made insurance claims where appropriate, but because of the uncertain nature of litigation and coverage decisions, we cannot predict the outcome of these matters. These matters could have a material adverse effect on our financial condition and profitability. Litigation is very costly, and the costs associated with prosecuting and defending litigation matters could have a material adverse effect on our financial condition and profitability. Although we are unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with litigation matters, we make accruals as warranted. However, the amounts that we accrue could vary significantly from the amounts we actually pay, due to inherent uncertainties and the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors.
1615
WE DEPEND ON OUR SENIOR MANAGEMENT TEAM AND THE LOSS OF ANY MEMBER COULD ADVERSELY AFFECT OUR OPERATIONS.
Our success is dependent on the management and leadership skills of our senior management team, including Stanley A. Rabin, our
chairmanPresident, Chief Executive Officer and Chairman of theboard.Board. If we lose any of these individuals or fail to attract and retain equally qualified personnel, then we may not be able to implement our business strategy. We have not entered into employment agreements with any of our senior management personnel other than Murray R. McClean,presidentExecutive Vice President and Chief Operating Officer and Hanns Zoellner, President of ourmarketingMarketing anddistribution division.Distribution Segment.SOME OF OUR CUSTOMERS MAY DEFAULT ON THE DEBTS THEY OWE TO US.
Economic conditions are not consistent in all the markets we serve. Some segments are still weak, and our customers may struggle to meet their obligations, especially if a significant customer of theirs defaults. We recorded a
$5.2$6.2 million provision in fiscal20032004 for losses on receivablesdue to weakness in the domestic and global economies,which increased our allowance for collection losses to$9.3$14.6 million. Other factors such as management and accounting irregularities have forced some companies into bankruptcy. A weak economic recovery and corporate failures could result in higher bad debt costs.CREDIT RATINGS AFFECT OUR ABILITY TO OBTAIN FINANCING AND THE COST OF SUCH FINANCING.
Credit ratings affect our ability to obtain financing and the cost of such financing. Our commercial paper program is ranked in the second highest category by
the following rating agencies: Moody'sMoody’s Investors Service (P-2),and Standard &Poor'sPoor’s Corporation (A-2)and Fitch (F-2). Our senior unsecured debt is investment grade rated by Standard &Poor'sPoor’s Corporation (BBB), Fitch (BBB)andMoody'sMoody’s Investors Service (Baa2).On November 5, 2003, Moody's Investors Service downgraded our debt from Baa1 to Baa2 but changed its outlook from negative to stable.In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, off balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy, industry conditions and contingencies. Lower ratings on our commercial paper program or our senior unsecured debt could impair our ability to obtain additional financing and will increase the cost of the financing that we do obtain.THE AGREEMENTS GOVERNING THE NOTES AND OUR OTHER DEBT CONTAIN FINANCIAL COVENANTS AND IMPOSE RESTRICTIONS ON OUR BUSINESS.
The indenture governing our 7.20% notes due 2005, 6.80% notes due 2007, 6.75% notes due 2009 and 5.625% notes due 2013 contains restrictions on our ability to create liens, sell assets, enter into sale and leaseback transactions and consolidate or merge. In addition, our credit facility contains covenants that place restrictions on our ability to, among other things:
- create liens; - enter into transactions with affiliates; - sell assets; - in the case of some of our subsidiaries, guarantee debt; and - consolidate or merge. 17
— create liens; — enter into transactions with affiliates; — sell assets; — in the case of some of our subsidiaries, guarantee debt; and — consolidate or merge. 16
Our credit facility also requires that we meet certain financial tests and maintain certain financial ratios, including a maximum debt to capitalization and interest coverage ratios.
Although the debt owed by CMCZ under a five-year term note is without recourse to Commercial Metals Company, our Swiss subsidiary that owns the CMCZ shares or any other of our subsidiaries, the note does contain certain covenants including minimum debt to EBITDA, debt to equity and tangible net worth requirements (as defined only by reference to CMCZ’s financial statements).
Other agreements that we may enter into in the future may contain covenants imposing significant restrictions on our business that are similar to, or in addition to, the covenants under our existing agreements. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise.
Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these restrictions could result in a default under the indenture governing the notes or under our other debt agreements. An event of default under our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. If we were unable to repay debt to our secured lenders if we incur secured debt in the future, these lenders could proceed against the collateral securing that debt. In addition, acceleration of our other indebtedness may cause us to be unable to make interest payments on the notes.
ITEM 2. PROPERTIES
Our Texas steel minimill is located on approximately 600 acres of land that we own. Our Texas minimill facilities include several buildings that occupy approximately
749,000753,000 square feet. Our Alabama steel minimill is located on approximately 41 acres of land, and it includes several buildings that occupy approximately 609,000 square feet. We utilize our facilities at the Texas and Alabama steel minimills for manufacturing, storage, office and other related uses. Our South Carolina steel minimill is located on approximately 101 acres of land, and the buildings occupy approximately 654,000 square feet. Our Arkansas steel minimill is located on approximately 135 acres of land, and the buildings occupy approximately204,000205,000 square feet. We lease approximately 30 acres of land at the Alabama minimill and all the land at the Arkansas and South Carolina minimills in connection with revenue bond financing or property tax incentives. We may purchase the land at the termination of the leases or earlier for a nominal sum.All other steel groupThe facilities of our domestic fabrication segment utilize approximately
1,2711,457 acres of land which we own and lease approximately6681 acres of land at various locations in Texas, Louisiana, Arkansas, Utah, South Carolina, Florida, Virginia, Georgia, North Carolina, Nevada, Iowa, California, Pennsylvania, Mississippi, Arizona, New Mexico, Arkansas andArizona.Oklahoma. Howell Metal Company owns approximately 30 acres of land in New Market, Virginia, with buildings occupying approximately 325,000 square feet.CMCZ’s principal operations are located in Zawiercie in south central Poland about 40 kilometers from Katowice. CMCZ and subsidiaries lease approximately 98% of the 2 million square meters of land utilized by the principal operations with a small balance owned. The land is leased from the State of Poland under contracts with 99 year durations and are considered to create a right of perpetual usufruct. The leases expire beginning in 2089 through 2100. The principal steel making operations are conducted in buildings having an area of approximately 229,000 square meters. The 6 major buildings in use have all been constructed on or after 1974. The real estate is also developed with approximately 133 other buildings including warehouses, administrative offices, workshops, garage, transformer stations, pumping
17
stations, gas stations, boiler houses, gate houses and contains some structures leased to unrelated parties as well as CMCZ subsidiaries. Other much smaller tracts of land are leased or owned in nearby communities including those utilized by 6 affiliated scrap processing facilities.
Our recycling
segment'ssegment’s plants occupy approximately 484 acres of land that we own in Beaumont, Dallas, Galveston, Houston, Lubbock, Midland, Odessa, Victoria and Vinton, Texas; Jacksonville, Ocala, Gainesville, Lake City, Orlando and Tampa, Florida; Shreveport, Louisiana; Chattanooga, Tennessee; Springfield and Joplin, Missouri; Burlington, North Carolina; Frontenac, Kansas; and Miami, Oklahoma. The recyclingsegment'ssegment’s other scrap processing locations are on leased land.We lease the office space where our corporate headquarters and all of our domestic marketing and distribution offices are located. We own three warehouse buildings in Australia, one of which is located on leased real estate. We lease the other warehouse facilities located in Australia.
The leases on the leased properties described above will expire on various dates and with the exception of the CMCZ leases described above, generally over the next ten years. Several of the leases have renewal options. We have had little difficulty renewing such leases as they expire. We estimate our minimum annual rental obligation for real estate operating leases in effect at August 31,
2003,2004, to be paid during fiscal2004,2005, to be approximately$5,318,000.$6.3 million. We also lease a18portion of the equipment we use in our plants. We estimate our minimum annual rental obligation for equipment operating leases in effect at August 31, 2003,2004, to be paid during fiscal2004,2005, to be approximately$4,000,000.$7.8 million.ITEM 3. LEGAL PROCEEDINGS
Our subsidiary, SMI-Owen Steel Company, Inc. or SMI-Owen, prior to our March 2002, sale of the assets used at its heavy structural steel fabrication facility, frequently worked on large and complex construction projects. Some of the projects generated significant disputes. In connection with work completed prior to the sale, 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. F/D secured insurance from St. Paul Fire & Marine Insurance Company under a subcontractor/vendor default protection policy. That insurance policy 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 made a claim under the insurance policy for all losses, costs, and expenses incurred by SMI-Owen because of the default. The insurance company refused to pay our claim, so we filed suit against the insurance company and the insurance broker, J & H Marsh McClennan, in March 2000 (C.A. No. G-00-149 United States District Court Southern District of Texas). During May 2002, we settled the litigation with the insurance company. The settlement included our recovery of the $6.6 million claim receivable, receipt of an additional $7.4 million, the release of the balance of $1.0 million of previously escrowed funds for payment of certain claims made by our subcontractors and, subject to certain contingencies, reimbursement of up to an additional $3.0 million. We have not settled our lawsuit against the insurance broker for insurance benefits we did not receive due to the broker's acts, errors and omissions. The project is now complete and we do not anticipate any additional construction costs. Other disputes concerning the Aladdin project were submitted to binding arbitration. During the 4th quarter of 2003, SMI-Owen mediated and settled, contingent upon completion and approval by the Bankruptcy Court which has jurisdiction over one of the parties, all disputes between SMI-Owen, Aladdin and F/D related to the project. SMI-Owen will pay $1.25 million of a $3.5 million settlement payment with $2.25 million to be paid by an insurance company. The resolution of this dispute, when finalized, will resolve all material claims asserted against SMI-Owen arising from the project which is now complete.. The settlement provides that SMI-Owen reserves all rights with regard to pending litigation against the insurance broker for insurance benefits not received by SMI-Owen due to the broker's acts, errors, omissions and other conduct related to the insurance program for the project.We have received notices from the EPA or state agencies 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
fourteenfifteen 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 EPA or respective state agency refers to these locations, none of which involve real estate we ever owned or conducted operations upon, as thePeak Oil Site in Tampa, Florida, the NL Industries/Taracorp Site in Granite City, Illinois, theSapp Battery Site in Cottondale, Florida, the Interstate Lead Company Site in Leeds, Alabama,the Poly-Cycle Industries Site in Techula, Texas, the Jensen Drive Site in Houston, Texas, the SoGreen/Parramore Site in Tifton, Georgia, the Stoller Site in Jericho, South Carolina, the RSR Corporation Site in Dallas, Texas, the Sandoval Zinc Company Site in 19Marion County, Illinois,the Ross Metals Site in Rossville, Tennessee, the Li Tungsten Site in Glen Cove, New York, theNLAmerican Brass site in Headline, Alabama, the Delatte Metals site in Ponchatoula, Louisiana, the Palmetto Recycling site in Columbia, South Carolina, the Peak Oil Site in Tampa, Florida, the R&H Oil Site in San Antonio, Texas, , the SoGreen/Parramore Site in Tifton, Georgia, the Stoller Sites in Jericho South Carolina and Pelham, Georgia, the Jensen Drive site in Houston, Texas .the Poly-Cycle Industries Site inPedricktown, New Jersey,Techula, Texas, and theStoller SiteIndustrial Salvage site inPelham, Georgia.Corpus Christi, Texas. We have periodicallyreceivereceived information requests from government environmental agencies with regard to other sites that are apparently under consideration for designation as listed sites under CERCLA or similar state statutes. Often we do not receive any further communication with regard to these sites. We do not know if any of these inquires will ultimately result in a demand for payment from us.The EPA notified us and other alleged PRPs that under Sec. 106 of CERCLA we and the other PRPs could be subject to a maximum fine of $25,000 per day and the imposition of treble damages if we and the other PRPs refuse to clean up the Peak Oil, Sapp Battery,
NL Industries/Taracorp,SoGreen/Parramore and Stoller sites as ordered by the EPA. We are presently participating in PRP organizations atthe Peak Oil, Sapp Battery, SoGreen/Parramore and Stollerthese sites which are paying for certain site remediation expenses. We do not believe that the EPA will pursue any fines against us if we continue to participate in the PRP groups or if we have adequate defenses to theEPA'sEPA’s imposition of18
fines against us in these matters.
In 1993, the Federal Energy Regulatory Commission entered an order against our wholly-owned subsidiary CMC Oil Company, or CMC Oil, which has been inactive since 1985. As a result of the order, CMC Oil is subject to a judgment which the Federal District Court upheld in 1994 and the Court of Appeals affirmed in 1995. The order found CMC Oil liable for overcharges constituting violations of crude oil reseller regulations from December 1977 to January 1979. The alleged overcharges occurred in connection with our joint venture transactions with RFB Petroleum, Inc. The overcharges total approximately $1,330,000 plus interest calculated from the transaction dates to the date of the District Court judgment under the Department of
Energy'sEnergy’s interest rate policy, and with interest thereafter at the rate of 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 us as a result of the CMC Oil litigation. We will vigorously defend ourselves if any such claim is asserted.We are unable to estimate the ultimate dollar amount of any 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. Management believes 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'SREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum Number (c) Total Number of (or Approximate Shares (or Units) Dollar Value) of Purchased as Part Shares (or Units) (a) Total Number of (b) Average Price of Publicly that May Yet Be Shares (or Units) Paid per Share (or Announced Plans or Purchased Under the Period Purchased Unit) Programs Plans or Programs June 1, 2004- June 30, 2004 1,116,152 shares July 1, 2004- July 31, 2004 1,116,152 shares August 1, 2004 - -August 31, 2004 143,847 $ 31.88 143,847 972,305 shares Total 143,847 $ 31.88 143,847 19
MARKET AND DIVIDEND INFORMATION
The table below summarizes the high and low sales prices reported on the New York Stock Exchange for our common stock and the quarterly cash dividends we paid for the past two fiscal years.
The amounts set forth below have been adjusted to reflect a two-for-one stock split in the form of a stock dividend on our common stock effective June 28, 2002. 20PRICE RANGE
OF COMMON STOCK
2002 FISCAL QUARTER HIGH LOW CASH DIVIDENDS - ------- -------- ------- --------------1st $ 16.50 $ 12.25 6.5 (cents) 2nd 18.40 16.33 6.5 (cents) 3rd 23.99 18.00 6.5 (cents) 4th 24.88 16.97 8 (cents)
2003 FISCAL QUARTER HIGH LOW CASH DIVIDENDS 1st $ 19.92 $ 15.70 8 (cents) 2nd 17.21 13.75 8 (cents) 3rd 18.79 12.79 8 (cents) 4th 19.94 16.80 8 (cents) PRICE RANGE
OF COMMON STOCK
2003 FISCAL QUARTER HIGH LOW CASH DIVIDENDS - ------- -------- ------- --------------1st $ 19.92 $ 15.70 8 (cents) 2nd 17.21 13.75 8 (cents) 3rd 18.79 12.79 8 (cents) 4th 19.94 16.80 8 (cents)
2004 FISCAL QUARTER HIGH LOW CASH DIVIDENDS 1st $ 26.00 $ 18.02 8 (cents) 2nd 31.95 25.75 8 (cents) 3rd 34.40 22.10 8 (cents) 4th 37.20 29.33 10 (cents) Since 1982, our common stock has been listed and traded on the New York Stock Exchange. From 1959 until the NYSE listing in 1982, our common stock was traded on the American Stock Exchange. The number of shareholders of record of our common stock at November
14, 2003,1, 2004, was approximately2,578.2,593.20
EQUITY COMPENSATION PLANS
Information about our equity compensation plans as of August 31,
20032004 that were either approved or not approved by our stockholders is as follows (number of shares in thousands):
A. B. C. NUMBER OF SECURITIES REMAINING FOR FUTURE NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE ISSUANCE UNDER EQUITY ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING COMPENSATION PLANS OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (A) ------------- ------------------- ------------------------- -----------------------Equity compensation plans 2,945,013 $14.05 2,041,660 approved by security holders Equity compensation plans not 0 0 approved by security holders 0 TOTAL 2,945,013 $14.05 2,041,66021
A. B. C. NUMBER OF SECURITIES NUMBER OF REMAINING FOR FUTURE SECURITIES TO BE ISSUANCE UNDER ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION EXERCISE OF EXERCISE PLANS OUTSTANDING PRICE OF OUTSTANDING (EXCLUDING SECURITIES OPTIONS, OPTIONS, WARRANTS AND REFLECTED IN COLUMN PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS (A) Equity compensation plans approved by security holders 3,690 $ 19.07 2,205 Equity compensation plans not approved by security holders 0 0 0 TOTAL 3,690 $ 19.07 2,205 ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth a summary of our selected consolidated financial information for the periods indicated. The per share amounts have been adjusted to reflect a two-for-one stock split in the form of a stock dividend on our common stock effective June 28, 2002.
Net earnings, diluted earnings per share, total assets and stockholders' equity have been restated as described in Note 14 to the consolidated financial statements.FOR THE YEARS ENDED AUGUST 31,
(DOLLARS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2004 2003 2002 2001 2000 Net Sales $ 4,768,327 $ 2,875,885 $ 2,479,941 $ 2,470,133 $ 2,661,420 Net Earnings 132,021 18,904 40,525 23,772 44,590 Diluted Earnings Per Share 4.42 0.66 1.43 0.90 1.56 Total Assets 1,988,046 1,283,255 1,247,373 1,095,604 1,170,092 Stockholders’ Equity 660,627 506,933 501,306 433,094 418,805 Long-term Debt 393,368 254,997 255,969 251,638 261,884 Cash Dividends Per Share 0.34 0.32 0.275 0.26 0.26 Ratio of Earnings to Fixed Charges 7.30 2.57 3.77 2.19 3.25 21
2003 2002 2001 2000 1999Net Sales $2,875,885 $2,479,941 $2,470,133 $2,661,420 $2,251,442 Net Earnings 18,904 40,525 23,772 44,590 46,974 Diluted Earnings Per Share 0.66 1.43 0.90 1.56 1.61 Total Assets 1,275,406 1,230,076 1,081,946 1,170,092 1,079,074 Stockholders' Equity 506,933 501,306 433,094 418,805 418,312 Long-term Debt 254,997 255,969 251,638 261,884 265,590 Cash Dividends Per Share 0.32 0.275 0.26 0.26 0.26ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This annual report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995, with respect to our financial condition, results of operations, cash flows and business, and our expectations or beliefs concerning future events, including net earnings, product pricing and demand, production rates, energy expense, insurance expense, interest rates, inventory levels, acquisitions and general market conditions. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts" or other similar words or phrases. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from our current opinion. Developments that could impact our expectations include the following: - interest rate changes; - construction activity; - decisions by governments affecting the level of steel imports, including tariffs and duties; - litigation claims and settlements; - difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes; - metals pricing over which we exert little influence; - increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing; 22- court decisions; - industry consolidation or changes in production capacity or utilization; - global factors including credit availability; - currency fluctuations; - scrap, energy, insurance and supply prices; and - the pace of overall economic activity. See the section entitled "Risk Factors" in this annual report for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. These factors and the other risk factors described in this annual report are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, we cannot assure you that the actual results or developments we anticipate will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, we caution prospective investors not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This Management's Discussion and Analysis of Financial Condition and Results of Operation should be read in conjunction with our consolidated financial statements and the accompanying notes contained in this annual report. 23We manufacture, recycle, market and distribute steel and metal products through a network of over
140150 locations in the United States and internationally.ManufacturingSubsequent to our acquisitions of CMC Zawiercie (CMCZ) and The Lofland Company (Lofland) in December 2003, we have revised our segment reporting to include five reportable segments. We have maintained our recycling and marketing and distribution segments, but presented our new Polish minimill, CMCZ, separately because its economic characteristics are different from our domestic minimills. Our former manufacturing segment has been split into two segments: (1) domestic mills, including our four steel minimills and copper tube minimill, and (2) domestic fabrication, including our new rebar acquisition (Lofland). Following our acquisition of Lofland, we made internal management reporting changes which necessitated this change in segment reporting. We have revised prior period results to be consistent with our current segment presentation.
Domestic Mills Operations
We conduct our
manufacturingdomestic mills operations throughthe following: - - 4 steel mills, commonly referred to as "minimills," that produce reinforcing bar, angles, flats, small beams, rounds, fence post sections and other shapes - - 30 steel plants that bend, cut and fabricate steel, primarily reinforcing bar and angles - - 1 plant that produces copper tubing - - 28 warehouses that sell or rent supplies for the installation of concrete - - 6 plants that produce special sections for floors and ceiling support - - 4 plants that produce steel fence posts - - 1 plant that treats steel with heat to strengthen and provide flexibility - - 1 plant that rebuilds railcars - - 1 railroad salvage companya network of:
• steel mills, commonly referred to as “minimills,” that produce reinforcing bar, angles, flats, small beams, rounds, fence post sections and other shapes; • scrap processing facilities that directly support these minimills; and • a copper tube minimill. CMCZ Operations
We conduct our CMCZ minimill operation through:
• a rolling mill that produces primarily reinforcing bar; • a rolling mill that produces primarily wire rod; and • our majority-owned scrap processing facilities that directly support CMCZ. Domestic Fabrication Operations
We conduct our domestic fabrication operations through a network of:
• steel fabrication and processing plants that bend, weld, cut and fabricate steel, primarily reinforcing bar and angles; • warehouses that sell or rent products for the installation of concrete; • plants that produce special sections for floors and ceiling support; • plants that produce steel fence posts; • plants that treat steel with heat to strengthen and provide flexibility; • a plant that rebuilds railcars; and • a railroad salvage company. Recycling Operations
We conduct our recycling operations through
44metal processing plants located in the states ofTexas, South Carolina,Florida, Georgia, Kansas, Louisiana, Missouri, North Carolina, Oklahoma,Kansas, Missouri,South Carolina, Tennessee,LouisianaandGeorgia.Texas.Marketing and Distribution Operations
We market and distribute steel, copper and aluminum coil, sheet and tubing, ores, metal concentrates, industrial minerals, ferroalloys and chemicals through our network of
15marketing and distribution offices,4processing facilities and joint ventures around the world. Our customers use these products in a variety of industries.You should read this
management'smanagement’s discussion and analysis in connection with your review of our consolidated audited financial statements and the accompanying footnotes.22
Critical Accounting Policies and Estimates
The following are important accounting policies, estimates and assumptions that you should understand as you review our financial statements. We apply these accounting policies and make these estimates and assumptions to prepare financial statements under accounting principles generally accepted
accounting principles.in the United States (GAAP). Our use of these accounting policies, estimates and assumptions affects our results of operations and our reported amounts of assets and liabilities. Where we have used estimates or assumptions, actual results could differ significantly from our estimates.REVENUE RECOGNITION Generally, weRevenue RecognitionWe recognize sales when title
passes.passes to the customer either when goods are shipped or when they are received based on the terms of the sale. For a few of our steel fabrication operations, we recognize net sales and profits from certain long-term fixed price contracts by the percentage-of-completion method. For the years ended August 31, 2004, 2003 and 2002, respectively, we recognized approximately 3%, 3% and 6% of our total net sales on a percentage-of-completion basis. In determining the amount of net sales to recognize, we estimate the total costs and profits expected to be recorded for the contract term and the recoverability of costs related to change orders.TheseWhen we estimate that a contract will result in a loss, the entire loss is accrued as soon as it is probable and estimable. Through the passage of time, due to the variances between actual costs and those that we previously anticipated, our estimates could change, resulting in changes in our earnings.CONTINGENCIESContingenciesWe make accruals as needed for litigation, administrative proceedings, government investigations (including environmental matters), and contract disputes. We base our environmental liabilities on estimates regarding the number of sites for which we will be responsible, the scope and cost of work to be performed at each site, the portion of costs that we expect we will
24share with other parties and the timing of the remediation. Where timing of expenditures can be reliably estimated, we discount amounts to reflect our cost of capital over time. We record these and other contingent liabilities when they are probable and when we can reasonably estimate the amount of loss. Where timing and amounts cannot be precisely estimated, we estimate a range, and we recognize the low end of the range without discounting. Also, see Note 9,11, Commitments and Contingencies, to the consolidated financialstatements for the year ended August 31, 2003. INVENTORY COSTstatements.Inventory CostWe determine inventory cost for most domestic inventories by the last-in, first-out method, or LIFO. At the end of each quarter, we estimate both inventory quantities and costs that we expect at the end of the fiscal year for these LIFO calculations, and we record an amount on a pro-rata basis. These estimates could vary substantially from the actual year-end results, causing an adjustment to cost of goods
sold.sold in our fourth quarter. See Note14,15, Quarterly Financial Data, to the consolidated financial statements. We record all inventories at the lower of their cost or market value.PROPERTY, PLANT AND EQUIPMENTProperty, Plant and EquipmentOur
manufacturingdomestic mills, CMCZ and recycling businesses are capital intensive. We evaluate the value of these assets and other long-lived assets whenever a change in circumstances indicates that their carrying value may not be recoverable. Some of the estimated values for assets that we currently use in our operations utilize judgments and assumptions of future undiscounted cash flows that the assets will produce. If these assets were for sale, our estimates of their values could be significantly different because of market conditions, specific transaction terms and abuyer'sbuyer’s different viewpoint of future cash flows. Also, we depreciate property, plant and equipment on a straight-line basis over the estimated useful lives of the assets. Depreciable lives are based on our estimate of theassets'assets’ economically useful lives. To the extent that anasset'sasset’s actual life differs from our estimate, there could be an impact on depreciation expense or a gain/loss on the disposal of the asset in a later period. We expense major maintenance costs as incurred.OTHER ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTSOther Accounting Policies and New Accounting PronouncementsSee Note 1, Summary of Significant Accounting Policies, to our consolidated financial statements.
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Consolidated Results of Operations
Our management uses
Year ended August 31, (in millions except share data) 2004 2003 2002 Net sales $ 4,768 $ 2,876 $ 2,480 Net earnings 132.0 18.9 40.5 Per diluted share 4.42 0.66 1.43 EBITDA 296.2 106.9 143.4 International net sales 1,778 830 503 As % of total 37 % 29 % 20 % LIFO* effect on net earnings expense (income) 48.6 6.1 1.0 Per diluted share 1.63 0.21 0.04
* Last in, first out inventory valuation method. In the table above, we have included a financial statement measure that was not derived in accordance with GAAP. We use EBITDA (earnings before interest expense, income taxes, depreciation and amortization) as a non-GAAP
measure, adjusted operating profit, to compareperformance measure. In calculating EBITDA, we exclude our largest recurring non-cash charge, depreciation andevaluate the financial performance of our segments. See Note 13, Business Segments, to the consolidated financial statements. We define adjusted operating profit as the sum of our earnings before income taxes and financing costs. Adjusted operating profitamortization. EBITDA provides a core operationalearningsperformance measurement that comparessegmentsresults without the need to adjust for federal,but more specifically,state and local taxes which have considerable variation between domestic jurisdictions. Tax regulations in international operations add additional complexity. Also, we exclude interest costand discounts on the sales of accounts receivablein our calculation ofadjusted operating profit.EBITDA. The results are, therefore, without consideration of financing alternatives of capital employed.25InWe use EBITDA as one guideline to assess our unleveraged performance return on our investments. EBITDA is also thefollowing table we are providing a reconciliation of the non-GAAP measure, adjusted operating profit (loss)target benchmark for our long-term cash incentive performance plan for management. Reconciliations to net earnings(loss):
Marketing and Corporate and (in millions) Manufacturing Recycling Distribution Eliminations Total - ------------------------------------------------------------------------------------------------------------------------Year ended August 31, 2003: Net earnings (loss) $ 13.6 $ 10.0 $ 15.5 $ (20.2) $ 18.9 Income taxes 6.5 5.1 4.8 (4.9) 11.5 Interest expense .1 -- 1.3 13.9 15.3 Discounts on sales of accounts receivable .2 .1 .2 .1 .6 - ------------------------------------------------------------------------------------------------------------------------ Adjusted operating profit (loss) $ 20.4 $ 15.2 $ 21.8 $ (11.1) $ 46.3 ======================================================================================================================== Year ended August 31, 2002: Net earnings (loss) $ 45.0 $ 3.7 $ 8.1 $ (16.3) $ 40.5 Income taxes 25.7 1.2 3.8 (8.1) 22.6 Interest expense .3 -- 2.0 16.4 18.7 Discounts on sales of accounts receivable .4 .2 .3 (.1) .8 - ------------------------------------------------------------------------------------------------------------------------ Adjusted operating profit (loss) $ 71.4 $ 5.1 $ 14.2 $ (8.1) $ 82.6 ======================================================================================================================== Year ended August 31, 2001: Net earnings (loss) $ 34.8 $ (1.5) $ 3.6 $ (13.1) $ 23.8 Income taxes 21.1 (.9) 2.1 (7.7) 14.6 Interest expense .4 -- 1.8 25.4 27.6 Discounts on sales of accounts receivable .4 .1 .3 .2 1.0 - ------------------------------------------------------------------------------------------------------------------------ Adjusted operating profit (loss) $ 56.7 $ (2.3) $ 7.8 $ 4.8 $ 67.0 ========================================================================================================================are provided below for the year ended August 31:
Year ended August 31, - -------------------------------------------------------------------------------------- (in millions except share data) 2003 2002 2001 - --------------------------------------------------------------------------------------Net sales $ 2,876 $ 2,480 $ 2,470 Net earnings 18.9 40.5 23.8 International sales 1,186 771 755 As % of total 41% 31% 31% LIFO effect on net earnings expense (income) 6.1 1.0 (1.1) Per diluted share 0.21 0.04 (0.04) LIFO reserve 17.4 8.1 6.5 % of inventory on LIFO 64% 72% 70%
(in millions) 2004 2003 2002 Net earnings $ 132.0 $ 18.9 $ 40.5 Interest expense 28.1 15.3 18.7 Income taxes 65.1 11.5 22.6 Depreciation and amortization 71.0 61.2 61.6
EBITDA $ 296.2 $ 106.9 $ 143.4
EBITDA does not include interest expense, income taxes and depreciation and amortization. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and our ability to generate revenues. Because we use capital assets, depreciation and amortization are also necessary elements of our costs. Also, the payment of income taxes is a necessary element of our operations. Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is appropriate to consider both net earnings determined under GAAP, as well as EBITDA, to evaluate our performance. Also, we separately analyze any significant fluctuations in interest expense, depreciation and amortization and income taxes.
Our EBITDA increased 177% to $296.2 million for our fiscal year ended August 31, 2004 as compared to $106.9 million in 2003. The following events had a significant financial impact during our fiscal year ended August 31,
20032004 as compared to our20022003 fiscal year:1.
1. We reported our highest net sales and net earnings ever. 2. Increased selling prices, margins, production, and shipments resulted in significantly higher adjusted operating profits in our domestic mills and recycling segments. 3. In December 2003, we acquired a minimill in Poland and a rebar fabricator with operations in Texas and surrounding states which significantly expanded our international manufacturing capabilities and enhanced our domestic market share in rebar fabrication. 4. Margins in our domestic fabrication segment were compressed because of the rapid increase in input costs, but adjusted operating profits were better than last year. 24
5. We attained record adjusted operating profits in our marketing and distribution segment due to robust demand in Asia (especially China), the improved U.S. economy, the weak U.S. dollar, and lower end-user inventories. 6. We recorded a $48.6 million after-tax LIFO expense ($1.63 per diluted share) compared to $6.1 million LIFO expense ($0.21 per diluted share) in 2003. 7. In 2004, we issued $200 million aggregate principal amount of 5.625% notes due 2013 following the purchase of $90 million of our notes otherwise due in 2005. 8. Our overall effective tax rate was lower due primarily to a 20% effective tax rate in Poland. In 2004, our net earnings reached all-time record levels as a
$6.1 million (after-tax)result of the combination of historically high selling prices, margins, production and shipments in most of our segments. These positive factors more than offset increased purchase prices, LIFOexpense ($0.21 per diluted share) compared to $1.0 million LIFO expense ($0.04 per diluted share) in 2002. 2. Our steel and copper tube minimills' earnings decreased due primarily to higher scrap, utilityexpenses and other inputcostscosts. We also benefited from growth and acquisitions, especially our acquisition of 71% of CMCZ in Poland. Global market conditions were favorable whichwere only partially offset byresulted in significantly increased selling prices andhigher shipments. 3. Margins were lower atmetal spreads, especially for our steel scrap and steel mill products. These market conditions included strong demand in Asia, an improving U.S. economy, thesteel group's fabrication operations due to lower selling prices in spite of higher shipments. 4. In 2002, we recorded a $3.4 million (after-tax) gain from the sale of the assets of SMI-Owen Steel Company. 5. Adjusted operating profits in our recycling segment in 2003 almost tripled from 2002 due 26mostly to the rise in prices in steel (ferrous) scrap markets. 6. Marketingrelatively weak U.S. dollar anddistribution's adjusted operating profit in 2003 was significantly higher than in 2002, with most of the improvement in international markets. Market conditions were difficult during the year ended August 31, 2003, but our strategy of diversification, both in our vertical integration as well as in our product lines, enabled us to remain profitable. Throughout much of 2003, our key markets, especially in the manufacturing segment, were very competitive, although conditions improved during the fourth quarter. Public construction and institutional building remained fairly strong. However, construction for factories, offices and other commercial buildings in the United States was significantly lower for the second consecutive year. These conditions, along with higher input costs, resulted in substantially lower operating profits in 2003 at our mills and fabrication operations as compared to 2002. Also, many of our international markets, except for China and Australia, remained weak. During the second half of fiscal 2003, demandlow end-user inventories. Demand for our productsincreased,was robust, andwe realized some benefit fromsupply was tight. Our strategy of diversifying our business by segment, products and geography allowed us to take advantage of theweaker U.S. dollar. Ourpositive environment. Conditions improved significantly throughout fiscal 2004, and our net earningsincreased significantlyin the third and fourthquarterquarters of fiscal2003, with net earnings2004 exceeded those forthe three months ended August 31, 2003 totaling $10.7 million as compared to $9.0 million in 2002.any previous complete fiscal year.Segments
Unless otherwise indicated, all dollars below are before minority interests and income taxes. Financial results for our reportable segments are consistent with the basis and manner in which we internally disaggregate financial information for making operating decisions. Following our acquisitions in December 2003, we have revised our segment reporting to include five reportable segments. We have
three reportable segments: manufacturing, recycling,revised prior period results to be consistent with our current segment presentation. See Note 14, Business Segments, to the consolidated financial statements.We use adjusted operating profit (loss) to compare and
marketingevaluate the financial performance of our segments. Adjusted operating profit is the sum of our earnings before income taxes, minority interests anddistribution.financing costs. Adjusted operating profit is equal to earnings before income taxes for our domestic mills and domestic fabrication segments because these segments require minimal outside financing. The following table shows net sales and adjusted operating profit (loss) by business segment:
Year ended August 31, (in millions) 2004 2003 2002 Net sales: Domestic mills $ 1,109 $ 770 $ 721 CMCZ* 427 — — Domestic fabrication 1,047 743 805 Recycling 774 441 378 Marketing and distribution 1,882 1,150 777 Corporate and eliminations (471 ) (228 ) (202 ) Adjusted operating profit (loss): Domestic mills 84.2 19.7 41.0 CMCZ* 69.3 — — Domestic fabrication 7.3 0.7 30.4 Recycling 67.9 15.2 5.1 Marketing and distribution 39.4 21.8 14.2 Corporate and eliminations (26.4 ) (11.0 ) (8.1 )
Year ended August 31, - --------------------------------------------------------------------------------------- (in millions) 2003 2002 2001 - ---------------------------------------------------------------------------------------Net sales: Manufacturing $ 1,340 $ 1,366 $ 1,350 Recycling 441 378 394 Marketing and distribution 1,150 777 771 Adjusted operating profit (loss): Manufacturing 20.4 71.4 56.7 Recycling 15.2 5.1 (2.3) Marketing and distribution 21.8 14.2 7.8*Acquired December 2003. Dollars are before minority interests. 25
2004 Compared to 2003
COMPARED TO 2002 MANUFACTURINGDomestic MillsWe include our four domestic steel
groupand our copper tubedivisionminimills in ourmanufacturingdomestic mills segment.AdjustedIn 2004, our domestic mills segment set all-time annual records for production, shipments and adjusted operatingprofit is equal to earnings before income taxes for our four steel minimills, our copper tube mill and the steel group's fabrication operations.profits. Ourmanufacturingdomestic mills segments’ adjusted operating profit for the year ended August 31, 2004 increased by $64.5 million as compared to 2003 on $339.2 million (44%) more net sales. Net sales and adjusted operating profit were higher in 2004 due primarily to higher selling prices and shipments as compared to 2003. Metal margins (the difference between the average selling price and scrap purchase cost) for the segment increased significantly in 2004 as compared to 2003 because increases in selling prices more than offset the increases in scrap purchase and other input costs and much higher expenses related to valuing our inventories under the LIFO method. Our LIFO expenses increased due to our higher scrap purchase and other input costs, as well as increased inventory quantities.Adjusted operating profit for our four domestic steel minimills was $75.1 million for the year ended August 31, 2004 as compared to $19.1 million for 2003. Selling prices and shipments increased in 2004 as compared to 2003 due to stronger demand, which was partially due to the recovering U.S. economy. Also, the competition from foreign steel imports was less as a result of the weaker U.S. dollar and stronger global markets, especially in China. Average scrap purchase costs were higher than last year due primarily to increased world demand for ferrous scrap. Our overall metal margins increased, resulting in significantly higher total adjusted operating profits for the four steel minimills in 2004 as compared to 2003. The table below reflects domestic steel and ferrous scrap prices per ton for the year ended August 31:
Increase 2004 2003 $ % Average mill selling price (finished goods) $ 385 $ 287 $ 98 34 % Average mill selling price (total sales) 379 278 101 36 % Average ferrous scrap purchase price 149 97 52 54 % Average metal margin 230 181 49 27 % The domestic steel minimills’ production and shipment levels (tons melted, rolled and shipped) for the year ended August 31, 2004 were at all-time record levels, in spite of the transformer failure at SMI-Texas on May 31, 2004. The table below reflects our domestic steel minimills’ operating statistics for the year ended August 31:
(in thousands) 2004 2003 Increase Tons melted 2,265 2,081 9 % Tons rolled 2,195 1,972 11 % Tons shipped 2,401 2,284 5 % Due to the factors discussed above, all of our domestic steel minimills, except for SMI-Texas, were more profitable for the year ended August 31, 2004 as compared to 2003. SMI-Alabama reported an adjusted operating profit of $29.8 million, an increase of $25.7 million for the year ended August 31, 2004 as compared to 2003. SMI-South Carolina reported $13.3 million in adjusted operating profit for the year ended August 31, 2004 as compared to a $7.1 million adjusted operating loss in 2003. Adjusted operating profit at SMI-Arkansas increased by $3.8 million to an adjusted operating profit of $3.9 million for the year ended August 31, 2004. However, adjusted operating profit at SMI-Texas decreased
$51.0by $1.5 million (8%) to $17.8 million for the year ended August 31, 2004 as compared to 2003. This decrease was due largely to the failure of SMI-Texas’ primary transformer on May 31, 2004, with the subsequent failure of the principal back up transformer in June 2004 and accruals related to a sales tax audit and unclaimed property. Although another replacement transformer was installed, it had a lower capacity, resulting in lower production than we had planned. In order to meet our sales commitments to our SMI-Texas customers in the fourth quarter of 2004, we purchased and rolled billets from other affiliated and unrelated minimills at higher costs. We intend to file a claim with our business interruption insurance carrier. See Note 11, Commitments and Contingencies, to the consolidated financial statements. Overall, the steel minimills recorded $24.1 million LIFO expense in 2004 as compared to $5.7 million in 2003. Utility expenses increased by $7.3 million (12%) in 2004 as compared to 2003. Electricity increased by $4.5 million (10%) due to both higher usage from increased overall production and rate increases. Natural gas costs increased26
by $2.8 million (15%) due to higher rates and usage. Costs for ferroalloys and graphite electrodes increased by $8.4 million and $2.3 million, respectively, in 2004 as compared to 2003 largely to more demand from U.S. mills, the impact of the weaker U.S. dollar and higher ocean freight costs on these imported items.
Our copper tube minimill’s adjusted operating profit was $9.0 million during the year ended August 31, 2004 as compared to an adjusted operating profit of $620 thousand for 2003. Copper tube selling prices and shipments increased due to stronger demand from residential and commercial customers. The strong U.S. market in 2004 more than compensated for increased foreign imports, alternative competing products such as plastic water tubing, and consolidation among our customers. Our average selling price increased more than our average copper scrap purchase cost resulting in increased metal margins in 2004 as compared to 2003. The table below reflects our copper tube minimill’s prices and costs per pound and operating statistics for the year ended August 31:
(pounds in millions) 2004 2003 Increase Pounds shipped 68.4 61.9 11 % Pounds produced 66.3 60.7 9 % Average selling price $ 1.69 $ 1.17 44 % Average scrap purchase cost $ 1.08 $ 0.72 50 % Average metal margin $ 0.61 $ 0.45 36 % Our copper tube minimill recorded $5.5 million LIFO expense for the year ended August 31, 2004 as compared to $519 thousand in 2003.
CMCZOn December 3, 2003, our Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), a steel minimill in Zawiercie, Poland. See Note 2, Acquisitions, to the consolidated financial statements. This acquisition greatly expanded our international manufacturing operations. CMCZ recorded net sales of $427.1 million and an adjusted operating profit of $69.3 million (before minority interests) for the year ended August 31, 2004. The factors described above affecting our domestic steel minimills affected CMCZ as well, except that it did not benefit from the weaker U.S. dollar. However, although market conditions remained favorable, the average selling price decreased by 4% during the fourth quarter as compared to the third quarter of 2004 due to increased competition. Subsequent to our acquisition, CMCZ, in coordination with our international marketing and distribution operation, found new outlets for its products. The table below reflects CMCZ’s steel and ferrous scrap prices per ton and our key operating statistics (tons in thousands) for the nine months ended August 31, 2004:
Average mill selling price (total sales) $ 380 Tons melted 1,159 Average ferrous scrap purchase price 179 Tons rolled 863 Average metal margin 201 Tons shipped 1,082 Domestic FabricationOur domestic fabrication businesses reported an adjusted operating profit of $7.3 million for the year ended August 31, 2004 as compared to an adjusted operating profit of $701 thousand in 2003. Net sales were $1.0 billion in 2004, an increase of $304.7 million (41%) as compared to 2003. On December 23, 2003, we acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) which operates steel reinforcing bar fabrication and construction-related product sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. This acquisition complemented our existing Texas rebar fabrication and construction-related products sales operations and expanded our service areas in each of the neighboring states. See Note 2, Acquisitions, to the consolidated financial statements. Lofland accounted for $78.3 million of the increase in net sales and reported a $5.8 million adjusted operating loss during 2004 subsequent to our acquisition. Lofland recorded a loss primarily because the overall purchase costs from our steel suppliers increased against our selling prices. Lofland’s sales prices did not increase as fast as our steel purchase costs because much of our fabrication work was sold months in advance at a fixed price. However, our domestic fabrication segment’s overall adjusted operating profit increased in 2004 as compared to 2003 due to overall higher average selling prices and shipments. As 2004 progressed, market conditions became increasingly favorable, resulting in higher gross margins in all of our product lines including rebar fabrication, construction-related products, steel fence posts, steel joists, castellated beams and structural steel fabrication. Increases in steel purchase costs were more than offset by increased selling prices and shipments. Although construction activity was mixed and varied by region, some private nonresidential construction markets improved and public and institutional construction continued at a solid level enabling us to obtain higher selling prices and increase shipments to meet demand.
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Our acquisition of Lofland resulted in 127 thousand additional tons shipped. The table below shows the average fabrication selling prices per ton (excluding stock and buyout sales) and total fabrication plant shipments for the years ended August 31:
2004 2003 Increase Average fabrication selling price $ 626 $ 536 17 % Tons shipped (in thousands) 1,311 1,028 28 % We recorded $26.3 million of LIFO expense in our domestic fabrication segment for the year ended August 31, 2004, due to the higher cost of steel and more inventories on hand. During the year ended August 31, 2003, we recorded $1.6 million of LIFO expense. During the year ended August 31, 2004, we recorded impairment charges of $6.6 million. See Note 5, Asset Impairment Charges, to the consolidated financial statements. We are continuing to evaluate certain other facilities which are performing under expectations or for which we are considering alternative uses. Our current estimates of cash flows do not indicate that the assets are impaired. However, these estimates and expected uses could change resulting in additional asset impairments.
During 2003, we acquired substantially all of the operating assets of the Denver, Colorado location of Symons Corporation, E.L. Wills in Fresno, California and Dunn Del Re Steel in Chandler, Arizona for a total of $13.4 million. No single one of these acquisitions was significant to our operations, nor were they significant in the aggregate.
RecyclingOur recycling segment reported an adjusted operating profit of $67.9 million for the year ended August 31, 2004 as compared with an adjusted operating profit of $15.2 million in 2003. Net sales for the year ended August 31, 2004 were 75% higher at $774.2 million. Gross margins in 2004 were much higher as compared to 2003. Our selling prices, particularly ferrous scrap, increased significantly because demand from Far Eastern buyers, especially China, and the weaker U.S. dollar resulted in more scrap exports by our competitors. In addition, domestic demand for ferrous scrap increased due to high levels of steel production, resulting in higher shipments. We exported nonferrous scrap to both Asia and Europe during 2004. Our sales volumes increased as well, partially due to additional materials that we were able to obtain through our National Accounts program directed at the management of scrap for our manufacturing customers. The following table reflects our recycling segment’s average selling prices per ton and tons shipped (in thousands) for the year ended August 31:
2004 2003 Increase Average ferrous selling price $ 172 $ 100 72 % Average nonferrous selling price $ 1,382 $ 1,021 35 % Ferrous tons shipped 1,979 1,639 21 % Nonferrous tons shipped 258 231 12 % Total volume processed and shipped* 3,411 2,811 21 %
* Includes all of our domestic processing plants. Also, we recorded $5.2 million LIFO expense for the year ended August 31, 2004 as compared to $1.3 million in 2003, due primarily to increased material purchase costs.
Marketing and DistributionNet sales in our marketing and distribution segment increased $732.1 million (64%) for the year ended August 31, 2004 as compared to 2003, $93.4 million of which resulted from functional currency fluctuations. Our adjusted operating profit for the year ended August 31, 2004 was $39.4 million as compared to $21.8 million in 2003, an increase of 81%. Our increased profitability in marketing and distribution was largely the result of our strategy in recent years to build up our regional business around the world and to increase our downstream presence. The net effect of functional currency fluctuations on our adjusted operating profit was an increase of $2.7 million. The remainder of the increases in net sales and adjusted operating profit was due to higher shipments and selling prices in 2004 as compared to 2003 for all divisions. The effect of these increases was partially offset by $13.8 million LIFO expense in 2004. LIFO expense of $266 thousand was recorded in 2003. Our higher 2004 LIFO expense was due to increases in both inventory purchase costs and quantities. Markets were favorable in several geographic regions around the world. Our sales increased significantly in the United States and Europe. We imported more steel, aluminum, copper and stainless steel into the United States, and gross
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margins for these products were higher in 2004 as compared to 2003. Also, sales increased for most of our product lines. Sales to and within Asia were up significantly, and the economy in Australia was still strong. Our 2004 sales and adjusted operating profits for industrial materials and products were at record levels because of strong demand, especially in China, Europe and the U.S. During 2004, we received a dividend of CZK 34.1 million ($1.6 million) from our 11% investee, Trinecke Zelezarny, a Czech steel mill.
Corporate and EliminationsCommensurate with our overall increase in profitability, discretionary items such as bonuses, profit sharing and contributions increased for the year ended August 31, 2004 as compared to 2003. Our interest expense for the year ended August 31, 2004 increased as compared to 2003 due primarily to our issuance of $100 million additional long-term debt which we used to finance the acquisitions of CMCZ and Lofland. See Note 6, Credit Arrangements, to the consolidated financial statements. Also, our average short-term borrowings increased in 2004 as compared to 2003 to finance additional working capital including our operations in Poland.
Our overall effective tax rate decreased to 30.7% for the year ended August 31, 2004 as compared to 37.8% in 2003, due to the effective tax rate in Poland of 20%. We consider our investment in CMCZ to be permanent.
Near-Term Outlook
We expect that the positive market conditions that resulted in our record 2004 net sales and adjusted operating profits will continue in our fiscal year ending August 31, 2005. Overall, our selling prices and volumes should be sustainable. We believe that activity in China has slowed as the Chinese government moderates the growth rate; however, increased exports from China to other Asian countries should benefit our international division. We believe that the moderate slowing of China’s economy (thereby avoiding a hard landing), the continued U.S. economic recovery and improved state budgets in the U.S. will all positively impact our business. However, our adjusted operating profits could be reduced if very high petroleum prices cause further increases in utility and freight costs. We expect that while our overall level of profitability will be sustained in 2005 as compared to 2004, a higher proportion of our adjusted operating profits will be from our domestic fabrication segment because our backlog has higher selling prices. CMCZ’s adjusted operating profit will be lower partially due to increased competition in their marketplace. Our domestic mills and marketing and distribution segments should continue to report comparable levels of adjusted operating profits in 2005 as compared to 2004, while recycling’s adjusted operating profit should be lower as ferrous prices moderate. Orders and selling prices in our domestic mills and marketing and distribution segments should remain firm. Our LIFO expenses should be lower in fiscal 2005 as compared to 2004.
We anticipate that our effective tax rate for the first quarter of 2005 will be 33%, excluding any impact from recent legislation. On October 1, 2004, the President signed the American Jobs Creation Act of 2004 (the Act) which offers a limited window of opportunity to repatriate certain cash dividends from foreign subsidiaries at a reduced rate. The Company is currently evaluating the Act. Due to the uncertainties regarding the new legislation, the Company has not had sufficient time to evaluate all available alternatives. We anticipate reaching final conclusions regarding the implications of the Act in fiscal 2005. We estimate that our net earnings per diluted share (including the impact of adjusting our inventory valuation to the LIFO method) will be between $1.70 and $1.90 for the three months ending November 30, 2004.
We have successfully reinstalled our principal transformer at SMI-Texas. We maintain business interruption insurance which should cover a substantial portion of the reduction in profitability at SMI-Texas as a result of the production curtailment during the fourth quarter of 2004. We also expect to file an additional business interruption claim covering a failure during start up in August 2003 of a new, higher capacity transformer at SMI-South Carolina. We have returned this transformer to its manufacturer in Italy, and it is now scheduled to be reinstalled in November 2004. We have not considered any business interruption insurance recoveries, which may be substantial, in our earnings estimate for the three months ended November 30, 2004 because we are unable to estimate the minimum recoverable amount. Also, we are uncertain as to the timing of recoveries.
We anticipate that our capital spending for 2005 will be $130 million, including acquisition costs for a shredder at CMCZ and a continuous caster project at our SMI-Texas melt shop.
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Long-Term Outlook
The rapid expansion of a number of emerging economies, including China, has been a major catalyst for the strong steel and nonferrous markets around the world. The magnitude of the growth in these economies has been a new dynamic in the global marketplace. Therefore, we believe that there is an enhanced prospect of significant long-term growth in demand for the global materials sector. We believe that we are well-positioned to exploit long-term opportunities. We expect strong demand for our products due to continuing recovery in demand throughout the major global economies as well as continued growth in developing countries. Emerging countries often have a higher growth rate for steel and nonferrous metals consumption. We believe that the demand will increase in Asia, particularly in China, as well as in Central and Eastern Europe.
We believe that there will be further consolidation in our industries, and we plan to continue to participate in a prudent way. The reasons for further consolidation include a historically inadequate return on capital for many companies, a high degree of fragmentation, the need to eliminate non-competitive capacity and more effective marketing.
2003 Compared to 2002
Domestic millsOur domestic mills’ adjusted operating profit decreased $21.3 million as compared to 2002.
The sale of SMI-Owen and aA litigation settlement at the steel mills in 2002 accounted for$10.6$2.5 million of the decrease. Excludingthese items,this item, adjusted operating profit decreased66%49% in 2003 as compared to 2002. The effect of valuing inventories under the LIFO method and increased utility costs accounted for $5.1 million and $9.4 million, respectively, of the decrease in adjusted operating profit. The remaining $4.3 million was due to higher scrap purchase costs, net of the effect of higher selling prices and shipments. Net sales for the year ended August 31, 2003decreased $26.4increased $49 million(2%(7%) as compared to 2002.SteelOur steel minimills implemented higher selling prices that became partially effective during the second half of 2003, although steel mill selling prices were at very low levels for much of 2003. However, scrap purchase prices were driven sharply higher by offshore demand and the weakening value of the U.S. dollar.Our steel minimills implemented higherThe sellingprices that became partially effective during the second half of 2003. However, theseprice increases and increased shipments did not fully offset higher scrap and utility costs. Gross margins were significantly lower as a result of these conditions. Our copper tubemill'smill’s gross margins were also lower due to increased copper scrap purchase prices and lower selling prices for its products.Our steel group's fabrication operations were less profitable in 2003 as compared to 2002 primarily due to lower selling prices 27which more than offset the impact of higher shipments. The table below reflects steel and scrap prices per ton:
August 31, ------------------ (dollars per ton) 2003 2002 - ------------------------------------------------------------------Average mill selling price-total sales $278 $269 Average mill selling price-finished goods only 287 275 Average fabrication selling price 536 608 Average ferrous scrap purchase price 97 80MINIMILLSAdjusted operating profit for our four domestic steel minimills decreased $18.2 million (52%) for the year ended August 31, 2003 as compared to 2002. The effect of valuing inventories under the LIFO method accounted for $3.5 million (19%) of the decrease in adjusted operating profit for the year ended August 31, 2003 as compared to 2002. Also, during the year ended August 31, 2002, our domestic steel minimills received $2.5 million from a nonrecurring graphite electrode litigation settlement. Even excluding these items, adjusted operating profit in 2003 decreased as compared to 2002 because higher shipments and average selling prices were not enough to offset higher input costs, including scrap and utilities. The table below reflects domestic steel and scrap prices per ton for the year ended August 31:
2003 2002 Average mill selling price (finished goods) $ 287 $ 275 Average mill selling price (total sales) 278 269 Average ferrous scrap purchase price 97 80 The domestic mills’ production and shipment levels (tons melted, rolled and shipped) were as follows for the year ended August 31:
Increase/ (in thousands) 2003 2002 (Decrease) Tons melted 2,081 2,100 (1 %) Tons rolled 1,972 2,026 (3 %) Tons shipped 2,284 2,171 5 % Our adjusted operating profit at
SMI TexasSMI-Texas decreased 25% to $19.3 million for the year ended August 31, 2003 as compared to an adjusted operating profit of $25.8 million in 2002.SMI SouthSMI-South Carolina lost $7.1 million for the year ended August 31, 2003 as compared to a $2.8 million adjusted operating profit in 2002.30
Higher scrap costs, higher energy costs and a weak demand for our products were the most significant reasons for
SMI South Carolina'sSMI-South Carolina’s loss in2003 although these factors were partially offset by price increases in the fourth quarter. SMI Arkansas2003. SMI-Arkansas reported a $160 thousand adjusted operating profit in 2003 as compared to a $3.5 million adjusted operating profit in 2002. Most of the decrease in adjusted operating profit atSMI ArkansasSMI-Arkansas was attributable to LIFO expense caused by higheryear endyear-end inventories of rerolling rail. However, adjusted operating profit at ourSMI AlabamaSMI-Alabama mill for the year ended August 31, 2003 increased 63% to $4.2 million as compared to $2.5 million in 2002. Cost reduction efforts, improved operating efficiencies and better market conditions were the key factors inSMI Alabama'sSMI-Alabama’s improved profitability.Our mills shipped 2,284,000 tons in 2003, an increase of 5% as compared to 2,171,000 tons shipped in 2002, due largely to higher billet sales. Our mills rolled 1,972,000 tons, a 3% decrease as compared to 2002. Our minimills melted 2,081,000 tons during the year ended August 31, 2003, which was a decrease of 1% as compared to 2002. Our average total mill selling price at $278 per ton increased $9 (3%) as compared to 2002. Our mill selling price for finished goods increased $12 per ton (4%) in 2003 as compared to 2002. Our average scrap purchase costs in 2003 increased $17 per ton (21%) as compared to 2002.Utility expenses increased by $9.4 million for the year ended August 31, 2003 as compared to 2002. The increase in utility costs was mostly due to higher natural gas costs, although electricity expenses also increased.FABRICATION AND OTHER BUSINESSES The steel group's fabrication and other businessesOur copper tube minimill reported
a combinedan adjusted operating profit of$6.0$620 thousand for the year ended August 31, 2003 as compared to an adjusted operating profit of $5.1 million in 2002. Net sales were 2% lower in 2003 as compared to 2002. The difference between the sales price and copper scrap purchase cost is commonly referred to as “the metal margin.” The metal margin declined in 2003 as compared to 2002 because selling prices decreased while copper scrap purchase costs increased. Although single family residential construction held up relatively well, other market sectors were weaker which put pressure on selling prices. The table below reflects our copper tube minimill’s prices and costs per pound and operating statistics for the year ended August 31:
Increase/ (pounds in millions) 2003 2002 (Decrease) Pounds shipped 61.9 59.3 4 % Pounds produced 60.7 56.2 8 % Average selling price $ 1.17 $ 1.24 (6 %) Average scrap purchase cost $ 0.72 $ 0.68 6 % Average metal margin $ 0.45 $ 0.56 (20 %) Domestic FabricationOur domestic fabrication operations were significantly less profitable in 2003 as compared to 2002, primarily due to lower selling prices which more than offset the impact of higher shipments. Our domestic fabrication operations reported an adjusted operating profit of $701 thousand for the year ended August 31, 2003 as compared to a profit of
$33.6$30.4 million in 2002. We recorded a $5.2 million gain from the sale of SMI-OwenSteel Companyin March 2002. Also, prior to its sale, SMI-Owen had an adjusted operating profit of $2.9 million for the year ended August 31, 2002. Excluding these items,fabricationdomestic fabrication’s adjusted operating profits decreased by$19.5$21.6 million(76%)for the year ended August 31, 2003 as compared to 2002.Our fabrication plants shipped 1,028,000 tons in 2003, 4% more thanThe $21.6 million decrease was due primarily to lower selling prices. The table below shows the984,000 tons shipped during 2002. Our fabricated rebar shipments increased 104,000 tons (19%) as compared to 2002. Lower structural, joist and post plant shipments partially offset this increase. Theaverage fabrication sellingpriceprices per ton (excluding stock and buyout sales) and total fabrication plant shipments for the year ended August31, 2003 decreased $72 per ton (12%) as compared to 2002. Our rebar fabrication, construction-related products, post and heat treating plants were profitable during the year ended August 31, 2003. Our joist and structural steel fabri- 28cation operations recorded losses during 2003 due to lower selling prices and shipments. During the year ended August 31, 2003, the joist plants reduced certain inventory stock values by $1.8 million to their estimated current market value. Also, during the year ended August 31, 2003, we wrote-down $711 thousand of inventory at two of our other fabrication facilities, we recognized a $998 thousand gain on the trade-in of rental forms in construction-related products, and we reduced our deferred insurance proceeds accrual by $937 thousand (see Note 9, Commitments and Contingencies to the consolidated financial statements).31:
Increase/ 2003 2002 (Decrease) Average fabrication selling price $ 536 $ 608 (12 )% Tons shipped (in thousands) 1,028 984 4 % During 2003, we acquired substantially all of the operating assets of the Denver, Colorado location of Symons Corporation, E.L. Wills in Fresno, California, and Dunn Del Re Steel in Chandler, Arizona. The Symons location is a concrete formwork supplier, and E.L. Wills and Dunn Del Re Steel are rebar fabrication operations. The purchase prices for these businesses totaled
$14.0$13.4 million. No single one of these acquisitions was significant to our operations.COPPER TUBE Our copper tube division reported an adjusted operating profit of $620 thousand for the year ended August 31, 2003 as compared to an adjusted operating profit of $5.1 million in 2002. Net sales were 2% lower in 2003 as compared to 2002. Our copper tube shipments increased 4% to 61.9 million pounds during 2003 as compared to 2002. However, our average net selling price for plumbing and refrigeration tube decreased by 7 cents per pound (6%) to $1.17 per pound as compared to $1.24 per pound in 2002. We increased our production to 60.7 million pounds for the year ended August 31, 2003, which was 8% more than the 56.2 million pounds that we produced in 2002. Our average copper scrap price increased 4 cents per pound (6%) during the year ended August 31, 2003 as compared to 2002. The difference between the sales price ($1.17 and $1.24 in 2003 and 2002, respectively) and copper scrap purchase cost ($0.72 and $0.68 in 2003 and 2002, respectively) are commonly referred to as "the metal spread." The metal spread declined 21% in 2003 as compared to 2002. Although single family residential construction held up relatively well, other market sectors were weaker which put pressure on selling prices. RECYCLINGRecyclingOur recycling segment reported an adjusted operating profit of $15.2 million for the year ended August 31, 2003 as compared to an adjusted operating profit of $5.1 million in 2002. All four of the geographic regions where the segment operates were substantially more profitable. Net sales for the year ended August 31, 2003 were $441.4 million, an increase of 17% as compared to our net sales of $378.1 million in 2002. Our gross margins were 24% higher in 2003 as compared to 2002, partially due to controls over costs.
The segment processed and shipped 1,639,000 tons ofHigher ferrousscrap during the year ended August 31, 2003, an increase of 10% as compared to 2002. Ferrous salesselling priceswere on average $100 per ton, 23% higher than in 2002. Greaterresulting from greater demand from overseas markets contributed31
to this increase, as well as the weaker U.S. dollar.
Nonferrous markets improved moderately duringThe following table reflects our recycling segment’s average selling prices per ton and tons shipped (in thousands) for the year ended August31, 2003. Our average nonferrous scrap sales price of $1,021 per ton was 8% higher than in 2002, although shipments were 3% lower at 231,000 tons. The total volume of scrap processed, including the steel group's processing plants, was 2,811,000 tons, an increase of 9% from the 2,568,000 tons processed in 2002. MARKETING AND DISTRIBUTION31:
Increase/ 2003 2002 (Decrease) Average ferrous selling price $ 100 $ 81 23 % Average nonferrous selling price $ 1,021 $ 947 8 % Ferrous tons shipped 1,639 1,494 10 % Nonferrous tons shipped 231 238 (3 )% Total volume processed and shipped* 2,811 2,568 9 %
* Includes all of our domestic processing plants. Marketing and DistributionNet sales for the year ended August 31, 2003 for our marketing and distribution segment increased $372.7 million (48%) to $1.15
billion, as compared to 2002 net sales of $777.0 million. Most of the increase related to sales outside of the United States.billion. Adjusted operating profit for the year ended August 31, 2003 was $21.8 million, an increase of 53% as compared to2002, due mostly2002. Most of the increases in net sales and adjusted operating profit related tobetter results from our international operations.sales outside of the United States. International steel prices for flat-rolled products rose and then weakened, because of decreased demand from China, during the first three quarters of 2003. However, the prices for flat-rolled steel products rose again during the fourth quarter. Prices for long products slowly increased during 2003. Our steel shipments increased, except for imports into the U.S. Our business in the U.S. was reduced because of the weak economy and the weaker U.S. dollar. Due to these factors, volumes, prices29and margins for nonferrous semi-finished products were lower in 2003 as compared to 2002. However, sales and margins for ores, minerals, ferroalloys and special metals were generally higher. Also, freight costs increased in 2003 as compared to 2002. Our marketing and distribution and service center operations in Australia were more profitable in 2003 as compared to 2002. Our joint venture Europickling facility in Belgium became profitable during 2003. Also, the joint venture arrangements with our 11% investee, Trinecke Zelezarny, a Czech mill,contributed to our sales in Central Europe. Sales into Asia, including China, were strong, especially during the first and second quarters of our fiscal 2003. In July 2003, our international subsidiary entered into a definitive agreement to purchase a controlling interest inHuta Zawiercie, a Polish steel minimill.CMCZ. This acquisitionis expected to close byclosed on December15,3, 2003.OTHERCorporate and EliminationsOur
employees'employees’ retirement plan expenses were 16% lower for the year ended August 31, 2003 as compared to 2002. Discretionary items,such asincluding bonuses and contributions, were lower for the year ended August 31, 2003 as compared to2002. We committed less to these items2002 because 2003 was less profitable. Interest expense for the year ended August 31, 2003 was lower as compared to 2002 due primarily to lower overall interest rates on short-term borrowings and two interest rate swaps on parts of our long-term debt which resulted in lower effective interest rates.During 2002, we favorably resolved all issues for our federal income tax returns through 1999. Due to the lack of any material adjustments, we reevaluated
theour tax accruals and, consequently, reduced the net tax expense by $1.0 million during 2002.On August 8, 2003, we increased our commercial paper program to permit maximum borrowings of up to $275 million, up from the prior year $174.5 million level. Commercial paper capacity is reduced by any outstanding standby letters of credit under the 2003 program which totalled $20.6 million at August 31, 2003. Near-Term Outlook We expect our fiscal year ending August 31,2004
to be significantly more profitable than 2003, partially because of the internal cost reductions and productivity improvements that we have made. We also are expecting better economic conditions in 2004, mostly in global manufacturing. We believe that our first quarter of 2004 will have comparable profits to the quarter ended August 31, 2003. We anticipate net earnings (excluding the effect of revaluing inventories on the LIFO method) to be approximately $9 million to $10 million for the first quarter of fiscal 2004. We have noted signs of increasing demand in the U.S. manufacturing sector, and some improvement in construction. However, office, lodging and industrial construction will be slower to recover. Also, orders for capital goods are higher. Asian markets are relatively strong and European markets are partially recovering. We anticipate that our overall results will be better in the second half of 2004 as compared to the first half. We anticipate our profits will be higher in 2004 in our manufacturing segment as compared to 2003 because of higher metal spreads and increased production, shipments and prices. We have implemented several steel minimill price increases on most of our products. The cumulative price increases are $70 per ton for merchant bar and $55 per ton for reinforcing bar. We are expecting these price increases to become fully effective during the first half of fiscal 2004. As a result, gross margins at our steel minimills should increase. We expect the gross margins in our fabrication and other related businesses to continue at current levels during the first few months in fiscal 2004. However, these margins should improve later in that year. We anticipate that our recycling segment will continue to report significant profits, due to strong demand for steel scrap and nonferrous metal scrap and the relatively weak U.S. dollar. 30Our marketing and distribution segment should remain profitable during our fiscal 2004. We expect that our U.S. operations will be more profitable, but that our international subsidiary will have lower profits in 2004 as compared to 2003. Overall, prices and volumes should remain constant. We are expecting that our purchase of the controlling interest in Huta Zawiercie will be completed by December 15, 2003. We anticipate that our capital spending for 2004 will be $61 million, excluding the $50 million acquisition cost for 71.1% of the shares of Huta Zawiercie. Most of these expenditures will be in our manufacturing segment including a major improvement project at our SMI-Texas melt shop. Long-Term Outlook We believe we are well-positioned to exploit long term opportunities. Long term, we expect stronger demand for our products due to the increased possibility of a recovery in demand throughout the major global economies as well as continued growth in developing countries. Emerging countries often have a higher growth rate for steel and nonferrous metals consumption. We believe that the demand will increase in Asia, particularly in China, as well as in Central and Eastern Europe. Further consolidation is a virtual certainty in the industries in which we participate, and we plan to continue to participate in a prudent way. The reasons for further consolidation include an inadequate return on capital for most companies, numerous bankruptcies, a high degree of fragmentation, the need to eliminate non-competitive capacity and more effective marketing. 312002 COMPARED TO 2001 Segments MANUFACTURING We include our steel group and our copper tube division in our manufacturing segment. Adjusted operating profit is equal to earnings before income taxes for our four steel minimills, our copper tube mill and the steel group's fabrication operations. Our manufacturing adjusted operating profit in 2002 increased $14.7 million (26%) as compared to 2001 on marginally more ($12 million) net sales. We achieved this increase in adjusted operating profit for two primary reasons in 2002: (i) the nonrecurrence of the prior year litigation accrual in the amount of $8.3 million, and (ii) the current year gain on the sale of the steel group's heavy structural fabrication operation, SMI-Owen, in the amount of $5.2 million. Excluding those items, our manufacturing segment's adjusted operating profit was slightly higher than last year. Increased production and shipments at our steel group's minimills more than offset lower selling prices, increased scrap purchase costs and lower copper tube earnings. Also, we spent less in 2002 on utilities, and we recorded lower depreciation and amortization expense. However, fiscal 2002 adjusted operating profits decreased from fiscal 2001 in the steel group's downstream steel fabrication and related businesses due to lower profits in rebar fabrication and structural steel fabrication, excluding SMI-Owen. The table below reflects steel and scrap prices per ton:
August 31, ------------------ (dollars per ton) 2002 2001 - ------------------------------------------------------------------Average mill selling price-total sales $269 $284 Average mill selling price-finished goods only 275 290 Average fabrication selling price 608 646 Average ferrous scrap purchase price 80 74MINIMILLS During 2002, adjusted operating profit for our four steel minimills rose 27% compared with 2001, despite lower selling prices. SMI South Carolina had a $2.8 million adjusted operating profit in 2002 compared to a $1.6 million loss in 2001. SMI Alabama turned around as well with a $2.5 million adjusted operating profit in 2002 compared to a $2.2 million loss in 2001. Adjusted operating profits at SMI Arkansas were up 4% in the current year period. These improvements more than offset a 7% decline in adjusted operating profits at SMI Texas as compared to 2001. A major reason for the minimills' improved profitability was a 14% increase in shipments because of continued public projects infrastructure construction. Shipments were 2,171,000 tons in 2002 compared to 1,903,000 in 2001. Mill production also increased over last year. Tons rolled were up 19% to 2,026,000 in 2002. Tons melted were up 17% to 2,100,000 in 2002. Even though demand was strong, the average total mill selling price at $269 per ton was $15 (5%) below last year. Also, in 2002, we sold more semi-finished billets, a product with a lower selling price than our average. Average scrap purchase costs were $6 per ton (8%) higher than in 2001, resulting in smaller margins. Utility expenses declined by $2.4 million as compared to 2001. Decreases in natural gas costs more than offset higher electricity costs. Also, depreciation and amortization expenses decreased by $5.2 million in 2002, primarily because SMI-South Carolina fully depreciated its mill rolls and guides as well as certain melt shop equipment. The mills also received $2.5 million from a nonrecurring graphite electrode litigation settlement in 2002. 32The U.S. government's new tariffs cover most of the steel minimills' products and range from 15-30% the first year, declining over the next two years. An import licensing and monitoring system and an anti-surge mechanism will further strengthen these remedies. Also, the U.S. administration plans to continue discussions with other steel producing nations to remove excess global capacity and eliminate subsidies. FABRICATION AND OTHER BUSINESSES Adjusted operating profit in the steel group's fabrication and other businesses increased by $12.1 million (57%) in 2002 as compared to 2001. Excluding the 2002 gain on the sale of SMI-Owen ($5.2 million) and the 2001 litigation accrual ($8.3 million), adjusted operating profits in 2002 decreased by $1.3 million (4%) as compared to 2001. Near the end of fiscal 2002, we discovered two significant, but unrelated events, requiring retroactive writedowns at two rebar fabrication operations. The total amount of the adjustments required to correct the August 31, 2002 balance sheets of these two facilities was $4.6 million. These adjustments affected fiscal years from 1999 to 2002. In August 2002, we uncovered a theft and an accounting fraud which occurred over four years at a rebar fabrication plant in South Carolina. The total adjustment required to revert the accounting records to their proper balances was $2.7 million. In September 2002, we discovered accounting errors related to losses on rebar fabrication and placement jobs at one facility in California, some of which date back to its acquisition in fiscal 2000. The resulting charge was $1.9 million. The South Carolina incident resulted in a $900 thousand expense in fiscal 2002. The remaining $3.7 million for both instances was attributed $885 thousand to fiscal 2001, $2.6 million to fiscal 2000, and $227 thousand to 1999, resulting in prior period adjustments to these previously reported financial statements. We took immediate action to strengthen compliance with our internal control policies in the areas of segregation of duties, personnel and management review and oversight. Controllers at both locations were replaced as well as the general manager of the rebar fabrication plant in South Carolina. The steel group has increased the level of detail, the frequency of submission and the amount of review of its operating locations' reporting. The Company has renewed emphasis on periodic and timely internal balance sheet audits at all operating locations and completed audits of all its operating locations in fiscal 2003. No major areas of noncompliance were noted. Senior management and area managers of all the Company's locations attended internal meetings led by the CEO and CFO regarding management's responsibility for internal control, dealing with noncompliance issues and the Company's commitment to only the highest of ethical standards of conduct. Fabrication plant shipments totaled 984,000 tons, down fractionally from 986,000 tons shipped in 2001. The average fabrication selling price in 2002 decreased $38 per ton (6%) as compared to 2001. Rebar fabrication markets were softer in 2002 as a result of intense competition, and several plants reported losses. During 2002, we acquired the real estate, equipment, inventory and work in process of Varmicon, Inc. in Harlingen, Texas. We now operate this rebar fabrication facility under the name of SMI-Valley Steel. The steel joist operations, which includes cellular and castellated beams, were break even in 2002, an improvement over the loss in 2001. Both prices and shipments decreased, but lower operating costs and shop efficiencies helped significantly. Also, in 2001 these operations incurred $8.9 million in start-up costs. Structural steel fabrication profits, excluding SMI-Owen and the prior year litigation accrual, were down in 2002 compared to 2001. However, our concrete-related products operations were more profitable in 2002. We continued to expand this business through the acquisition of Dowel Assembly Manufacturing Company, or DAMCO, in Jackson, Mississippi. DAMCO manufactures dowel baskets and has an epoxy coating business. In 2002, the steel group started Spray Forming International, a stainless steel cladding operation located in South Carolina. COPPER TUBE Our copper tube division's adjusted operating profit decreased 59% with 7% less net sales as compared to 2001. Copper tube shipments increased 3% from 2001 to a record 59.3 million pounds, and production increased 5% from 2001 to a record 56.2 million pounds. However, average sales prices dropped 10% in 2002 to $1.24 per pound as compared to the average sales 33price in 2001 of $1.38. The biggest factor was lower apartment and hotel/motel construction. Consequently, demand for plumbing and refrigeration tube was not as strong. The 2002 product mix included increased quantities of HVAC products and line sets. In the marketplace, we continued to adapt to the consolidation among our buyers. The difference between sales price and copper scrap purchase cost (commonly referred to as "the metal spread"), declined 8% in 2002 compared to 2001. Lower raw material purchase costs did not fully compensate for the decline in selling prices. RECYCLING Our recycling segment reported an adjusted operating profit of $5.1 million in 2002 compared with an adjusted operating loss of $2.3 million in 2001. Net sales in 2002 were 4% lower at $378 million as compared to 2001. However, gross margins were 11% above last year, primarily because we shipped 8% more total tons. Demand for ferrous scrap improved both in the U.S. and internationally. The segment processed and shipped 1,494,000 tons of ferrous scrap in 2002, 10% more than in 2001. Ferrous sales prices were on average $81 per ton, an increase of $6 from 2001. Nonferrous shipments were flat at 238,000 tons. The average 2002 nonferrous scrap sales price of $947 per ton was 9% lower than in 2001. Increased productivity, higher asset turnover and reduced costs contributed to the improved 2002 results. The total volume of scrap processed, including the steel group's processing plants, was 2,568,000 tons, an increase of 11% from the 2,308,000 tons processed in 2001. In 2002, we acquired most of the transportation assets of Sampson Steel Corporation in Beaumont, Texas. These assets were combined with our existing scrap processing facility in Beaumont. Also, we closed our Midland, Texas facility, resulting in a writedown of $455,000 on certain equipment. MARKETING AND DISTRIBUTION Net sales in 2002 for our marketing and distribution segment increased 1% to $777 million as compared to 2001. Adjusted operating profit in 2002 increased 82% to $14.2 million as compared to 2001, mostly due to better results from our Australian operations. International steel prices and volumes for steel and nonferrous semifinished products improved during the second half of 2002, primarily in the distribution and processing businesses. However, depressed economies, oversupply in most markets and intense competition from domestic suppliers in the respective markets caused compressed margins for numerous steel products, nonferrous metal products and industrial raw materials and products. The U.S. dollar weakened against major currencies, a beneficial development. In September 2001, we completed our acquisition of Coil Steels Group, an Australian service center in which we already owned a 22% share. This acquisition provided $2.2 million of additional profits and $69.0 million in net sales during 2002. Sales and profits for the Company's pre-existing business in Australia also improved significantly. However, this increase in net sales was more than offset by decreased sales in our U.S. operations due to fewer imports into the United States. Operating profits for the U.S. divisions improved significantly due to Cometals which returned to more historical levels, and Dallas Trading which benefited from the U.S. tariff legislation. Lower margins at Commonwealth on semi-finished products almost offset these improvements. Our European operations' net sales decreased slightly in 2002 as compared to 2001, but profits improved significantly. The segment's recent strategy of growing its downstream marketing and distribution business offset the continuing very difficult trading conditions. OTHER Selling, general and administrative, as well as employees' retirement plans expenses, were higher in 2002 as compare to 2001, mostly due to our acquisition of CSG in 2001 and discretionary items such as bonuses and profit sharing. This increase was consistent with the improvement in our operating profitability. Interest expense decreased by $8.9 million (32%) from 2001 largely due to lower interest rates and much lower average short-term borrowings. Also, during 2002 we entered into two interest rate swaps which resulted in interest expense sav- 34ings. During 2002, we favorably resolved all issues for our federal income tax returns through 1999. Due to the lack of any material adjustments, we reevaluated the tax accruals and, consequently, reduced the net tax expense by $1.0 million during 2002. 2003Liquidity and Capital ResourcesWe discuss liquidity and capital resources on a consolidated basis. Our discussion includes the sources and uses of our
threefive operating segments and centralized corporate functions. We have a centralized treasury function and use inter-company loans to efficiently manage the short-term cash needs of our operating divisions. We invest any excess funds centrally.We rely upon cash flows from operating activities, and to the extent necessary, external short-term financing
sources.sources for liquidity. Our short-term financing sources include the issuance of commercial paper, sales ofcertainaccounts receivable, documentary letters of credit with extended terms, short-term trade financing arrangements and borrowing under our bank credit facilities. From time to time, we have issued long-term public and privatedebt placements.debt. See Note 6, Credit Arrangements, to the consolidated financial statements. Our investment grade credit ratings and general business conditions affect our access to external financing on a cost-effective basis. Depending on the price of our common stock, we may realize significant cash flows from the exercise of stock options.Moody's32
Moody’s Investors Service (P-2)
,and Standard &Poor'sPoor’s Corporation (A-2)and Fitch (F-2)rate our $275 million commercial paper program in the second highest category. To support our commercial paper program,on August 8, 2003,weentered into a $275 millionhave an unsecured contractually committed revolving credit agreement with a group of sixteen banks. Our $275 million facility expires in August 2006.This agreement provides for borrowing in U.S. dollars withUnder theinterest rate indexed to LIBOR. The spread over LIBOR may vary between 33 basis points and 105 basis points based upon the rating of our non-credit enhanced senior unsecured long-term debt by Moody's Investors Service and Standard & Poor's Corporation. Actual borrowings are subject to a facility fee which may vary between 17 and 45 basis points based on the same debt ratings. In addition, if we borrow more than 33% of the authorized borrowings under the credit agreement, we will incur an additional 12.5 basis point fee on actual borrowings. No compensating balances are required. The credit agreement serves as a backup toprogram, our commercial paperprogram.capacity is reduced by our outstanding standby letters of credit which totaled $19.9 million at August 31, 2004. The costs of our revolving credit agreement may be impacted by a change in our credit ratings. We plan to continue our commercial paper program and the revolving credit agreements in comparable amounts to support the commercial paper program.For added flexibility,Also, wemay secure financing through securitized saleshave numerous informal, uncommitted, short-term credit facilities available from domestic and international banks. These credit facilities are available to support import letters of credit, foreign exchange transactions and, in certainaccounts receivable in an amount not to exceed $130 million and direct sales of accounts receivable. We may continually sell accounts receivable on an ongoing basis to replace those receivables that have been collected from our customers.instances, short-term working capital loans.Our long-term public debt was
$254$360 million at August 31,20032004 and is investment grade rated by Standard &Poor'sPoor’s Corporation(BBB), Fitch(BBB) and byMoody'sMoody’s InvestorsServiceServices (Baa2). We believe we have access to the public markets for potential refinancing or the issuance of additional long-term debt.See Note 15, Subsequent Events, toDuring the year ended August 31, 2004, we purchased $90 million of ourconsolidated financial statements regarding our issuance7.20% notes otherwise due in 2005, and issued $200 million ofbonds5.625% notes due November 2013.In March 2004, we refinanced the notes payable that we assumed upon the acquisition of CMCZ with a five-year term note with a group of four banks for 150 million PLN ($38.4 million) and
repaymenta revolving credit facility with maximum borrowings ofcertain debt after year end. Also, we have numerous informal, uncommitted credit facilities available from domestic60 million PLN ($16.4 million). The term note andinternational banks. Thesethe revolving credit facilities arepricedsecured by the majority of CMCZ assets and contain certain financial covenants. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt. At August 31, 2004, only a minimal amount was outstanding on CMCZ’s revolving credit facility.In order to facilitate certain trade transactions, we utilize letters of credit, advances and non- or limited-recourse trade financing arrangements to provide assurance of payments and advance funding to our suppliers. The letters of credit may be for prompt payment or for payment at
current market rates.a future date, conditional upon the bank finding the documentation presented to be in strict compliance with all terms and conditions of the letter of credit. Our banks issue these letters of credit under informal, uncommitted lines of credit which are in addition to the committed revolving credit agreement. In some cases, if our suppliers choose to discount the future dated obligation we may absorb the discount cost. The trade financing arrangements consist of a financing agreement with a lender which is secured by a supply agreement with our supplier. The lender is repaid after the product is delivered to us in conformance with the supply agreement. We are not liable for repayment of the principal and/or interest to the bank unless and until we have received the conforming deliveries from the supplier.Credit ratings affect our ability to obtain short- and long-term financing and the cost of such financing. If the rating agencies were to reduce our credit ratings, we would pay higher financing costs and probably would have less availability of the informal, uncommitted facilities.
On November 5, 2003, Moody's Investors Service downgraded our senior unsecured debt rating from Baa1 to Baa2, but changed its outlook from negative to stable, equal to that of Standard & Poor's.In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding,off balanceoff-balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy, industryconditionscondition and contingencies.We are 35committed to maintainingMaintaining our investment graderatings.ratings is a high priority for us.Certain of our financing agreements include various covenants.
The most restrictive of theseOur revolving credit agreement contains financial covenantsrequires us to maintain an interest coveragewhich require that we (a) not permit our ratio of consolidated long-term debt (including current maturities) to total capitalization (defined in our credit agreement as stockholders’ equity less intangible assets plus long-term debt) to be greater thanthree times0.55 to 1.00 at any time and, (b) not permit our quarterly ratio of consolidated EBITDA to consolidated interest expense on a rolling twelve month basis to33
be less than 3.00 to 1.00. At August 31, 2004, our ratio of consolidated debt to total capitalization was 0.40 to 1.00. Our ratio of
55%, asconsolidated EBITDA to interest expense for the year ended August 31, 2004 was 10.5 to 1.00. In addition, our credit agreement contains covenants that restrict our ability to, among other things:
• create liens; • enter into transactions with affiliates; • sell assets; • in the case of some of our subsidiaries, guarantee debt; and • consolidate or merge. The indenture governing our long-term public debt contains restrictions on our ability to create liens, sell assets, enter into sale and leaseback transactions, consolidate or merge and limits the ability of some of our subsidiaries to incur certain types of debt or to guarantee debt. Also, our five-year term note at CMCZ contains certain covenants including minimum debt to EBITDA, debt to equity and tangible net worth requirements (as defined
in the financing agreement. A few of the agreements provide that if we default on the terms of another financing agreement, it is considered a default under these agreements.for CMCZ only). We have complied with the requirements, including the covenants of our financing agreements as of and for the year ended August 31,2003.2004.Off-Balance Sheet ArrangementsFor added flexibility, we may secure financing through sales of certain accounts receivable both in the U.S. and internationally. See Note 3, Sales of Accounts Receivable, to the consolidated financial statements. Our domestic program provides for such sales in an amount not to exceed $130 million, and our European and Australian subsidiaries can sell up to 15 million GBP and 50 million AUD of additional accounts receivable. We may continually sell accounts receivable on an ongoing basis to replace those receivables that have been collected from our customers. The U.S. securitization program contains certain cross-default provisions whereby a termination event could occur should we default under another credit arrangement. As a result of an amendment on April 22, 2004, a different termination event based on our credit ratings that had been included in the program was eliminated. We use the securitization program as a source of funding that is not reliant on either our short-term commercial paper program or our revolving credit
agreements and accounts receivable securitization agreement include ratings triggers. The triggerfacility. As such, we do not believe that any reductions in therevolving credit agreements is solely a meanscapacity or termination of the securitization program would materially impact our financial position, cash flows or liquidity because we have access toreset pricing for facility fees and, if a borrowing occurs, on loans. Within the accounts receivable securitization agreement, the ratings trigger is contained in a "termination event," but the trigger is set at catastrophic levels. The trigger requires a combinationother sources ofratings actions on behalf of two independent rating agencies and is set at levels six ratings categories below our current rating.external funding.Our
manufacturingdomestic mills, CMCZ and recycling businesses are capital intensive. Our capital requirements include construction, purchases of equipment and maintenance capital at existing facilities. We plan to invest in newoperations. We also plan to invest inoperations, use working capital to support the growth of our businesses, and pay dividends to our stockholders.We continue to assess alternative means of raising capital, including potential dispositions of under-performing or non-strategic assets. Any
potentialfuture major acquisitions could require additional financing from external sourcesincludingsuch as the issuance of common or preferred stock.CASH FLOWSCash FlowsOur cash flows from operating activities primarily result from sales of steel and related products, and to a lesser extent, sales of nonferrous metal products. We also sell and rent construction-related products and accessories. We have a diverse and generally stable customer base. We use futures or forward contracts as needed to mitigate the risks from fluctuations in foreign currency exchange rates and metals commodity prices. See Note 7, Financial Instruments, Market and Credit Risk, to the consolidated financial statements. The volume and pricing of orders from our U.S. customers in the manufacturing and construction sectors affect our cash flows from operating activities.
Our international marketingThe pace of economic expansion anddistribution operationsretraction of major industrialized and emerging markets (especially China) outside of the U.S. also significantly affect our cash flows from operating activities. The weather can influence the volume of products we ship in any given period. Also, the general economy, the strength of the U.S. dollar, governmental action, and various other factors beyond our control influence our volume and prices. Periodic fluctuations in our prices and volumes can result in variations in cash flows from operating activities. Despite these fluctuations, we have historically relied on operating activities as a steady source of cash.34
Our
net cash flows fromoperating activitieswere $15.3 millionfor the year ended August 31,2003, which were $81.32004 provided net cash flows of $49.7 millionloweras compared to the$96.6$14.3 million of net cash flowsfromprovided by our operating activities for the year ended August 31,2002. Our net2003. Net earningsdecreased $21.6were $113.1 millionin 2003 as compared to 2002. Also, our accounts receivable and inventories increased by $112.6 million in 2003 as compared to an increase of $85.9 million in 2002. These items increased in 2003 primarily in our marketing and distribution operations due tohighersales orders from outside of the United States. Our accounts payable at August 31, 2003 was higher than at August 31, 2002, but the increase in accounts payable was not commensurate with the increase in inventories. Duringfor the year ended August 31,2003, we paid more bonuses and other discretionary expenses, which had been accrued2004 as compared to 2003. However, net working capital increased by $241.3 million to $640.8 million at August 31,2002, than we did during the year ended August 31, 2002. As a result, our accrued expenses decreased during the year ended2004 from $399.4 million at August 31, 2003.Also, we paid $9.6Our newly acquired CMCZ and Lofland operations accounted for $89.1 million of the increase (of which $43.3 million was directly related to balances at their acquisitions). Accounts receivable (excluding amounts acquired at CMCZ and Lofland) increased $223.8 million during the year ended August 31, 2004 as compared to 2003. This increase was much greater than the increase in accounts receivable of $65.7 million in 2003,relatingalthough the trend was generally higher over the past three years due primarily to growth in our operations. In addition to growth, accounts receivable significantly increased in all segments in 2004, primarily due to higher selling prices and shipments with the majority of the increases in domestic fabrication, recycling and marketing and distribution. Also, we sold $77.9 million of accounts receivable for the year ended August 31, 2004 as compared to $18.7 million in 2003 (See Note 3, Sales of Accounts Receivable, to the consolidated financial statements). Our inventories (excluding those acquired with CMCZ and Lofland) increased by $290.5 million during the year ended August 31, 2004 as compared to anadverse trial judgment thatincrease of $36.4 million in 2003. The 2004 increase wasupheld on appeal. This judgment had beenprimarily due to higher purchase costs, higher quantities in anticipation of increased sales, and goods in transit. The majority of the increases were in our marketing and distribution and domestic fabrication segments. Also, our trade accounts payable, accruedatexpenses, other payables and income taxes (excluding Lofland and CMCZ) increased by $224.0 million during the year ended August 31,362002. During 2002, we had received $15.0 million2004 as compared to 2003 due primarily to increased inventory purchases and higher discretionary accruals.The decrease in net cash flows from
a favorable litigation settlement and $5.2 millionoperating activities for thecontract balanceyear ended August 31, 2003 as compared to 2002 primarily resulted from lower net earnings in 2003 andsettlementincreases in working capital as a result ofdisputed change orders on an old large structuralincreased accounts receivable and inventories. Net sales in the fourth quarter of 2003 were significantly higher than in the fourth quarter of the previous year, resulting in more accounts receivable at year end. Inventories increased in 2003 as compared to 2002 primarily due to higher costs and higher inventory quantities at the minimills and our steel fabricationcontract at SMI-Owen. Weand post plants.Excluding the acquisitions of Lofland and CMCZ, we invested
$49.8$51.9 million in property, plant and equipment during the year ended August 31, 2004, which was slightly more than during 2003an increase of $2.6 million (5%) as comparedand 2002. We expect our capital spending for fiscal 2005 to2002. The capital expenditures in 2003 were primarily in our manufacturing segment. In addition, we acquired the operating assets of two rebar fabrication operations and one construction-related products business in 2003, for a total of $13.4 million cash. In 2002, we acquired the remaining shares of the Coil Steels Group (CSG) for $6.8be $130 million.Also, in 2002, we received $19.7 million from the sale of the assets of SMI-Owen, our large structural steel fabrication operation located in Columbia, South Carolina.We assess our capital spending each quarter and reevaluate our requirements based upon current and expected results.In November 2003, we issued $200 million of long-term notes due in 2013. The proceeds from this offering were used to purchase $90 million of our notes otherwise due in 2005 and finance our purchases of CMCZ and Lofland. In March 2004, we refinanced $38.4 million of CMCZ’s notes payable that we had assumed in our acquisition through the issuance of a long-term note and a revolving credit facility. Also during 2004, we obtained more extended payment terms through the use of discounted documentary letters of credit rather than through more traditional extended terms with our trade suppliers. In October 2003, we entered into a trade financing arrangement to enable us to provide a low risk $35.3 million advance to one of our key suppliers. The advance was partially repaid during 2004 as the supplier delivered the materials that we purchased under a related supply agreement.
At August 31,
2003, 27,994,6902004, 29,277,964 common shares were issued and outstanding,including 4,270,476with 2,987,202 held in our treasury. During the year ended August 31, 2004, we received $19.5 million from stock issued under our employee incentive and stock purchase plans as compared to $6.2 million in 2003 and $30.2 million in 2002. We purchased 143,847 shares of our common stock during the year ended August 31, 2004 at $31.88 per share as compared to 951,410 shares at $15.36 per share in 2003. We paid dividends of$9.0$9.8 million during the year ended August 31,2003,2004, approximately the same amount ascomparedwe paid during 2003. In June 2004, we increased our quarterly cash dividend by 25% to$7.510 cents per common share.During our fiscal year ending August 31, 2005, we will repay $10 million in
2002. During the year ended August 31, 2003, we purchased 951,410 shares of our common stock at an average price of $15.36 per share. These shares were heldlong-term debt principal when it matures inour treasury. During 2003, we received $6.2July 2005. Our $9.8 millionfrom the issuance of stock from our treasury under our stock incentive and purchase plans, as compared to $30.2 million received from these transactions in 2002. During the year ended August 31, 2003, we used our excess cash and cash equivalents, sold accounts receivable and entered intoshort-term trade financingarrangements to help meetarrangement will be self-liquidating with cash flows from our operating activities. We believe that our cashrequirements, purchase property, plant and equipment and acquire our common stock for the treasury. No amounts were outstanding under our commercial paper programflows from operating activities will continue to provide liquidity during 2005. In addition, at August 31,2003 or 2002. We have no significant amounts due on2004 we had $90 million and $255 million unused capacity under ourlong-term debt until July 2005. Wedomestic accounts receivable securitization and commercial paper35
programs, respectively. Therefore, we believe that we have sufficient liquidity
for fiscal 2004.to enable us to meet our contractual obligations of $929 million over the next twelve months, the majority of which are expenditures associated with normal revenue-producing activities and to make our planned capital expenditures of $130 million.Contractual Obligations
The following table represents our contractual obligations as of August 31,
20032004 (dollars in thousands):
Payments Due By Period* Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Contractual Obligations: $ 404,620 $ 11,252 $ 71,283 $ 122,020 $ 200,065 23,989 9,756 14,233 — — 156,560 25,184 46,960 33,766 50,650 61,962 14,064 20,398 11,700 15,800 1,007,346 868,777 90,077 34,421 14,071
Total contractual cash obligations $ 1,654,477 $ 929,033 $ 242,951 $ 201,907 $ 280,586
Payments Due Within* ---------------------------------------------------------------- Total 1 Year 2-3 Years 4-5 Years After 5 Years -------- -------- --------- --------- -------------Contractual Obligations: Long-term debt(1) $255,637 $ 640 $ 104,884 $ 50,041 $100,072 Operating leases(2) 40,670 9,318 14,068 8,386 8,898 Unconditional purchase obligations(3) 186,100 79,831 68,911 13,493 23,865 -------- -------- --------- -------- -------- Total contractual* We have not discounted the cash obligations $482,407 $ 89,789 $ 187,863 $ 71,920 $132,835in this table.(1) Total amounts are included in the August 31, 2004 consolidated balance sheet. See Note 6, Credit Arrangements, to the consolidated financial statements. (2) Payments will be due only if steel is delivered in conformance with the related supply agreement, for which purchase prices are negotiated in advance of each delivery. (3) Interest payments related to our short-term debt are not included in the table as they do not represent a significant obligation as of August 31, 2004. (4) Includes minimum lease payment obligations for non-cancelable equipment and real-estate leases in effect as of August 31, 2004. See Note 11, Commitments and Contingencies, to the consolidated financial statements. (5) About 95% of these purchase obligations are for inventory items to be sold in the ordinary course of business. In August 2004, we adopted Financial Reporting Release No. 67, Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations. As a result, purchase obligations now include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement. Agreements with variable terms are excluded because we are unable to estimate the minimum amounts. *We have not discounted the cash obligations in this table. (1) Total amounts are included in the August 31, 2003 consolidated balance sheet. See Note 4, Credit Arrangements, and Note 15, Subsequent Event, to the consolidated financial statements. (2) Includes minimum lease payment obligations for noncancelable equipment and real-estate leases in effect as of August 31, 2003. See Note 9, Commitments and Contingencies, to the consolidated financial statements. (3) About 68% of these purchase obligations are for inventory items to be sold in the ordinary course of business; most of the remainder are for freight and supplies associated with normal revenue-producing activities. 37Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain transactions that our customers or suppliers request. At August 31,
2003,2004, we had committed$20.6$19.9 million under these arrangements. All commitments expire within one year.At the request of a customer and its surety bond issuer, we have agreed to indemnify the surety against all costs the surety may incur should our customer fail to perform its obligations under construction contracts covered by payment and performance bonds issued by the surety. We are the customer's primary supplier of steel, and steel is a substantial portion of our customer's cost to perform the contracts. We believe we have adequate controls to monitor the customer's performance under the contracts including payment for the steel we supply. As of August 31, 2003, the surety had issued bonds in the total amount (without reduction for work performed to that date) of $11.9 million which are subject to our guaranty obligation under the indemnity agreement.Contingencies
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and government investigations, including environmental
matters, and contract disputes.matters. We may incur settlements, fines, penalties or judgments because of some of these matters. While we are unable to estimate precisely the ultimate dollar amount of exposure or loss in connection with these matters, we make accrualswe deem necessary.as warranted. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, and the uncertainties involved in litigation. Accordingly, we cannot always estimate a meaningful range of possible exposure. We believe that we have adequately provided in our consolidated financial statements for the estimablepotentialprobable impact of these contingencies. We also believe that the outcomes will not significantly affect the long-term results of operations or our financial position. However, they may have a material impact on earnings for a particularperiod. CONSTRUCTION CONTRACT DISPUTESquarter.Environmental and Other Matters
See Note
9,11, Commitments and Contingencies, to the consolidated financial statements.ENVIRONMENTAL AND OTHER MATTERS GENERAL36
GeneralWe are subject to federal, state and local pollution control laws and regulations. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs.
Our original business and one of our core businesses for over eight decades is metals recycling. In the present era of conservation of natural resources and ecological concerns, we are committed to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well intentioned, are contrary to the goal of greater recycling. Such regulations expose us and the industry to potentially significant risks.
We believe that recycled materials are commodities that are diverted by recyclers, such as us, 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.
38Environmental agencies at various federal and state levels 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.
SOLID AND HAZARDOUS WASTESolid and Hazardous WasteWe currently own or lease, and in the past owned or leased, properties that have been used in our operations. Although we used operating and disposal practices that were standard in the industry at the time, wastes may have been disposed or released on or under the properties or on or under locations where such wastes have been taken for disposal. We are currently involved in the investigation and remediation of several such properties. State and federal laws applicable to wastes and contaminated properties have gradually become stricter over time. Under new laws, we could be required to remediate properties impacted by previously disposed wastes. We have been named as a potentially responsible party at a number of contaminated sites.
We generate wastes, including hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act
("RCRA")(RCRA) and comparable state and/or local statutes where we operate. These statutes, regulations and laws may have limited disposal options for certain wastes.SUPERFUNDSuperfundThe U.S. Environmental Protection Agency
or EPA,(EPA) or an equivalent state agency notified us that we are considered a potentially responsible partyor PRP,(PRP) atfourteenfifteen sites, none owned by us. We may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980or CERCLA,(CERCLA) or a 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. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time we may contest, our liability at the sites. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites.CLEAN WATER ACTBecause of various factors, including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the extended time periods over which such costs may be incurred, we cannot reasonably estimate our ultimate costs of compliance with CERCLA. At August 31, 2004, based on currently available information, which is in many cases preliminary and incomplete, we believe that our aggregate liability for cleanup and remediation costs in connection with nine of the fifteen sites will be between $1.1 million and $1.6 million. We have accrued for these liabilities based upon our best estimates. We are not able to estimate the possible range of loss on the other sites. The amounts paid and the expenses incurred on these fifteen sites for the year ended August 31, 2004 were not material. Historically, the amounts that we have ultimately paid for such remediation activities have not been material.Clean Water ActThe Clean Water Act
("CWA")(CWA) imposes restrictions and strict controls regarding the discharge of wastes into waters of the United States, a term broadly defined. These controls have become more stringent over time and it is probable that additional restrictions will be imposed in the future. Permits must generally be obtained to discharge pollutants into federal waters; comparable permits may be required at the state level. The CWA and many state agencies provide for civil, criminal and administrative penalties37
for unauthorized discharges of pollutants. In addition, the EPA has promulgated regulations that may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge, we may be liable for penalties and costs.
CLEAN AIR ACTClean Air ActOur operations are subject to regulations at the federal, state and local level for the control of emissions from sources of air pollution. New and modified sources of air pollutants are often required to obtain permits prior to commencing construction, modification and/or operations. Major sources of air pollutants are subject to more stringent requirements, including the potential need for additional permits and to increased scrutiny in the context of enforcement. The EPA has been implementing its stationary emission control program through expanded enforcement of the New Source Review Program. Under this program, new or modified sources are required to construct what is referred to as the Best Available Control Technology. Additionally, the EPA is implementing new, more stringent standards for ozone and fine particulate matter. The EPA recently has promulgated new national emission
standsstandards for hazardous air pollutants for steel mills which will require all major sources in this category to meet the standards by reflecting39application of maximum achievable control technology. Compliance with the new standards could require additional expenditures. In fiscal
2003,2004, we incurred environmentalexpenseexpenses of$11.8$18.2 million.This expenseThe expenses included the cost of environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessments, remediation, consultant fees, baghouse dust removal and various other expenses. Approximately$4.2$5.8 million of our capital expenditures for20032004 related to costs directly associated with environmental compliance. At August 31,2003, $2.92004, $4.2 million was accrued for environmental liabilities of which$1.3$2.0 millioniswas classified as other long-term liabilities.Business Interruption Insurance Claims and Unclaimed Property
See Note 11, Commitments and Contingencies to the consolidated financial statements.
Dividends
We have paid quarterly cash dividends in each of the past
4041 consecutive years. We paid dividends in20032004 at the rate of 8 cents per shareeachfor the first three quarters and 10 cents per share for the fourth quarter.40ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk
APPROACH TO MINIMIZING MARKET RISKApproach to Minimizing Market RiskSee Note
5,7, Financial Instruments, Market and Credit Risk, to the consolidated financial statements for disclosure regarding our approach to minimizing market risk. Also, see Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements. The following types of derivative instruments were outstanding at August 31,2003,2004, in accordance with our risk management program.CURRENCY EXCHANGE FORWARDSCurrency Exchange ForwardsWe enter into currency exchange forward contracts as economic hedges of international trade commitments denominated in currencies other than the United States dollar, or, if the transaction involves our Australian or European subsidiaries, their local currency. No single foreign currency poses a primary risk to us. Fluctuations that cause temporary disruptions in one market segment tend to open opportunities in other segments.
Effective September 1, 2002, we changed most of our European subsidiaries' functional currency to the Euro. We do not anticipate that this change will have a significant impact on our financial results. COMMODITY PRICESCommodity PricesWe base pricing in some of our sales and purchase contracts on forward metal commodity exchange quotes which we determine at the beginning of the contract. Due to the volatility of the metal commodity indexes, we enter into metal commodity forward or futures contracts for copper, aluminum and zinc. These forwards or futures mitigate the risk of unanticipated declines in gross margins on these contractual commitments. Physical transaction quantities will not match exactly with standard commodity lot sizes, leading to small gains and losses from ineffectiveness.
INTEREST RATE SWAPSInterest Rate SwapsSee Note
4,6, Credit Arrangements, to the consolidated financial statements regarding our strategy for managing the fluctuations in interest rates on our long-term debt. If interest rates increased or decreased by one percentage point, the effect on interest expense related to our variable-rate debt and the fair value of our long-term debt would be approximately $400 thousand and $21 million, respectively.The following table provides certain information regarding the foreign exchange and commodity financial instruments discussed above.
41FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS AS OF AUGUST39
Foreign Currency Exchange Contract Commitments as of August 31,
2003:
U.S. $ Amount Range of Equivalent (in thousands) Currency Hedge Rates (in thousands) - -------------- -------- ----------- --------------16,780 Euro $ 1.123-1.003 $ 18,457 584,447 Japanese yen 0.0080-0.0075 4,872 10,547 British pound 1.6692-1.5630 16,755 114,192 Australian dollar 0.6757-0.5484 73,563 133 New Zealand dollar 0.5330 76 80,142 Polish zloty 0.2506-0.2485 20,000 - ----------------------------------------------------------------------- 133,723 Revaluation as of August 31, 2003, at quoted market 133,724 - ----------------------------------------------------------------------- Unrealized loss $ (1)- -2004:
Functional Currency Foreign Currency U.S. $ Amount Amount Range of Equivalent Type (in thousands) Type (in thousands) Hedge Rates (in thousands) US $ 24,914 Polish zloty (PLN) 93,043 $3.7579–3.7146 $ 24,914 PLN 18,949 Euro (EUD) 4,191 0.2117–0.2274 5,037 PLN 29,731 US$ 7,997 0.2647–0.2745 7,997 EUD 22,447 British Pound 15,230 0.6617–0.6808 26,850 EUD 28,380 US$ 34,669 1.2100–1.2393 34,669 EUD 2,931 PLN 13,100 4.453–4.477 3,390 Australian dollar (AUD) 83,544 US$ 58,302 0.5775–0.7522 58,302 AUD 9,298 Japanese Yen 719,721 73.00–78.05 6,558 AUD 927 EUD 538 0.5630–0.6052 647
168,364 Revaluation as of August 31, 2004, at quoted market 168,610
Unrealized gain $ 246
- - HedgeThe range of hedge ratesreflectrepresents functional to foreign currency conversionto U.S. dollar.
AS OF AUGUST 31, 2002 (IN THOUSANDS): Revaluation at quoted market $ 98,619 Unrealized gain $ 253METAL COMMODITY CONTRACT COMMITMENTS AS OF AUGUSTrates.
As of August 31, 2003 (in thousands): Revaluation at quoted market $ 133,724 Unrealized loss $ (1 ) Metal Commodity Contract Commitments as of August 31,
2003:2004:
Range or Total Contract Amount of Value at Long/ # of Standard Total Hedge Rates Inception Terminal Exchange Metal Short Lots Lot Size Weight Per MT/lb. (in thousands) London Metal Exchange (LME) Copper Long 375 25 MT 9,375 MT $ 2,515.00–2,915.00 $ 1,026 Copper Short 150 25 MT 3,750 MT 2,793.00–2,846.10 424 Nickel Long 756 6 MT 4,536 MT 12,438.64–13,685.95 9,811 Nickel Short 756 6 MT 4,536 MT 12,220.00–15,050.00 10,301 Aluminum Long 2,563 25 MT 64,075 MT 1,581.75–1,758.00 6,971 Aluminum Short 6,275 25 MT 156,875 MT 1,589.00–1,743.50 10,695 Zinc Long 100 55,000 lbs. 5.5 MM lbs. 1,059.00–1,100.00 109 New York Mercantile Per 100/wt. Exchange Copper Long 148 25,000 lbs. 3.7 MM lbs. 89.00–128.10 4,336 Commodities Division (Comex) Copper Short 200 25,000 lbs. 5.0 MM lbs. 122.40–132.80 6,359
50,032 Revaluation as of August 31, 2004, at quoted market 49,183
Unrealized gain $ 849
Range or Total Contract Amount of Value at Long/ # of Standard Total Hedge Rates Inception Terminal Exchange Metal Short Lots Lot Size Weight Per• Seven lots mature after one year • MT (in thousands) - ----------------- ----- ----- ---- -------- ------ ------ --------------London Metal Exchange (LME) Copper Long 125 25 MT 3,125 MT $ 1,476.00-1,777.00 $ 206 Copper Short 25 25 MT 625 MT 1,778.00 44 Nickel Short 167 6 MT 1,002 MT 8,735.00-9,595.00 2,620 Aluminum Long 452 25 MT 11,300 MT 1,301.50-1,449.00 3,162 Aluminum Short 4,500 25 MT 112,500 MT 1,346.00-1,424.75 6,420 New York Mercantile Per 100/wt. Exchange Copper Long 193 25,000= Metric Tons• MM = Millions • lbs. 4.8 MM lbs. 69.55-81.90 3,832 Commodities Division (Comex) Copper Short 73 25,000 lbs. 1.8 MM lbs. 78.95-81.85 1,411 17,695 Revaluation as of August 31, 2003, at quoted market 17,537 - ---------------------------------------------------------------------------------------------------------------- Unrealized gain $ 158= Pounds- - Seven lots mature after one year - - MT = Metric Tons - - MM = Millions
As of August 31, 2003 (in thousands): Revaluation at quoted market $ 17,537 Unrealized gain $ 158 40
AS OF AUGUST 31, 2002 (IN THOUSANDS): Revaluation at quoted market $16,502 Unrealized loss $ 161ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 42ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATACommercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended August 31, ------------------------------------ (in thousands, except share data) 2003 2002 2001 - --------------------------------- -------- -------- ----------Net sales $2,875,885 $2,479,941 $2,470,133 Costs and expenses: Cost of goods sold 2,586,845 2,162,527 2,172,813 Selling, general and administrative expenses 231,037 220,883 212,428 Employees' retirement plans 12,271 14,685 10,611 Interest expense 15,338 18,708 27,608 Litigation accrual -- -- 8,258 ---------- ---------- ---------- 2,845,491 2,416,803 2,431,718 ---------- ---------- ---------- Earnings before income taxes 30,394 63,138 38,415 Income taxes 11,490 22,613 14,643 ---------- ---------- ---------- Net earnings $ 18,904 $ 40,525 $ 23,772 ========== ========== ========== Basic earnings per share $ 0.67 $ 1.48 $ 0.91 ========== ========== ========== Diluted earnings per share $ 0.66 $ 1.43 $ 0.90 ========== ========== ==========
Year ended August 31, (in thousands, except share data) 2004 2003 2002 Net sales $ 4,768,327 $ 2,875,885 $ 2,479,941 Costs and expenses: Cost of goods sold 4,160,726 2,586,845 2,162,527 Selling, general and administrative expenses 367,550 243,308 235,568 Interest expense 28,104 15,338 18,708
4,556,380 2,845,491 2,416,803
Earnings before income taxes and minority interests 211,947 30,394 63,138 Income taxes 65,055 11,490 22,613
Earnings before minority interests 146,892 18,904 40,525 Minority interests 14,871 — —
Net earnings $ 132,021 $ 18,904 $ 40,525
Basic earnings per share $ 4.59 $ 0.67 $ 1.48
Diluted earnings per share $ 4.42 $ 0.66 $ 1.43
See notes to consolidated financial statements.
4341
Commercial Metals Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
August 31, -------------------------- (in thousands, except share data) 2003 2002 - ------------------------------------------------------------------------------------ASSETS Current assets: Cash and cash equivalents $ 75,058 $ 124,397 Accounts receivable (less allowance for collection losses of $9,275 and $8,877) 397,490 350,885 Inventories 310,816 268,040 Other 61,053 50,930 - ------------------------------------------------------------------------------------ Total current assets 844,417 794,252 Property, plant and equipment: Land 34,617 29,099 Buildings 127,780 119,592 Equipment 747,207 727,650 Leasehold improvements 38,117 34,637 Construction in process 15,503 10,801 - ------------------------------------------------------------------------------------ 963,224 921,779 Less accumulated depreciation and amortization (588,842) (543,624) - ------------------------------------------------------------------------------------ 374,382 378,155 Other assets 56,607 57,669 - ------------------------------------------------------------------------------------ $ 1,275,406 $ 1,230,076 ==========================
August 31, (in thousands) 2004 2003 Assets Current assets: Cash and cash equivalents $ 123,559 $ 75,058 Accounts receivable (less allowance for collection losses of $14,626 and $9,275) 607,005 397,490 Inventories 645,484 310,816 Other 48,184 68,902
Total current assets 1,424,232 852,266 Property, plant and equipment: Land and buildings 202,400 162,397 Equipment 810,801 746,453 Leasehold improvements 55,641 38,117 Construction in process 21,688 15,503
1,090,530 962,470 Less accumulated depreciation and amortization (639,040 ) (588,842 )
451,490 373,628 Goodwill 30,542 6,837 Other assets 81,782 50,524
$ 1,988,046 $ 1,283,255
See notes to consolidated financial statements.
44
August 31, --------------------------- (in thousands, except share data) 2003 2002 - ---------------------------------------------------------------------------------------------LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term trade financing arrangement $ 15,000 $ -- Accounts payable 300,662 275,232 Accrued expenses and other payables 126,971 133,608 Income taxes payable 1,718 5,676 Current maturities of long-term debt 640 631 - --------------------------------------------------------------------------------------------- Total current liabilities 444,991 415,147 Deferred income taxes 44,419 32,813 Other long-term liabilities 24,066 24,841 Long-term debt 254,997 255,969 Commitments and contingencies Stockholders' equity: Capital stock: Preferred stock -- -- Common stock, par value $5.00 per share: authorized 40,000,000 shares; issued 32,265,166 shares; outstanding 27,994,690 and 28,518,453 shares 161,326 161,326 Additional paid-in capital 863 170 Accumulated other comprehensive income (loss) 2,368 (1,458) Retained earnings 401,869 392,004 - --------------------------------------------------------------------------------------------- 566,426 552,042 Less treasury stock 4,270,476 and 3,746,713 shares at cost (59,493) (50,736) - --------------------------------------------------------------------------------------------- 506,933 501,306 --------------------------- $ 1,275,406 $ 1,230,076 ===========================42
August 31, (in thousands, except share data) 2004 2003 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable-trade $ 385,108 $ 225,705 Accounts payable-documentary letters of credit 116,698 74,782 Accrued expenses and other payables 248,790 126,971 Income taxes payable 11,343 1,718 Notes payable — CMCZ 530 — Short-term trade financing arrangements 9,756 23,025 Current maturities of long-term debt 11,252 640
Total current liabilities 783,477 452,841 Deferred income taxes 50,433 44,418 Other long-term liabilities 39,568 24,066 Long-term trade financing arrangement 14,233 — Long-term debt 393,368 254,997 Minority interests 46,340 — Commitments and contingencies Stockholders’ equity: Capital stock: Preferred stock — — Common stock, par value $5.00 per share: authorized 100,000,000 and 40,000,000 shares; issued 32,265,166 shares; outstanding 29,277,964 and 27,994,690 shares 161,326 161,326 Additional paid-in capital 7,932 863 Accumulated other comprehensive income 12,713 2,368 Retained earnings 524,126 401,869
706,097 566,426 Less treasury stock 2,987,202 and 4,270,476 shares at cost (45,470 ) (59,493 )
660,627 506,933
$ 1,988,046 $ 1,283,255
See notes to consolidated financial statements.
4543
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
August 31, -------------------------------------- (in thousands) 2003 2002 2001 - --------------------------------------------------------------------------------------------------------CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES: Net earnings $ 18,904 $ 40,525 $ 23,772 Adjustments to earnings not requiring cash: Depreciation and amortization 61,203 61,579 67,272 Provision for losses on receivables 5,162 3,985 4,371 Deferred income taxes 11,605 2,408 (726) Tax benefits from stock plans 330 4,467 404 Gain on sale of SMI-Owen -- (5,234) -- Other (256) (307) (148) Changes in operating assets and liabilities, net of effect of acquisitions and sale of SMI-Owen: Decrease (increase) in accounts receivable (71,938) (48,690) (8,276) Funding from accounts receivable sold 18,662 -- 58,498 Decrease (increase) in inventories (40,676) (37,206) 46,508 Decrease (increase) in other assets (1,028) 912 5,837 Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes 14,594 66,927 (2,389) Increase (decrease) in other long-term liabilities (1,275) 7,231 (2,431) - -------------------------------------------------------------------------------------------------------- Net Cash Flows From Operating Activities 15,287 96,597 192,692 CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES: Purchases of property, plant and equipment (49,792) (47,223) (53,022) Acquisition of Coil Steels Group, net of cash received -- (6,834) -- Acquisition of fabrication businesses (13,416) -- -- Sale of assets of SMI-Owen -- 19,705 -- Sales of property, plant and equipment 1,388 3,496 2,866 - -------------------------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (61,820) (30,856) (50,156) CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES: Short-term trade financing arrangement 15,000 -- -- Short-term borrowings, net change -- (9,981) (88,673) Payments on long-term debt (373) (10,101) (8,786) Stock issued under incentive and purchase plans 6,216 30,238 4,383 Treasury stock acquired (14,610) -- (6,716) Dividends paid (9,039) (7,521) (6,780) - -------------------------------------------------------------------------------------------------------- Net Cash From (Used By) Financing Activities (2,806) 2,635 (106,572) - -------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (49,339) 68,376 35,964 Cash and Cash Equivalents at Beginning of Year 124,397 56,021 20,057 - -------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 75,058 $ 124,397 $ 56,021 ========================================================================================================
Year ended August 31, (in thousands) 2004 2003 2002 Cash Flows From (Used By) Operating Activities: Net earnings $ 132,021 $ 18,904 $ 40,525 Adjustments to reconcile net earnings to cash from operating activities: Depreciation and amortization 71,044 61,203 61,579 Minority interests 14,871 — — Asset impairment charges 6,583 630 579 Provision for losses on receivables 6,154 5,162 3,985 Tax benefits from stock plans 6,148 330 4,467 Loss on reacquisition of debt 3,072 — — Deferred income taxes 2,142 11,568 2,396 Net gain on sale of assets and other (1,319 ) (886 ) (6,120 ) Changes in operating assets and liabilities, net of effect of acquisitions and sale of SMI-Owen: Accounts receivable (223,845 ) (65,736 ) (49,264 ) Accounts receivable sold 77,925 18,662 — Inventories (290,474 ) (36,351 ) (38,104 ) Other assets 10,001 5,042 (2,658 ) Accounts payable, accrued expenses, other payables and income taxes 223,968 (2,947 ) 3,492 Other long-term liabilities 11,403 (1,275 ) 7,231
Net Cash Flows From Operating Activities 49,694 14,306 28,108 Cash Flows From (Used By) Investing Activities: Purchases of property, plant and equipment (51,889 ) (49,792 ) (47,223 ) Sales of property, plant and equipment 3,192 1,388 3,496 Acquisitions of CMCZ and Lofland, net of cash acquired (99,401 ) — — Acquisitions of other businesses, net of cash acquired (2,110 ) (13,416 ) (6,834 ) Sale of assets of SMI-Owen — — 19,705
Net Cash Used By Investing Activities (150,208 ) (61,820 ) (30,856 ) Cash Flows From (Used By) Financing Activities: Increase in documentary letters of credit 41,916 9,930 64,852 Proceeds from trade financing arrangements 35,307 15,000 18,578 Payments on trade financing arrangements (34,343 ) (9,175 ) (15,064 ) Short-term borrowings, net change (702 ) — (9,872 ) Proceeds from issuance of long-term debt 238,400 — — Payments on long-term debt (132,680 ) (373 ) (10,101 ) Stock issued under incentive and purchase plans 19,530 6,216 30,238 Treasury stock acquired (4,586 ) (14,610 ) — Dividends paid (9,764 ) (9,039 ) (7,521 ) Debt reacquisition and issuance costs (4,989 ) — —
Net Cash From (Used By) Financing Activities 148,089 (2,051 ) 71,110 Effect of exchange rate changes on cash 926 226 14
Increase (Decrease) in Cash and Cash Equivalents 48,501 (49,339 ) 68,376 Cash and Cash Equivalents at Beginning of Year 75,058 124,397 56,021
Cash and Cash Equivalents at End of Year $ 123,559 $ 75,058 $ 124,397
See notes to consolidated financial statements.
4644
Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OFSTOCKHOLDERS'STOCKHOLDERS’ EQUITY
Common Stock ------------------------ Accumulated Additional Other Number of Paid-In Comprehensive Retained (in thousands, except share data) Shares Amount Capital Income (Loss) Earnings - -----------------------------------------------------------------------------------------------------------Balance, September 1, 2000 16,132,583 $ 80,663 $ 14,231 $ (1,591) $405,317 Comprehensive income: Net earnings 23,772 Other comprehensive loss- Unrealized loss on derivatives, net of taxes of $7 (14) Foreign currency translation adjustment (356) Comprehensive income Cash dividends (6,780) Treasury stock acquired Stock issued under incentive and purchase plans (301) - ----------------------------------------------------------------------------------------------------------- Balance, August 31, 2001 16,132,583 80,663 13,930 (1,961) 422,309 =========================================================================================================== Comprehensive income: Net earnings 40,525 Other comprehensive income (loss)- Foreign currency translation adjustment 513 Unrealized loss on derivatives, net of taxes of $(5) (10) Comprehensive income Cash dividends (7,521) 2-for-1 stock split 16,132,583 80,663 (17,354) (63,309) Stock issued under incentive and purchase plans (873) Tax benefits from stock plans 4,467 - ----------------------------------------------------------------------------------------------------------- Balance, August 31, 2002 32,265,166 161,326 170 (1,458) 392,004 =========================================================================================================== Comprehensive income: Net earnings 18,904 Other comprehensive income (loss)- Foreign currency translation adjustment 3,855 Unrealized loss on derivatives, net of taxes of $(16) (29) Comprehensive income Cash dividends (9,039) Treasury stock acquired Stock issued under incentive and purchase plans 363 Tax benefits from stock plans 330 - ----------------------------------------------------------------------------------------------------------- Balance, August 31, 2003 32,265,166 $ 161,326 $ 863 $ 2,368 $401,869 ===========================================================================================================
Treasury Stock --------------------------------- Number of (in thousands, except share data) Shares Amount Total - -----------------------------------------------------------------------------Balance, September 1, 2000 (2,959,908) $(79,815) $418,805 Comprehensive income: Net earnings 23,772 Other comprehensive loss- Unrealized loss on derivatives, net of taxes of $7 (14) Foreign currency translation adjustment (356) -------- Comprehensive income 23,402 Cash dividends (6,780) Treasury stock acquired (271,500) (6,716) (6,716) Stock issued under incentive and purchase plans 177,419 4,684 4,383 - ----------------------------------------------------------------------------- Balance, August 31, 2001 (3,053,989) (81,847) 433,094 ============================================================================= Comprehensive income: Net earnings 40,525 Other comprehensive income (loss)- Foreign currency translation adjustment 513 Unrealized loss on derivatives, net of taxes of $(5) (10) -------- Comprehensive income 41,028 Cash dividends (7,521) 2-for-1 stock split (3,053,989) Stock issued under incentive and purchase plans 2,361,265 31,111 30,238 Tax benefits from stock plans 4,467 - ----------------------------------------------------------------------------- Balance, August 31, 2002 (3,746,713) (50,736) 501,306 ============================================================================= Comprehensive income: Net earnings 18,904 Other comprehensive income (loss)- Foreign currency translation adjustment 3,855 Unrealized loss on derivatives, net of taxes of $(16) (29) -------- Comprehensive income 22,730 Cash dividends (9,039) Treasury stock acquired (951,410) (14,610) (14,610) Stock issued under incentive and purchase plans 427,647 5,853 6,216 Tax benefits from stock plans 330 - ----------------------------------------------------------------------------- Balance, August 31, 2003 (4,270,476) $(59,493) $506,933 =============================================================================
Common Stock Additional Accumulated
OtherTreasury Stock Number of Paid-In Comprehensive Retained Number of (in thousands, except share data) Shares Amount Capital Income (Loss) Earnings Shares Amount Total Balance, September 1, 2001 16,132,583 $ 80,663 $ 13,930 $ (1,961 ) $ 422,309 (3,053,989 ) $ (81,847 ) $ 433,094 Comprehensive income: Net earnings 40,525 40,525 Other comprehensive income (loss)— Foreign currency translation adjustment, net of taxes of $276 513 513 Unrealized loss on derivatives, net of taxes of $(5) (10 ) (10 ) Comprehensive income 41,028 Cash dividends (7,521 ) (7,521 ) 2-for-1 stock split 16,132,583 80,663 (17,354 ) (63,309 ) (3,053,989 ) Stock issued under incentive and purchase plans (873 ) 2,361,265 31,111 30,238 Tax benefits from stock plans 4,467 4,467
Balance, August 31, 2002 32,265,166 161,326 170 (1,458 ) 392,004 (3,746,713 ) (50,736 ) 501,306
Comprehensive income: Net earnings 18,904 18,904 Other comprehensive income (loss)— Foreign currency translation adjustment, net of taxes of $2,076 3,855 3,855 Unrealized loss on derivatives, net of taxes of $(16) (29 ) (29 ) Comprehensive income 22,730 Cash dividends (9,039 ) (9,039 ) Treasury stock acquired (951,410 ) (14,610 ) (14,610 ) Stock issued under incentive and purchase plans 363 427,647 5,853 6,216 Tax benefits from stock plans 330 330
Balance, August 31, 2003 32,265,166 161,326 863 2,368 401,869 (4,270,476 ) (59,493 ) 506,933
Comprehensive income: Net earnings 132,021 132,021 Other comprehensive income— Foreign currency translation adjustment, net of taxes of $4,996 9,279 9,279 Unrealized gain on derivatives, net of taxes of $574 1,066 1,066 Comprehensive income 142,366 Cash dividends (9,764 ) (9,764 ) Treasury stock acquired �� (143,847 ) (4,586 ) (4,586 ) Stock issued under incentive and purchase plans 921 1,427,121 18,609 19,530 Tax benefits from stock plans 6,148 6,148
Balance, August 31, 2004 32,265,166 $ 161,326 $ 7,932 $ 12,713 $ 524,126 (2,987,202 ) $ (45,470 ) $ 660,627
See notes to consolidated financial statements.
4745
Commercial Metals Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONSNature of OperationsThe Company manufactures, recycles and markets steel and metal products and related materials. Its
manufacturing anddomestic mills, recycling facilities and primary markets are located in the Sunbelt from the mid-Atlantic area through the West. Also, the Company operates a steel minimill in Zawiercie, Poland. Through its global marketing offices, the Company markets and distributes steel and nonferrous metal products and other industrial products worldwide.As more fully discussed inSee Note13, the manufacturing segment is the most dominant in terms of capital assets and adjusted operating profit. CONSOLIDATION14, Business Segments.ConsolidationThe consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances are
eliminated in consolidation.eliminated.Investments in 20% to 50% owned affiliates are accounted for on the equity method. All investments under 20% are accounted for under the cost method.
REVENUE RECOGNITION Generally, salesThe Company owns a 71.1% interest in CMC Zawiercie (CMCZ). The accounts of CMCZ are consolidated beginning December 1, 2003. See Note 2, Acquisitions.
Revenue RecognitionSales are recognized when title passes to the
customer. Somecustomer either when goods are shipped or when they are received based upon the terms of therevenues related tosale. For some of the Company’s steel fabrication operations, net sales and profits from certain long-term fixed price contracts are recognized on thepercentagepercentage-of-completion method. For the years ended August 31, 2004, 2003 and 2002, respectively, approximately 3%, 3% and 6% ofcompletion method.total consolidated net sales were recognized on a percentage-of-completion basis. In determining the amount of net sales to recognize, the Company estimates the total costs and contract amount expected to be recorded for the contract term and the recoverability of costs related to change orders. When the Company estimates that a contract will result in a loss, the entire loss is accrued as soon as it is probable and estimable. 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.CASH AND CASH EQUIVALENTSCash and Cash EquivalentsThe Company considers temporary investments that are short term (generally with original maturities of three months or less) and highly liquid to be cash equivalents.
INVENTORIESInventoriesInventories 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.
Elements of cost in finished goods inventory in addition to the cost of material include depreciation, amortization, utilities, consumable production supplies, maintenance and production wages. Also, the costs of departments that support production including materials management and quality control, are allocated to inventory.
PROPERTY, PLANT AND EQUIPMENTProperty, Plant and EquipmentProperty, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. 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. At August 31,
2003,2004, the useful lives used for depreciation and amortization were as follows:Buildings 7 to 40 years Equipment 3 to 15 years Leasehold improvements 3 to 10 years We evaluate
Buildings 7 to 40 years Equipment 3 to 15 years Leasehold improvements 3 to 10 years 46
The Company evaluates the carrying value of property, plant and equipment whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations. If
we determine thatan impairment exists,we reducethe net book values are reduced to fair values as warranted. Major maintenance is expensed as incurred.START-UP COSTSIntangible AssetsThe following intangible assets are included within other assets on the consolidated balance sheets as of August 31:
2004 2003 Gross Gross Carrying Accumulated Carrying Accumulated (in thousands) Amount Amortization Net Amount Amortization Net Intangible assets subject to amortization: Non-competition agreements $ 2,172 $ 1,055 $ 1,117 $ 1,572 $ 289 $ 1,283 Production backlog 1,200 800 400 — — — Customer base 4,743 258 4,485 — — — Favorable land leases 3,642 32 3,610 — — — Other 2,387 1,008 1,379 2,198 591 1,607
Total $ 14,144 $ 3,153 $ 10,991 $ 3,770 $ 880 $ 2,890
Aggregate amortization expense for intangible assets for the years ended August 31, 2004, 2003, and 2002 were $2.1 million, $857 thousand, and $705 thousand, respectively. At August 31, 2004, the weighted average useful lives of these intangible assets, excluding the favorable land leases in Poland, was 8 years. The weighted average lives of the favorable land leases were 85 years. Estimated amounts of amortization expense for the next five years are as follows (in thousands):
Year 2005 $ 1,569 2006 1,140 2007 1,058 2008 887 2009 471 Start-Up CostsStart-up costs associated with the acquisition and expansion of
manufacturing and recyclingfacilities are expensed as incurred.48ENVIRONMENTAL COSTSEnvironmental CostsThe Company accrues liabilities for environmental investigation and remediation costs based upon estimates regarding the
number ofsites for which the Company will be responsible, the scope and cost of work to be performed at each site, the portion of costs that will be shared with other parties and the timing of remediation. Where amounts and timing can be reliably estimated, amounts are discounted. Where timing and amounts cannot be reasonably determined, a range is estimated and the lower end of the range is recognized on an undiscounted basis.STOCK-BASED COMPENSATIONThe Company’s asset retirement obligations are not material.Stock-Based CompensationThe Company accounts for stock options granted to employees and directors using the intrinsic value based method of accounting. Under this method, the Company does not recognize compensation expense for the stock options because the exercise price is equal to the market price of the underlying stock on the date of the grant.
The Black-Scholes option pricing model was used to calculate the pro forma stock-based compensation costs. The following assumptions were required as of August 31:
- ----------------------------------------------------------------------------- 2003 2002 2001 - -----------------------------------------------------------------------------Risk-free interest rate 3.05% 4.42% 4.84% Expected life 5.44 years 5.44 years 4.60 years Expected volatility .257 .250 .232 Expected dividend yield 1.8% 1.7% 1.7%
2004 2003 2002 Risk-free interest rate 2.94 % 3.05 % 4.42 % Expected life 4.36 years 5.44 years 5.44 years Expected volatility 0.260 0.257 0.250 Expected dividend yield 1.0 % 1.8 % 1.7 % 47
If the Company had used the
Black-Scholesfair-value based method of accounting, net earnings and earnings per share would have been reduced to the pro forma amounts listed in the table below. For purposes of pro forma earnings disclosures, the assumed compensation expense is amortized over theoptions'options’ vesting periods.The pro forma information includes options granted in preceding years.
(in thousands, except per share data) 2003 2002 2001 - -----------------------------------------------------------------------------Net earnings, as reported $ 18,904 $ 40,525 $ 23,772 Pro forma stock-based compensation cost 1,875 1,637 1,195 ------------------------------------ Net earnings, pro forma $ 17,029 $ 38,888 $ 22,577 Net earnings per share, as reported Basic $ 0.67 $ 1.48 $ 0.91 Diluted $ 0.66 $ 1.43 $ 0.90 Net earnings per share, pro forma Basic $ 0.60 $ 1.42 $ 0.86 Diluted $ 0.60 $ 1.37 $ 0.86
(in thousands, except per share amounts) 2004 2003 2002 Net earnings, as reported $ 132,021 $ 18,904 $ 40,525 Pro forma stock-based compensation cost 2,829 1,875 1,637
Net earnings — pro forma $ 129,192 $ 17,029 $ 38,888 Net earnings per share — as reported: Basic $ 4.59 $ 0.67 $ 1.48 Diluted $ 4.42 $ 0.66 $ 1.43 Net earnings per share — pro forma: Basic $ 4.49 $ 0.60 $ 1.42 Diluted $ 4.33 $ 0.60 $ 1.37 The Black-Scholes weighted-average per share fair value of the options granted in 2004, 2003 and 2002 was $7.35, $3.47 and
2001 was $3.47,$4.52,and $2.77,respectively.INCOME TAXESIncome TaxesThe Company and its U.S. subsidiaries file a consolidated federal income tax return, and federal income taxes are allocated to subsidiaries based upon their respective taxable income or loss. Deferred income taxes are provided for temporary differences between financial and tax reporting. The principal differences are described in Note
6,8, Income Taxes. Benefits from tax credits are reflected currently in earnings. The Company provides for taxes on unremitted earnings of foreignsubsidiaries. FOREIGN CURRENCYsubsidiaries, except for CMCZ and its operations in Australia, which it considers to be permanently invested.Foreign CurrenciesThe functional currency of most of the
Company's international subsidiaries in Australia,Company’s European marketing and distribution operations is the Euro. The functional currencies of the Company’s Australian, United Kingdom andGermany isCMCZ operations are the localcurrency. Effective September 1, 2002, most of 49the Company's subsidiaries in Europe changed their functional currency to the Euro. This change did not materially impact the financial condition or results of operations of the Company.currencies. The remaining internationalsubsidiaries'subsidiaries’ functional currency is the United States dollar. Translation adjustments are reported as a component of accumulated other comprehensiveloss. USE OF ESTIMATESincome (loss). Transaction gains from transactions denominated in currencies other than the functional currencies were $2.8 million, $1.9 million and $10 thousand for the years ended August 31, 2004, 2003, and 2002, respectively.Use of EstimatesThe 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.
DERIVATIVESDerivativesThe Company records derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses from the changes in the values of the derivatives are recorded in the statement of earnings, or are deferred if they are designated and are highly effective in achieving offsetting changes in fair values or cash flows of the hedged items during the term of the hedge.
RECLASSIFICATIONSReclassificationsCertain reclassifications have been made in the
20022003 and20012002 financial statements to conform to the classifications used in the current year.RECENTLY ISSUED ACCOUNTING STANDARDSAccounts Payable — Documentary Letters of CreditIn order to facilitate certain trade transactions, the Company utilizes documentary letters of credit to provide assurance of payment to its suppliers. These letters of credit may be for prompt payment or for payment at a future date conditional upon the bank finding the documentation presented to be in strict compliance with all terms and conditions of the letter of credit. The banks issue these letters of credit under informal, uncommitted lines of credit which are in addition to the Company’s contractually committed revolving credit agreement. In some cases, if the Company’s suppliers choose to discount the future dated obligation, the Company
adoptedmay pay the discount cost. The amounts currently payable under letters of credit in connection with such discount arrangements are classified as Accounts Payable — Documentary Letters of Credit. In the prior years, these amounts were included as a component of accounts payable and the related fluctuation was included in cash flows from operations.48
These prior year amounts were reclassified to conform to the current year presentation. The related discount charges are included as a component of interest expense in the consolidated financial statements.
Recently Issued Accounting StandardsIn accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill“Goodwill and Other Intangible Assets," effective September 1, 2002. Goodwill” goodwill was no longer amortized afterthat date.September 1, 2002. Goodwillwas $6.8 million at August 31, 2003 and 2002. The comparison of 2003 to the prior year period was as follows:
Year ended August 31, ------------------------------------------ (in thousands) 2003 2002 2001 - -----------------------------------------------------------------------Reported net earnings $ 18,904 $ 40,525 $ 23,772 Add: goodwill amortization -- 684 682 - ----------------------------------------------------------------------- Adjusted net earnings $ 18,904 $ 41,209 $ 24,454 - -----------------------------------------------------------------------The goodwillamortization was$0.02$684 thousand ($0.02 per basic and dilutedshareshare) for the year ended August 31,2002,2002.The Company has determined that it does not have relationships with any entities which meet the definition of a variable interest entity as defined under FIN No. 46, “Consolidation of Variable Interest Entities,” as revised.
NOTE 2. ACQUISITIONS
On December 3, 2003, the Company’s Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), of Zawiercie, Poland, for 200 million Polish Zlotys (PLN), $51.9 million on the acquisition date. In connection with the acquisition, the Company also assumed debt of 176 million PLN ($45.7 million), acquired $3.8 million in cash and
$0.03 per basicincurred $1.7 million of directly related costs. CMCZ operates a steel minimill similar to those operated by the Company’s domestic mills with total annual capacity of over 1 million metric tons consisting of rebar anddiluted sharewire rod products as well as merchant bar. With this acquisition, the Company has become a significant manufacturer of rebar and wire rod in a key Central European market.On December 23, 2003, the Company acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) for $48.8 million cash, $9 million of which was placed in escrow which could be used to resolve any claims that the
yearCompany might have against the sellers for eighteen months post-acquisition. During the nine months ended August 31,2001. Effective September 1, 2002,2004, the Companyadopted SFAS No. 143, "Accountingsettled certain claims against the escrow forAsset Retirement Obligations,"$392 thousand. At August 31, 2004, $7 million remains in escrow. The Company also incurred $1.1 million of external costs directly related to this acquisition. Lofland is the sole stockholder of the Lofland Company and subsidiaries whichrequires entities to recordoperate steel reinforcing bar fabrication and construction-related product sales facilities from eleven locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. This acquisition complemented the Company’s existing Texas rebar fabrication and construction-related product sales operations and expanded the Company’s service areas in each of the neighboring states.The following summarizes the allocation of the purchase prices at fair value as of
a liability for an asset retirement obligation when it is incurred by increasing the carrying amount of the related longlived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful lives of the assets. The Company has asset retirement obligations relating to landfills which were no longer in use atthe date ofadoptionthe acquisitions (in thousands). The minority interest in CMCZ is recorded at historical cost.
CMCZ Lofland Total Accounts receivable $ 42,355 $ 18,894 $ 61,249 Inventories 30,360 5,139 35,499 Property, plant and equipment 84,981 10,268 95,249 Goodwill — 23,405 23,405 Other intangible assets 3,451 9,800 13,251 Other assets 8,441 1,219 9,660 Liabilities (44,943 ) (19,151 ) (64,094 ) Debt (45,717 ) — (45,717 ) Minority interest (29,101 ) — (29,101 )
$ 49,827 $ 49,574 $ 99,401
Accounts receivable were recorded net of
SFAS No. 143.an allowance for doubtful accounts of $477 thousand and $4.3 million for Lofland and CMCZ, respectively. Subsequent inventory costs were determined on the FIFO method for CMCZ and the LIFO method for Lofland.The intangible assets acquired include customer base, non-competition agreement, favorable land leases and production backlog, which have finite lives, and the acquisition of Lofland resulted in a brand name valued at $3.5 million with an indefinite life. For tax purposes, the Company
had previously recorded environmental liabilitiesexpects to be able to deduct approximately $3.8 million of goodwill related to carry-over tax attributes. CMCZ’s liabilities decreased by49
$1.2 million from the
capping, closure and monitoring costs required for these landfills. Therefore, the transition to SFAS No. 143 did not have a significant impact on the Company's net earnings and related per share amounts. At Augustestimate reported at May 31,2003 and 2002, the Company had recorded $1.5 million and $1.7 million, respectively, relating2004 due to thelandfill obligations. In September 2002, the Company adopted SFAS No. 144, "Accounting for the Impairmentresolution of certain environmental contingencies. The fair value estimates were determined either on a market-based orDisposal of Long-Lived Assets."income-based approach.The
adoption of SFAS No. 144 did not significantly affect the Company's financial position,results of operationsor cash flows.from these acquisitions are included in the consolidated statement of earnings from the dates of their acquisition. The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisitions of CMCZ and Lofland had taken place at the beginning of the year. The pro forma information includes primarily adjustments for amortization of acquired intangible assets, depreciation expense based upon the new basis of property, plant and equipment, and interest expense for new and assumed debt. The Companyadopted SFAS No. 146, "Accountingconsiders its investment in Poland to be permanent and, therefore, does not provide forCosts Associated with Exit or Disposal Activities," for all such activities initiated after December 31, 2002.U.S. income taxes on the earnings of CMCZ. Theadoptionpro forma financial information is not necessarily indicative ofSFAS No. 146 did not have a significant impact onthe results of operationsor financial position oras they would have been had the transaction been effected on the assumed dates.
(Unaudited) Year ended August 31, (in thousands, except per share data) 2004 2003 Net sales $ 4,882,421 $ 3,297,712 Net earnings 133,007 26,061 Diluted earnings per share 4.46 0.91 Also, in 2004 the Company’s recycling segment acquired a recycling facility located in Lufkin, Texas, for $1.6 million cash
flowswhich resulted in recognition of $300 thousand additional goodwill.In 2003, the Company acquired substantially all of the
Company. 50In November 2002,operating assets of E.L. Wills, Inc., a rebar fabrication company located in Fresno, California, theFinancial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 45, "Guarantor's Accountingconcrete form andDisclosure Requirements for Guarantees, Including Indirect Guarantees on Indebtednessconstruction-related product Denver, Colorado sales location ofOthers," which applies to all guarantees issued or modified after December 31, 2002. The Company has not entered into or modified any significant guarantees since December 31, 2002,Symons Corporation, andtherefore, no liability was recorded at August 31, 2003. The Company's existing guarantees at December 31, 2002 had been given at the requestDunn Del Re Steel, Inc., a rebar fabrication company located in Chandler, Arizona. Operations ofa customer and its surety bond issuer. The Company has agreed to indemnify the surety against all costs that the surety may incur should the customer fail to perform its obligations under construction contracts covered by payment and performance bonds issued by the surety. As of August 31, 2003, the surety had issued bondsthese acquired entities are reflected in thetotal amount (without reductionconsolidated statements of earnings from the date of their respective acquisitions. The following is a summary of the allocation of purchase price for these acquisitions as of thework performed to date)date the assets were acquired (in thousands):
E.L. Dunn Wills Symons Del Re Total Inventory $ 1,227 $ 173 $ 575 $ 1,975 Property, plant and equipment 2,215 55 2,435 4,705 Rental equipment — 4,400 — 4,400 Identifiable intangible assets 705 1,000 1,280 2,985 Note payable — — (625 ) (625 ) Other 52 — (76 ) (24 )
Total $ 4,199 $ 5,628 $ 3,589 $ 13,416
The intangible assets acquired included trade names, customer lists and backlogs, most of
$11.9 million,which have finite lives and aresubject to the Company's guarantee obligation under the indemnity agreement.being amortized. Thefair valueannual amortization of theseguaranteesintangibles was notsignificant.material.In
January 2003,September 2001, theFASB issued FIN No. 46, "ConsolidationCompany acquired the remainder ofVariable Interest Entities." The consolidation requirement applies to entities established on or prior to January 31, 2003,the shares of Coil Steels Group, an Australian service center inthe first fiscal year or interim period ending after December 15, 2003. The Company does not expect FIN No. 46 to have an impact on its financial reporting.which it already owned a 22% interest for $6.8 million cash.NOTE
2.3. SALES OF ACCOUNTS RECEIVABLEThe Company has an accounts receivable securitization program
(Securitization Program)which it utilizes as a cost-effective, short-term financing alternative. Underthe Securitization Program,this program, the Company and several of its subsidiaries(the Originators)periodically sell certain eligible trade accounts receivable to theCompany'sCompany’s wholly-owned consolidated special purpose subsidiary (CMCR). CMCR is structured to be a bankruptcy-remoteentity.entity and was formed for the sole purpose of buying and selling receivables generated by the Company. The Company, irrevocably and without recourse, transfers all applicable trade accounts receivable to CMCR. CMCR, in turn, sells an undivided percentage ownership interest(Participation Interest)in the pool of receivables to an affiliate of a third party financialinstitution (Buyer).50
institution. On April 22, 2004, the program was amended to add a second financial institution. CMCR may sell undivided interests of up to $130 million, depending on the
Company'sCompany’s level of financing needs.This Securitization Program is designed to enable receivables sold by the Company to CMCR to constitute true sales under U.S. Bankruptcy Laws, and the Company has received an opinion from counsel relating to the "true sale" nature of the program. As a result, these receivables are available to satisfy CMCR's own obligations to its third party creditors.The Company accounts for its transfers of receivables to CMCR together with CMCR’s sales of undivided interests in these receivables to the
Securitization Program in accordance withfinancial institutions as sales under SFAS No. 140,"Accounting“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The transfers meet all of the criteria for a sale under SFAS No. 140.” At the timea Participation Interestan undivided interest in the pool of receivables is sold, the amount is removed from the consolidated balance sheet and the proceeds from the sale are reflected as cash provided by operating activities.At August 31,
20032004 and2002,2003, uncollected accounts receivable of$152$236 million and$146$152 million, respectively, had been sold toCMCR, and the Company'sCMCR. The Company’s undivided interest in these receivables (representing the Company’s retained interest) wassubordinate to any interest owned by the Buyer.83% and 100% at August 31, 2004 and 2003, respectively. At August 31,2003 and 2002, no Participation Interests2004, the financial institution buyers owned $40.0 million inCMCR'sundivided interests in CMCR’s accounts receivable pool,were owned by the Buyer and, therefore, none werewhich was reflected as a reduction in accounts receivable on theCompany'sCompany’s consolidated balancesheets. Discounts (losses) onsheet. The average monthly amounts of undivided interests owned by thesales of accounts receivable to the Buyer under this Programfinancial institution buyers were$584 thousand, $793 thousand$22.1 million, $15.4 million and$976 thousand$22.9 million for the years ended August 31, 2004, 2003 and 2002,and 2001,respectively.These losses represented primarily the costs of funds and were included in selling, general and administrative expenses.The carrying amount of theCompany'sCompany’s retained interest in the receivables approximated fair value due to the short-term nature of the collection period. The retained interest is determined reflecting 100% of any allowance for collection losses51on the entire receivables pool. No other material assumptions are made in determining the fair value of the retained interest. This retained interest is subordinate to, and provides credit enhancement for, the financial institution buyers’ ownership interest in CMCR’s receivables, and is available to the financial institution buyers to pay any fees or expenses due to them and to absorb all credit losses incurred on any of the receivables. The Company is responsible for servicing the entire pool of receivables. At August 31, 2003, the carrying amount of the Company's retained interest (representing the Company's interest in the receivable pool) was $152 million (100%) in the revolving pool of receivables of $152 million. The carrying amount of the Company's retained interest was $146 million (100%) in the revolving pool of receivables of $146 million at August 31, 2002.In addition to the
Securitization Programsecuritization program described above, theCompany'sCompany’s international subsidiaries in Europe and Australia periodically sell accounts receivable. These arrangements also constitute true sales and, once the accounts are sold, they are no longer available to satisfy theCompany'sCompany’s creditors in the event of bankruptcy. In August 2004, the Company’s Australian subsidiary entered into an agreement with a financial institution to periodically sell certain trade accounts receivable up to a maximum of 50 million AUD ($35 million). This Australian program contains covenants in which our subsidiary must meet certain coverage and tangible net worth levels (as defined). At August 31, 2004, our Australian subsidiary was in compliance with these covenants. Uncollected accounts receivable that had been sold under these international arrangements and removed from the consolidated balance sheets were$20.8$58.7 million and$2.1$20.8 million at August 31, 2004 and 2003, respectively. The average monthly amounts of international accounts receivable sold were $27.7 million, $16.5 million and $5.2 million for the years ended August 31, 2004, 2003 and 2002, respectively.Discounts (losses) on domestic and international sales of accounts receivable were $1.6 million, $584 thousand and $793 thousand for the years ended August 31, 2004, 2003 and 2002, respectively. These losses primarily represented the costs of funds and were included in selling, general and administrative expenses.
NOTE
3.4. INVENTORIESBefore deduction of
LIFOlast-in, first-out (LIFO) inventory valuation reserves of$17,403,000$92.2 million and$8,074,000$17.4 million at August 31,20032004 and2002,2003, respectively, inventories valued under the first-in, first-out method (FIFO) approximated replacement cost.At August 31, 2004 and 2003, 60% and
2002,64%and 72%, respectively, of total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consisted mainly of material dedicated to CMCZ and the marketing and distribution business.The majority of the
Company'sCompany’s inventories are in the form of finished goods, with minimal work in process. Approximately$20.5$58.1 million and$16.5$20.5 million were in raw materials at August 31, 2004 and 2003, respectively.51
NOTE 5. ASSET IMPAIRMENT CHARGES
The Company recognized non-cash asset impairment charges of $6.6 million in its domestic fabrication segment during the year ended August 31, 2004. $2.9 million was attributable to certain assets of the Company’s former cellular beam facility in Virginia, and
2002, respectively.resulted from discontinuation of service by the railroad to this location. In the fourth quarter of 2004, the Company determined that the current operating plans for two of its other operations were no longer feasible and recognized non-cash asset impairment charges totaling $3.2 million. These impairment charges were recorded in selling, general and administrative expenses.NOTE
4.6. CREDIT ARRANGEMENTSIn August 2003, the Company increased itsThe Company’s commercial paper program
to permitpermits maximum borrowings of up to $275million, an increase from the prior year $174.5 million level.million. TheCompany's commercial paperprogram’s capacity is reduced by outstanding standby letters of creditunder the 2003 programwhich totalled$20.6$19.9 million at August 31,2003.2004. It is theCompany'sCompany’s policy to maintain contractual bank credit lines equal to 100% of the amount of all commercial paper outstanding. On August 8, 2003, the Company arranged an unsecured revolving credit agreement with a group of sixteen banks consisting of a three-year, $275 million facility. These agreements provide for borrowing in United States dollars indexed to LIBOR. Facility fees of22.527.5 basis points per annum are payable on the multi-year credit lines. The revolving credit agreement includes various covenants. The most restrictive of these requires maintenance of an interest coverage ratio of greater than three times and a debt/capitalization ratio of 55% (as defined). No compensating balances are required. The Company was in compliance with these requirements at August 31,2003.2004. At August 31,20032004 and2002,2003, no borrowings were outstanding under the commercial paper program or the related revolving credit agreements.The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are priced at
bankers'bankers’ acceptance rates or on a cost of funds basis. No compensating balances or commitment fees are required under these credit facilities. Amounts outstanding on these facilities relate totrade payablesaccounts payable settled underBankers Acceptances. 52During Augustbankers acceptances as described in Note 1, Summary of Significant Accounting Policies.In order to facilitate certain trade transactions, the Company utilizes documentary letters of credit, advances and non- or limited-recourse trade financing arrangements to provide assurance of payments and advanced funding to its suppliers. In October 2003,
an international subsidiaryone of theCompanyCompany’s international subsidiaries (the “Subsidiary”) entered into a$15 million short-term tradefinancing arrangement with an independent third party lender for the sole purpose of advancing funds for steel purchases to afinancial institution as a risk management technique relating to the subsidiary's purchase agreement with a Chinese supplier. Under the agreements,key supplier of which the Companyadvancedowns an 11% interest (the “Supplier”). The 30 million Euro financing agreement was secured by a market-based supply agreement between the$15Subsidiary and the Supplier for the delivery of steel requiring quarterly purchases of 21 million Euro or 87.5 thousand metric tons, whichever is higher. The lender is tothe supplier and will repay the bank onlybe repaid after the product isshippeddelivered in conformance with thespecificationssupply agreement, and the Subsidiary is not liable for repayment of the principal and/or interest unless and until it has received conforming deliveries of the products from the Supplier. Based upon minimum delivery requirements in thesupply agreement. InSupply Agreement, theeventCompany expects to pay the lender a minimum ofa default by the supplier, the Company's obligation2.5 million Euro per quarter. These agreements terminate October 31, 2006. At August 31, 2004, liabilities to thebank would not exceed $1.5 million. Thelender of $24.0 million (19.7 million Euro) were recorded as short- and long-term trade financing arrangements and the advance to thesupplierSupplier was recordedinas current and othercurrentassets on the consolidated balance sheet. As of August 2003, $23.0 million was recorded as short-term trade financing arrangements under similar agreements with the Supplier and another supplier which terminated during 2004. The total amount of purchases from the Supplier (including those under this trade financing arrangement) were $146 million, $110 million, and $90 million for the years ended August 31, 2004, 2003 and 2002, respectively.52
Long-term debt and amounts due within one year are as follows, as of August 31:
(in thousands) 2003 2002 - ------------------------------------------------------7.20% notes due July 2005 $ 104,185 $ 104,775 6.75% notes due February 2009 100,000 100,000 6.80% notes due August 2007 50,000 50,000 Other 1,452 1,825 - ------------------------------------------------------ 255,637 256,600 Less current maturities 640 631 - ------------------------------------------------------ $ 254,997 $ 255,969 ======================================================
(in thousands) 2004 2003 7.20% notes due July 2005 $ 10,246 $ 104,185 6.80% notes due August 2007 50,000 50,000 6.75% notes due February 2009 100,000 100,000 5.625% notes due November 2013 200,000 — CMCZ term note 41,096 — Other 3,278 1,452
404,620 255,637 Less current maturities 11,252 640
$ 393,368 $ 254,997
Interest on these notes is payable
semiannually.semiannually, excluding CMCZ which is paid quarterly.During the year ended August 31, 2004, the Company repurchased $90 million of its 7.20% notes due in 2005. The Company recorded pre-tax charges of $3.1 million for the year ended August 31, 2004, resulting from the cash payments made to retire the notes. These losses on the reacquisition of debt are included in selling, general and administrative expenses. The $3.1 million was in excess of the $4.2 million of cash proceeds received by the Company upon settlement of a related interest rate swap. Also, in November 2003, the Company issued $200 million of its 5.625% notes due in November 2013. The Company entered into an interest rate lock on a portion of the new debt resulting in an effective rate of 5.54%.
On April 9, 2002 the Company entered into two interest rate swaps to convert a portion of
itsthe Company’s long term debt from a fixed interest ratelong-term debt commitmentto a floating interestcommitment. These arrangements adjustrate. The impact of these swaps adjusted theCompany'samount of fixedtorate and floatinginterestrateexposure as well as reducedebt and reduced overall financing costs. At August 31, 2004, a portion of these hedges remained in effect and were effective for the $10 million remaining on the 7.20% notes. The swaps effectivelyconvertconverted the interest rate on the$100 million debtnotes due July 2005 fromathe fixed rate of 7.20% toathe six month LIBOR (determined in arrears) plus a spread of 2.02%. The floating rate was3.13%3.9% at July 15,2003,2004, the most recent reset date. The total fair value of both swaps, including accrued interest, was$4.6 million$308 thousand and$5.2$4.6 million at August 31, 2004 and 2003,and 2002, respectively, and isrespectively. The swaps are recorded in otherlong-termcurrent assets with a corresponding increase in the 7.20% long-term notes, representing the change in fair value of the hedgeddebt, netdebt.On March 26, 2004, CMCZ borrowed 150 million PLN ($38.4 million) under a five-year term note with a group of four banks. The term note was used to refinance a portion of CMCZ’s notes payable. The note has scheduled principal payments in eight equal, semi-annual installments beginning in September 2005. Interest is accrued
interest. These hedges were highly effectiveat the Warsaw Interbank Offered Rate (WIBOR) plus 1.25% and was fixed at 7.31% for theyears endedsix month period ending December 26, 2004. The term note is collateralized by CMCZ’s inventory and fixed assets. In March 2004, CMCZ also entered into a revolving credit facility with the same group of banks with maximum borrowings of 60 million PLN ($16.4 million) bearing interest at WIBOR plus 0.8% and collateralized by CMCZ’s accounts receivable. At August 31,20032004, the facility had $530 thousand outstanding and2002.the interest rate, which resets daily, was approximately 7.46%. The term note and the revolving credit facility contain certain financial covenants for CMCZ. CMCZ was in compliance with these covenants at August 31, 2004. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt.The aggregate amounts of all long-term debt maturities for the five years following August 31,
20032004 are (in thousands):2004-2005—$640; 2005-11,252; 2006—$104,819; 2006-10,632; 2007—$65; 2007-60,651; 2008—$50,028; 200810,621; 2009 andthereafter-thereafter—$100,085. Interest expense is comprised of the following:311,464.
Year ended August 31, -------------------------------- (in thousands) 2003 2002 2001 - -------------------------------------------------------Long-term debt $ 13,835 $ 16,499 $ 17,532 Commercial paper 189 145 7,076 Notes payable 1,314 2,064 3,000 - ------------------------------------------------------- $ 15,338 $ 18,708 $ 27,608 =======================================================Interest of
$254,000, $447,000,$372 thousand, $254 thousand, and$1,111,000$447 thousand was capitalized in the cost of property, plant and equipment constructed in 2004, 20032002,and2001,2002, respectively. Interest of$14,393,000, $18,879,000,$25.1 million, $14.4 million, and$28,704,000$18.9 million was paid in 2004, 2003 and 2002,and 2001,respectively.53
NOTE
5.7. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISKGenerally 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.Due to near-term maturities, allowances for collection losses, investment grade ratings and security provided, the following financial
instruments'instruments’ carrying amounts are considered equivalent to fair value:- Cash and cash equivalents - Accounts receivable/payable - Short-term trade financing arrangement
• Cash and cash equivalents • Accounts receivable/payable • Notes payable — CMCZ • Trade financing arrangements The
Company'sCompany’s long-term debt is predominantly publicly held. Fair value was determined by indicated market values.
August 31, -------------------- (in thousands) 2003 2002 - -----------------------------------------------------Long-Term Debt: Carrying amount $ 255,637 $ 256,600 Estimated fair value 278,497 259,656 =====================================================
August 31, (in thousands) 2004 2003 Long-Term Debt: Carrying amount $ 404,620 $ 255,637 Estimated fair value 427,801 278,497 The Company maintains both corporate and divisional credit departments. Credit limits are set for customers. Credit insurance is used for some of the
Company'sCompany’s divisions. Letters of credit issued or confirmed by 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'sCompany’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 theCompany'sCompany’s accounts receivable.During the year ended August 31, 2003, the Company acquired $1.5 million in property, plant and equipment in a noncash transaction after foreclosing on a delinquent note receivable from a customer.The
Company'sCompany’s worldwide operations and product lines expose it to risks from fluctuations in foreign currency exchange rates and metals commodity prices. The objective of theCompany'sCompany’s risk management program is to mitigate these risks using futures or forward contracts (derivative instruments). The Company enters into metal commodity forward contracts to mitigate the risk of unanticipated declines in gross margin due to the volatility of thecommodities'commodities’ prices, and enters into foreign currency forward contracts which match the expected settlements for purchases and sales denominated inforeignother than functional currencies. The Company designatesas hedges for accounting purposesonly those contracts which closely match the terms of theunder lying transaction.underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the statements of earnings for the years ended54August 31, 2004, 2003 2002and2001.2002. Certain of the foreign currency and all of the commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.The changes in fair value of these instruments resulted in a $328 thousand decrease, a $208 thousand decrease and a $452 thousand increase in cost of goods sold for the years ended August 31, 2003, 2002 and 2001, respectively.All of the instruments are highly liquid and none are entered into forspeculativetrading purposes.AtThe following chart shows the impact on the consolidated statements of earnings of the changes in fair value of these economic hedges included in determining net earnings (in thousands) for the year ended August
31, 2003 and 2002,31. Settlements are recorded within the same line item as the related unrealized gains (losses).
Earnings (Expense) 2004 2003 2002 Cost of goods sold (commodity instruments) $ 670 $ 328 $ 208 Net sales (foreign currency instruments) 377 (317 ) 391 54
The Company’s derivative
assets recorded in other current assets were $1.8 million and $1.6 million, respectively, and derivative liabilities of $1.7 million and $1.4 million, respectively,instruments were recordedin other current liabilities.as follows on the consolidated balance sheets (in thousands) at August 31:
2004 2003 Derivative assets (other current assets) $ 2,909 $ 1,809 Derivative liabilities (other payables) 1,700 1,690 See Note
4,6, Credit Arrangements, regarding theCompany'sCompany’s interest ratehedges.risk management strategies.NOTE
6.8. INCOME TAXESThe provisions for income taxes include the following:
Year ended August 31, -------------------------------- (in thousands) 2003 2002 2001 - ----------------------------------------------------------Current: United States $ (2,220) $ 18,173 $ 13,498 Foreign 1,848 1,532 8 State and local 257 500 1,863 - ---------------------------------------------------------- (115) 20,205 15,369 Deferred 11,605 2,408 (726) - ---------------------------------------------------------- $ 11,490 $ 22,613 $ 14,643 ==========================================================
Year ended August 31, (in thousands) 2004 2003 2002 Current: United States $ 41,005 $ (2,220 ) $ 18,173 Foreign 18,050 1,848 1,532 State and local 4,317 257 500
63,372 (115 ) 20,205 Deferred 1,683 11,605 2,408
$ 65,055 $ 11,490 $ 22,613
During 2002, the Company favorably resolved all issues for its federal income tax returns through 1999. Management reevaluated the tax accruals resulting in a net decrease of approximately $1,000,000 in 2002.
Taxes of
$3,930,000, $11,016,000$33.9 million, $3.9 million and$8,691,000$11.0 million were paid in 2004, 2003 and 2002,and 2001,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 long-term tax liabilities (assets) associated with these differences are:
August 31, ---------------------- (in thousands) 2003 2002 - ----------------------------------------------------------------------Tax on difference between tax and book depreciation $ 41,657 $ 38,457 U.S. taxes provided on foreign income and foreign taxes 15,585 11,857 Net operating losses (less allowances of $1,703 and $780) (837) (561) Alternative minimum tax credit (1,713) (1,713) Other accruals (3,662) (9,183) Other (6,611) (6,044) - ---------------------------------------------------------------------- Total $ 44,419 $ 32,813 ======================================================================55Current
August 31, (in thousands) 2004 2003 Tax on difference between tax and book depreciation $ 47,172 $ 41,657 U.S. taxes provided on foreign income and foreign taxes 19,474 15,585 Deferred compensation (12,164 ) (6,612 ) Net operating losses (less allowances of $1,184 and $1,703) (1,547 ) (837 ) Alternative minimum tax credit (1,713 ) (1,713 ) Other accruals (789 ) (3,662 )
Total $ 50,433 $ 44,418
A current deferred tax
assetsasset of $4.4million and $12.3million at August 31, 2003,and 2002, respectively, werewas included in other assets on the consolidated balancesheets.sheet. These deferred taxes were largely due to different book and tax treatments of various allowances and accruals. No valuation allowances wererequired at August 31, 2003 or 2002 for the current deferred tax assets.required.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, theThe Company provides United States taxes on unremitted foreignearnings.earnings except for its operations in CMCZ and Australia, which it considers to be permanently invested. The amount of these permanently invested earnings at August 31, 2004 was $47.6 million and $33.5 million for CMCZ and Australia, respectively. In the event that the Company repatriated these earnings, incremental U.S. taxes may be incurred. The Company has determined that it is not practicable to determine the amount of these incremental U.S. taxes. Net operating losses consist of$150$143 million of state net operating losses that expire during the tax years ending from 2006 to2023.2024. These assets55
will be reduced as tax expense is recognized in future periods. The $1.7 million alternative minimum tax credit is available indefinitely.
The
FSC Repeal and Extraterritorial Income Exclusion Act of 2000 replaced the Foreign Sales Corporation (FSC) tax benefits with the "extraterritorial income" exemption (ETI) for fiscal year 2002 and the years thereafter. The ETI exclusion maintains the same level of tax benefit for current FSC users. The Company'sCompany’s effective taxrates were 37.8%rate for the year ended August 31, 2004 was reduced as compared to the year ended August 31, 200335.8% for 2002, and 38.1% for 2001.primarily due to the effective tax rate in Poland of 20%. Reconciliations of the United States statutory rates to the effective rates are as follows:
Year ended August 31, ----------------------- 2003 2002 2001 - -------------------------------------------------Statutory rate 35.0% 35.0% 35.0% State and local taxes .6 1.0 3.1 ETI (.9) (1.2) (1.1) Other 3.1 1.0 1.1 - ------------------------------------------------- Effective tax rate 37.8% 35.8% 38.1% =================================================
Year ended August 31, 2004 2003 2002 Statutory rate 35.0 % 35.0 % 35.0 % State and local taxes 1.3 0.6 1.0 Extraterritorial Income Exclusion (1.3 ) (0.9 ) (1.2 ) Foreign rate differential (4.4 ) — — Other 0.1 3.1 1.0
Effective tax rate 30.7 % 37.8 % 35.8 %
NOTE
7.9. CAPITAL STOCKIn January 2004, the Company’s stockholders increased the number of shares of common stock that are authorized for issuance to 100,000,000. At August 31, 2004, the Company had authorization to purchase 972,305 of its common shares. The Company increased its quarterly cash divided by 25 percent to ten cents per common share, effective with the July 2004 payment. Previously, the quarterly cash dividend was eight cents per share.
On May 20, 2002, the
Company'sCompany’s Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend on its common stock.This stock split was effective June 28, 2002, to shareholders of record on June 7, 2002. On June 28, 2002 the Company issued 16,132,583 additional shares of common stock and transferred $17,354,000 from paid-in capital and $63,309,000 from retained earnings to common stock.All applicable share and per share amounts in the accompanying consolidated financial statementshave beenwere restated to reflect this stock split.Following the stock split, the Company also instituted a quarterly cash dividend of eight cents per share on the increased number of shares. STOCK PURCHASE PLANStock Purchase PlanAlmost all U.S. resident employees with a year of service at the beginning of each calendar year may participate in the
Company'sCompany’s employee stock purchase plan. The Directors annually establish the purchase discount from the market price. The discount was 25% for each of the three years ended August 31, 2004, 20032002and2001.2002. In January 2003, theCompany'sCompany’s stockholders approved an amendment to the plan that increased by 1,000,000 the maximum number of shares that may be eligible for issuance and increased the maximum number of shares that an eligible employee may purchase annually from 200 to 400 shares. Yearly activity of the stock purchase plan was as follows:
2003 2002 2001 - -----------------------------------------------------------Shares subscribed 289,210 282,780 347,640 Price per share $ 12.35 $ 12.48 $ 9.48 Shares purchased 223,880 257,860 74,480 Price per share $ 12.48 $ 9.48 $ 11.74 Shares available 1,141,94656
2004 2003 2002 Shares subscribed 297,870 289,210 282,780 Price per share $ 20.10 $ 12.35 $ 12.48 Shares purchased 227,340 223,880 257,860 Price per share $ 12.35 $ 12.48 $ 9.48 Shares available 890,926 The Company recorded compensation expense for this plan of
$932,000, $815,000$936 thousand, $932 thousand and$291,000$815 thousand in 2004, 2003 and 2002,and 2001,respectively.STOCK OPTION PLANSStock Option PlansThe 1986 Stock Incentive Plan (1986 Plan) ended November 23, 1996, except for 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'sCompany’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'sCompany’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. The terms of the 1996 Plan resulted in additional authorized shares of 934,970 in 2004, 62,806 in 2003, and 1,073,782 in2002, and 67,270 in 2001.2002. In addition, theCompany'sCompany’s shareholders authorized an additional 1,000,000 shares during 2002.56
In January 2000, the
Company'sCompany’s stockholders approved the 1999 Non-Employee Director Stock Option Plan and authorized 400,000 shares to be made available for grant. Under this Plan, each outside director of the Company will receive annually an option to purchase 3,000 shares of theCompany'sCompany’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 theCompany'sCompany’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.57Combined information for shares subject to options for the three plans is as follows:
Weighted Average Price Exercise Range Number Price Per Share - --------------------------------------------------------------------September 1, 2000 Outstanding 4,350,860 $13.47 $ 6.31-15.97 Exercisable 3,559,810 13.06 6.31-15.44 Granted 803,672 11.71 10.95-13.23 Exercised (320,422) 10.70 6.31-15.44 Forfeited (99,932) 13.82 10.99-15.97 Increase authorized 67,270 - -------------------------------------------------------------------- August 31, 2001 Outstanding 4,734,178 $13.36 $ 9.21-15.97 Exercisable 3,608,052 13.47 9.21-15.97 Granted 805,380 17.28 17.17-21.42 Exercised (2,212,903) 13.13 9.21-15.97 Forfeited (80,920) 14.00 11.76-17.17 Increase authorized 2,073,782 - -------------------------------------------------------------------- August 31, 2002 Outstanding 3,245,735 $14.46 $10.10-21.42 Exercisable 2,111,744 13.94 10.10-18.05 Granted 847,430 14.56 14.54-15.10 Exercised (211,618) 12.39 13.32-19.24 Forfeited (36,629) 14.66 10.10-17.17 Increase authorized 62,806 - -------------------------------------------------------------------- August 31, 2003 Outstanding 3,844,918 $14.60 $10.97-21.42 Exercisable 2,655,803 14.24 10.97-21.42 Available for grant 1,189,924 - --------------------------------------------------------------------
Weighted Average Price Exercise Range Number Price Per Share September 1, 2001 Outstanding 4,734,178 $ 13.36 $ 9.21—15.97 Exercisable 3,608,052 13.47 9.21—15.97 Granted 805,380 17.28 17.17—21.42 Exercised (2,212,903 ) 13.13 9.21—15.97 Forfeited (80,920 ) 14.00 11.76—17.17 Increase authorized 2,073,782
August 31, 2002 Outstanding 3,245,735 14.46 10.10—21.42 Exercisable 2,111,744 13.94 10.10—18.05 Granted 847,430 14.56 14.54—15.10 Exercised (211,618 ) 12.39 13.32—19.24 Forfeited (36,629 ) 14.66 10.10—17.17 Increase authorized 62,806
August 31, 2003 Outstanding 3,844,918 14.60 10.97—21.42 Exercisable 2,655,803 14.24 10.97—21.42 Granted 892,572 31.08 30.10—31.13 Exercised (1,288,895 ) 14.31 11.76—17.17 Forfeited (29,330 ) 16.17 11.77—31.13 Increase authorized 934,970
August 31, 2004 Outstanding 3,419,265 18.99 10.97—31.13 Exercisable 2,139,374 14.85 10.97—30.10 Available for grant 1,314,399
Share information for options at August 31,
2003:
Outstanding Exercisable - -------------------------------------------------------------------------------- Weighted Average Remain- Weighted Weighted Range of ing Con- Average Average Exercise Number tractual Exercise Number Exercise Price Outstanding Life (Yrs) Price Outstanding Price - --------------------------------------------------------------------------------$10.97-12.25 692,746 3.7 $ 11.81 692,746 $ 11.81 13.13-15.10 1,954,972 3.7 14.32 1,134,222 14.16 15.44-21.42 1,197,200 4.6 16.65 828,835 16.39 ================================================================================ $10.97-21.42 3,844,918 4.0 $ 14.60 2,655,803 $ 14.2458PREFERRED STOCK2004:
Outstanding Exercisable Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Yrs) Price Outstanding Price $10.97—12.25 426,952 2.9 $ 11.74 426,952 $ 11.74 13.13—15.10 1,226,555 3.7 14.40 825,739 14.32 15.44—21.42 875,436 3.6 16.67 875,436 16.67 30.10—31.13 890,322 6.5 31.08 11,247 $ 30.10
$10.97—31.13 3,419,265 4.3 $ 18.99 2,139,374 $ 14.85
57
Preferred StockPreferred 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 PLANStockholder Rights PlanOn July 28, 1999, the
Company'sCompany’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 theCompany'sCompany’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 theCompany'sCompany’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'sCompany’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 theCompany'sCompany’s stock or shares of theacquirer'sacquirer’s stock at a 50% discount. TheCompany'sCompany’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.NOTE
8. EMPLOYEES'10. EMPLOYEES’ RETIREMENT PLANSSubstantially all employees in the U.S. are covered by defined contribution profit sharing and savings plans. These tax qualified plans are maintained and contributions made in accordance with ERISA. The Company also provides certain eligible executives benefits pursuant to a
non-qualifiednonqualified benefit restoration plan (BRP Plan) equal to amounts that would have been available under the tax qualified ERISA plans, but are not available due to limitations of ERISA, tax laws and regulations. Company contributions, which are discretionary, to all plans were$12,271,000, $14,685,000,$32.8 million, $13.2 million, and$10,611,000,$14.0 million, for 2004, 2003 and 2002, respectively. These costs were recorded in selling, general and2001, respectively.administrative expenses.The deferred compensation liability under the BRP Plan was
$18.6$22.7 million and$14.4$18.6 million at August 31,20032004 and2002,2003, respectively, and recorded in other long-term liabilities. Though under no obligation to fund the plan, the Company has segregated mutual fund assets in a trust whose current value at August 31, 2004 and 2003and 2002was$14.6$20.2 million and$13.2$14.6 million, respectively, and recorded in other long-term assets.A certain number of employees outside of the U.S. participate in defined contribution plans maintained in accordance with local regulations. Company contributions to these international plans were $1.4 million, $902 thousand, and $773 thousand for the years ended August 31, 2004, 2003, and 2002, respectively.
The Company has no significant postretirement obligations. The
Company'sCompany’s historical costs for postemployment benefits have not been significant and are not expected to be in the future.59NOTE
9.11. COMMITMENTS AND CONTINGENCIESMinimum lease commitments payable by the Company and its consolidated subsidiaries for
non-cancelablenoncancelable operating leases in effect at August 31,2003,2004, are as follows for the fiscal periods specified:
Real (in thousands) Equipment Estate - ------------------------------------------------------2004 $ 4,000 $ 5,318 2005 3,188 4,689 2006 2,290 3,901 2007 1,737 3,328 2008 and thereafter 2,483 9,736 - ------------------------------------------------------ $ 13,698 $ 26,972 ======================================================
Real (in thousands) Equipment Estate 2005 $ 7,758 $ 6,306 2006 6,615 4,419 2007 5,770 3,594 2008 4,709 2,762 2009 and thereafter 5,600 14,429
$ 30,452 $ 31,510
58
Total rental expense was
$13,428,000, $11,774,000$16.0 million, $13.4 million and$11,483,000 in 2003, 2002 and 2001, respectively. CONSTRUCTION CONTRACT DISPUTES During 2001, the Company increased its litigation accrual (included in accrued expenses and other payables) by $8.3 million due to an adverse judgment from a trial. At August 31, 2002, $9.6 million was accrued (including interest). The judgment was upheld on appeal and paid in 2003. In another matter, a subsidiary of the Company, SMI-Owen Steel Company, Inc. (SMI-Owen) entered into a fixed price contract with the design/builder general contractor (D/B) to furnish, erect and install structural steel and certain other materials along with related design and engineering work for the construction of a large hotel and casino complex. In connection with the contract, the D/B secured insurance under a subcontractor/vendor default protection policy which named the Company as an insured in lieu of performance and payment bonds. The Company made a claim against the insurance company for expenses incurred from the default of a large subcontractor. During 2002, the Company and the insurance company settled related litigation filed by the Company, and the Company recovered $15 million which included recovery of a $6.6 million claim receivable, receipt of an additional amount ($7.4 million), the release of the balance of $1 million of previously escrowed funds and, subject to certain contingencies, reimbursement of an additional amount (up to $3 million). The $7.4$11.8 million inexcess of the claim receivable2004, 2003 andescrow amount released was recorded as deferred insurance proceeds (in other long-term liabilities at August 31, 2002) pending final resolution of the Company's disputes with the D/B. At August 31,2002, respectively.Environmental and
2001, the Company maintained contract receivables of $7.2 million from the D/B. Such amounts are included within other assets on the accompanying balance sheets. During 2003, SMI-Owen settled, contingent upon completion and approval by the Bankruptcy Court which has jurisdiction over one of the parties, all disputes between SMI-Owen, the D/B and the owner of the Project. SMI-Owen will pay $1.25 million of the $3.5 million settlement payment with $2.25 million to be paid by the insurance company. Final resolution of this dispute will resolve all material claims asserted against SMI-Owen arising from the Project. The Company reduced its accrual for the deferred insurance proceeds by $937,000 at August 31, 2003 to reflect this settlement. The settlement agreement provides that SMI-Owen reserves all rights with regards to pending litigation against an insurance broker for insurance benefits not received by SMI-Owen due to the broker's acts, errors, omissions and other conduct related to the insurance program for the Project. The Company 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. 60In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. ENVIRONMENTAL AND OTHER MATTERSOther MattersManagement 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
fourteenfifteen 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 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.ItIn general, state escheat statutes allow the examination for unclaimed property to extend back ten or more years. Although no audits are currently in process, the Company has recorded liabilities for the estimated minimum potential unclaimed property. The Company is unable to estimate a meaningful range for such exposure.
Management believes that adequate provision has been made in the
opinionfinancial statements for the potential impact ofthe Company's managementthese issues, and that theoutcome of these proceedings, individually or in the aggregate,outcomes will nothave a material adverse effect onsignificantly impact the results of operations or the financial position of theCompany.Company, although they may have a material impact on earnings for a particular quarter.Business Interruption Insurance Claims On August 18, 2003, the Company’s new electric arc furnace transformer failed at its SMI-South Carolina melt shop after only six days in operation. This transformer had been purchased and installed to increase the melt shop’s production capacity. After the failure of the new transformer, the Company’s former transformer was reinstalled. The Company has insurance coverage for the interruption of business operations, including lost profits and additional expenditures incurred. As the claim period will run until the new transformer is reinstalled, and no formal claim has been filed with the insurance company, management is unable to estimate the amount that will ultimately be received under the policy. Costs for repairing the transformer are being covered by the equipment manufacturer.
On May 31, 2004, the Company’s primary transformer at SMI-Texas’ melt shop failed. The principal back up transformer was immediately installed and subsequently failed in June 2004. Another replacement transformer was installed and operated until October 2004, when, following repairs, the original transformer was successfully reinstalled. Management intends to file insurance claims for both business interruption and property damage relating to these transformer failures.
No amounts have been recorded in the consolidated financial statements for these potential insurance recoveries, which amounts could be substantial. All costs have been expensed as incurred.
59
NOTE
10.12. EARNINGS PER SHAREIn calculating earnings per share, there were no adjustments to net earnings to arrive at
incomeearnings for any years presented. The reconciliation of the denominators of the earnings per share calculations are as follows at August 31:
2004 2003 2002 Shares outstanding for basic earnings per share 28,767,957 28,202,979 27,377,083 Effect of dilutive securities: Stock options/ purchase plans 1,076,382 402,616 898,208
Shares outstanding for diluted earnings per share 29,844,339 28,605,595 28,275,291
No stock options
granted June 7, 2002,were anti-dilutive at August 31, 2004 based on the average share price of $33.04. Stock options with total outstanding share commitments of 10,000 were anti-dilutive atyear end, are antidilutive.
August 31, ------------------------------------ 2003 2002 2001 - --------------------------------------------------------------------------Shares outstanding for basic earnings per share 28,202,979 27,377,083 26,059,122 Effect of dilutive securities: Stock options/ purchase plans 402,616 898,208 261,866 - -------------------------------------------------------------------------- Shares outstanding for diluted earnings per share 28,605,595 28,275,291 26,320,988 ==========================================================================AtAugust 31,2003, the Company had authorization to purchase 1,116,152 of its common shares. 612003. All stock options expire by 2011. NOTE
11.13. ACCRUED EXPENSES AND OTHER PAYABLES
August 31, ----------------------- (in thousands) 2003 2002 - -------------------------------------------------------------Salaries, wages and commissions $ 37,698 $ 31,544 Insurance 13,562 12,987 Employees' retirement plans 11,325 15,086 Advance billings on contracts 10,787 7,855 Taxes other than income taxes 8,699 9,470 Freight 8,228 5,980 Litigation accruals 6,650 16,416 Interest 1,833 1,901 Other 28,189 32,369 - ------------------------------------------------------------- $ 126,971 $ 133,608 =============================================================
August 31, (in thousands) 2004 2003 Salaries, bonuses and commissions $ 94,501 $ 37,698 Employees’ retirement plans 30,477 11,325 Freight 22,903 8,228 Advance billings on contracts 18,058 10,787 Insurance 15,359 13,562 Taxes other than income taxes 11,575 8,699 Contract losses 7,470 3,121 Litigation accruals 6,650 6,650 Interest 5,205 1,833 Environmental 2,185 1,563 Other 34,407 23,505
$ 248,790 $ 126,971
NOTE
12. ACQUISITIONS In January 2003, the Company acquired substantially all of the operating assets of E.L. Wills, Inc., a rebar fabrication company located in Fresno, California, specializing in commercial and industrial construction throughout the states of California and Nevada for $4.2 million cash. In May, 2003, the Company acquired substantially all of the operating assets of the Denver, Colorado location of Symons Corporation for $5.6 million cash. This acquisition expands the Company's concrete form and construction-related product sales in the western part of the United States. Effective August 31, 2003, the Company acquired substantially all of the operating assets of Dunn Del Re Steel, Inc., a rebar fabrication company located in Chandler, Arizona for $3.6 million cash and the assumption of a $625 thousand note payable. Its primary market is Arizona, extending also to Utah, New Mexico, California and Nevada. The purchase price allocation for Dun Del Re Steel has been prepared on a preliminary basis, and reasonable changes may be made following valuation by business appraisers of the intangible assets. Operations of the acquired entities are reflected in the consolidated statement of earnings from the date of their respective acquisitions. The pro forma impact on operations, as of the beginning of 2003, of these acquisitions would not have been materially different from the actual results. The following is a summary of the allocation of purchase price for these acquisitions as of the date the assets were acquired (in thousands):
E.L. Dunn Wills Symons Del Re Total - ---------------------------------------------------------------------------------------Inventory $ 1,227 $ 173 $ 575 $ 1,975 Property, plant and equipment 2,215 55 2,435 4,705 Rental equipment -- 4,400 -- 4,400 Identifiable intangible assets 705 1,000 1,220 2,925 Note payable -- -- (625) (625) Other 52 -- (16) 36 - --------------------------------------------------------------------------------------- Total $ 4,199 $ 5,628 $ 3,589 $ 13,416 =======================================================================================62Rental equipment and intangible assets are included in long-term other assets on the August 31, 2003 consolidated balance sheet. The intangible assets acquired include trade names, customer lists and backlogs, all of which have finite lives and are being amortized. The estimated annual amortization of intangibles is not expected to be material. In July 2003, the Company's subsidiary, Commercial Metals (International) AG, entered into a purchase agreement to buy 71.1% of the outstanding shares of Huta Zawiercie, S.A. in Zawiercie, Poland for approximately $50 million in cash and $32 million assumed long-term debt. Huta Zawiercie operates a steel minimill similar to those operated by the Company's steel group. Its annual capacity is about 1 million tons consisting mainly of rebar and wire rod products. This transaction is expected to be completed by December 15, 2003. NOTE 13.14. BUSINESS SEGMENTSThe
Company'sCompany’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.TheFollowing the acquisitions of CMCZ and Lofland in December 2003, (See Note 2, Acquisitions), the Company has
threefive reportablesegments consisting of manufacturing,segments: domestic mills, CMCZ, domestic fabrication, recycling and marketing and distribution.ManufacturingPrior period results have been revised to be consistent with the current segment presentation.The domestic mills segment includes the Company’s domestic steel minimills (including the scrap processing facilities which directly support these mills) and the copper tube minimill. The copper tube minimill is aggregated with the Company’s steel minimills because it has similar economic characteristics. The newly-acquired CMCZ minimill and subsidiaries in Poland have been presented as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are different from that of the Company’s domestic minimills. The domestic fabrication segment consists of the
CMC steel group's minimills, steelCompany’s rebar (including Lofland) and joist fabrication operations, fence post manufacturing plants,heat treating, railcar rebuildingconstruction-related andconstruction-relatedother products facilities. Following the acquisition of Lofland, the Company’s chief operating decision maker began reviewing the results of domestic fabrication operations separately, thus necessitating the reporting of these operations aswella separate segment. The recycling and marketing and distribution segments are asHowell Metal Company's copper tube manufacturing facility. The manufacturing segment's business operates primarily in the southern and western United States.they have been previously reported. Recycling consists of the Secondary60
Metals Processing
Division'sDivision’s scrap processing and sales operations primarily in Texas, Florida and the southern United States. Marketing and distribution includes both domestic and international operations for the sales, distribution and processing of both ferrous and nonferrous metals and other industrial products. Thesegment'ssegment’s activities consist only of physical transactions and not speculation. The corporate and eliminations segment contains eliminations of intersegment transactions, expenses of the Company’s corporate headquarters and interest expense relating to its long-term public debt and commercial paper program.The Company uses adjusted operating profit 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:
External Net Sales for the Year ended August 31, ------------------------------------ (in thousands) 2003 2002 2001 - -----------------------------------------------------------United States $1,689,645 $1,708,863 $1,714,898 Non United States 1,186,240 771,078 755,235 - ----------------------------------------------------------- Total $2,875,885 $2,479,941 $2,470,133 ===========================================================
Long-Lived Assets as of August 31, ------------------------------------ (in thousands) 2003 2002 2001 - -----------------------------------------------------------United States $ 409,298 $ 421,332 $ 449,121 Non United States 21,691 14,492 9,812 - ----------------------------------------------------------- Total $ 430,989 $ 435,824 $ 458,933 ===========================================================63Summarized data for the Company's international operations located outside of the United States (principally in Europe, Australia and the Far East) are as follows:
Year ended August 31, ------------------------------------ (in thousands) 2003 2002 2001 - ---------------------------------------------------------------------Net sales - unaffiliated customers $ 626,257 $ 378,745 $ 266,609 - --------------------------------------------------------------------- Total assets 186,322 124,870 83,743 - ---------------------------------------------------------------------The following is a summary of certain financial information by reportable
segment:
Adjustments Marketing and 2003 (dollars in thousands) Manufacturing Recycling and Distribution Corporate Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------Net sales - unaffiliated customers $ 1,336,095 $ 409,554 $ 1,129,777 $ 459 $ -- $ 2,875,885 Intersegment sales 3,420 31,890 19,920 -- (55,230) -- - --------------------------------------------------------------------------------------------------------------------------- Net sales 1,339,515 441,444 1,149,697 459 (55,230) 2,875,885 =========================================================================================================================== Adjusted operating profit (loss) 20,365 15,206 21,784 (11,039) -- 46,316 =========================================================================================================================== Interest expense* 3,376 844 1,214 10,158 (254) 15,338 =========================================================================================================================== Capital expenditures 43,452 5,765 3,560 2,428 -- 55,205 =========================================================================================================================== Depreciation and amortization 50,227 7,936 2,134 906 -- 61,203 =========================================================================================================================== Total assets 738,944 106,749 342,752 86,961 -- 1,275,406 ===========================================================================================================================
2002 (dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------------Net sales - unaffiliated customers $ 1,362,308 $ 354,387 $ 762,584 $ 662 $ -- $ 2,479,941 Intersegment sales 3,587 23,667 14,428 -- (41,682) -- - --------------------------------------------------------------------------------------------------------------------------- Net sales 1,365,895 378,054 777,012 662 (41,682) 2,479,941 =========================================================================================================================== Adjusted operating profit (loss) 71,447 5,098 14,196 (8,102) -- 82,639 =========================================================================================================================== Interest expense* 3,949 1,011 1,050 13,145 (447) 18,708 =========================================================================================================================== Capital expenditures 39,046 4,723 9,323 965 -- 54,057 =========================================================================================================================== Depreciation and amortization 49,538 9,650 1,609 782 -- 61,579 =========================================================================================================================== Total assets 720,450 98,847 262,111 148,668 -- 1,230,076 ===========================================================================================================================segment (in thousands):
2001 (dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------------Net sales - unaffiliated customers $ 1,344,483 $ 371,298 $ 752,723 $ 1,629 $ -- $ 2,470,133 Intersegment sales 5,375 22,539 18,433 -- (46,347) -- - --------------------------------------------------------------------------------------------------------------------------- Net sales 1,349,858 393,837 771,156 1,629 (46,347) 2,470,133 =========================================================================================================================== Adjusted operating profit (loss) 56,700 (2,324) 7,833 4,790 -- 66,999 =========================================================================================================================== Interest expense* 10,585 2,165 1,332 14,637 (1,111) 27,608 =========================================================================================================================== Capital expenditures 45,979 5,587 1,208 248 -- 53,022 =========================================================================================================================== Depreciation and amortization 54,402 11,005 1,124 741 -- 67,272 =========================================================================================================================== Total assets 739,625 93,268 188,405 60,648 -- 1,081,946 ===========================================================================================================================
Marketing Adjustments Domestic Domestic and and 2004 Mills CMCZ Fabrication Recycling Distribution Corporate Eliminations Consolidated Net sales—unaffiliated customers $ 845,348 $ 354,328 $ 1,041,690 $ 717,557 $ 1,809,276 $ 128 $ — $ 4,768,327 Intersegment sales 263,888 72,813 5,631 56,618 72,507 — (471,457 ) —
Net sales 1,109,236 427,141 1,047,321 774,175 1,881,783 128 (471,457 ) 4,768,327
Adjusted operating profit (loss) 84,156 69,318 7,288 67,887 39,427 (26,394 ) — 241,682
Interest expense* 2,370 3,175 5,135 (93 ) 4,056 13,833 (372 ) 28,104
Capital expenditures 25,734 7,913 7,954 8,688 1,214 386 — 51,889
Depreciation and amortization 36,324 10,098 13,369 7,705 2,665 883 — 71,044
Goodwill 306 — 27,006 3,230 — — — 30,542
Total assets 421,517 242,547 497,044 143,504 569,220 114,214 — 1,988,046
2003 Net sales—unaffiliated customers 596,418 — 739,677 409,554 1,129,777 459 — 2,875,885 Intersegment sales 173,635 — 2,961 31,890 19,920 — (228,406 ) —
Net sales 770,053 — 742,638 441,444 1,149,697 459 (228,406 ) 2,875,885
Adjusted operating profit (loss) 19,664 — 701 15,206 21,784 (11,039 ) — 46,316
Interest expense* (273 ) — 3,649 844 1,214 10,158 (254 ) 15,338
Capital expenditures 25,979 — 12,060 5,765 3,560 2,428 — 49,792
Depreciation and amortization 37,908 — 12,319 7,936 2,134 906 — 61,203
Goodwill 306 — 3,601 2,930 — — — 6,837
Total assets 412,403 — 326,541 106,749 350,601 86,961 — 1,283,255
2002 Net sales—unaffiliated customers 559,420 — 802,888 354,387 762,584 662 — 2,479,941 Intersegment sales 161,901 — 2,288 23,667 14,428 — (202,284 ) —
Net sales 721,321 — 805,176 378,054 777,012 662 (202,284 ) 2,479,941
Adjusted operating profit (loss) 41,006 — 30,441 5,098 14,196 (8,102 ) — 82,639
Interest expense* (583 ) — 4,532 1,011 1,050 13,145 (447 ) 18,708
Capital expenditures 20,364 — 18,682 4,723 2,489 965 — 47,223
Depreciation and amortization 37,206 — 12,332 9,650 1,609 782 — 61,579
Goodwill 306 — 3,536 2,935 — — — 6,777
Total assets 421,706 — 298,744 98,847 279,408 148,668 — 1,247,373
* Includes intercompany interest expense (income) in the segments.
6461
The following table provides a reconciliation of
the non-GAAP measure,consolidated adjusted operating profit(loss)to netearnings (loss). ADJUSTED OPERATING PROFIT RECONCILIATION
Marketing and Corporate and (in millions) Manufacturing Recycling Distribution Eliminations Total - ---------------------------------------------------------------------------------------------------------------------Year ended August 31, 2003: Net earnings (loss) $ 13,557 $ 10,006 $ 15,529 $ (20,188) $ 18,904 Income taxes 6,477 5,104 4,753 (4,844) 11,490 Interest expense 130 5 1,313 13,890 15,338 Discounts on sales of accounts receivable 201 91 189 103 584 - --------------------------------------------------------------------------------------------------------------------- Adjusted operating profit (loss) $ 20,365 $ 15,206 $ 21,784 $ (11,039) $ 46,316 ===================================================================================================================== Year ended August 31, 2002: Net earnings (loss) $ 45,026 $ 3,741 $ 8,085 $ (16,327) $ 40,525 Income taxes 25,739 1,187 3,769 (8,082) 22,613 Interest expense 291 4 2,039 16,374 18,708 Discounts on sales of accounts receivable 391 166 303 (67) 793 - --------------------------------------------------------------------------------------------------------------------- Adjusted operating profit (loss) $ 71,447 $ 5,098 $ 14,196 $ (8,102) $ 82,639 ===================================================================================================================== Year ended August 31, 2001: Net earnings (loss) $ 34,826 $ (1,579) $ 3,612 $ (13,087) $ 23,772 Income taxes 21,150 (903) 2,139 (7,743) 14,643 Interest expense 357 12 1,798 25,441 27,608 Discounts on sales of accounts receivable 367 146 284 179 976 - --------------------------------------------------------------------------------------------------------------------- Adjusted operating profit (loss) $ 56,700 $ (2,324) $ 7,833 $ 4,790 $ 66,999 =====================================================================================================================65earnings:
Year ended August 31, (in thousands) 2004 2003 2002 Net earnings $ 132,021 $ 18,904 $ 40,525 Minority interests 14,871 — — Income taxes 65,055 11,490 22,613 Interest expense 28,104 15,338 18,708 Discounts on sales of accounts receivable 1,631 584 793
Adjusted operating profit $ 241,682 $ 46,316 $ 82,639
The following represents the Company’s external net sales by major product and geographic area:
Year ended August 31, (in thousands) 2004 2003 2002 Major product information: Steel products $ 2,991,272 $ 1,821,506 $ 1,551,579 Industrial materials 519,967 242,912 183,283 Ferrous scrap 384,196 155,054 118,138 Nonferrous scrap 328,357 249,619 232,184 Other products 544,535 406,794 394,757
Net sales $ 4,768,327 $ 2,875,885 $ 2,479,941
Geographic area: United States $ 2,989,554 $ 2,045,965 $ 1,977,285 Europe 827,249 203,831 164,349 Asia 493,609 298,335 69,170 Australia/New Zealand 315,442 223,213 177,366 Other 142,473 104,541 91,771
Net sales $ 4,768,327 $ 2,875,885 $ 2,479,941
The following represents long-lived assets by geographic area:
Year ended August 31, (in thousands) 2004 2003 2002 United States $ 437,170 $ 409,284 $ 421,316 Poland 95,057 — — Australia 11,346 11,009 8,826 Other 20,241 10,696 10,582
Total long-lived assets $ 563,814 $ 430,989 $ 440,724
62
NOTE
14.15. QUARTERLY FINANCIAL DATA (UNAUDITED)Summarized quarterly financial data for fiscal 2004, 2003
2002and20012002 are as follows (in thousands except per share data):
Three Months Ended 2003 --------------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 - --------------------------------------------------------------------Net sales $ 636,179 $ 660,816 $ 774,151 $ 804,739 Gross profit 61,060 67,919 74,419 85,641 Net earnings 2,205 2,933 3,022 10,744 Basic EPS 0.08 0.10 0.11 0.38 Diluted EPS 0.08 0.10 0.11 0.38
Three Months Ended 2002 --------------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 - --------------------------------------------------------------------Net sales $ 572,168 $ 574,325 $ 651,604 $ 681,844 Gross profit 78,095 74,880 92,120 72,319 Net earnings 8,482 6,572 16,433 9,038 Basic EPS 0.32 0.24 0.59 0.32 Diluted EPS 0.32 0.24 0.56 0.31
Three Months Ended 2001 --------------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 - --------------------------------------------------------------------Net sales $ 601,926 $ 584,188 $ 629,435 $ 654,584 Gross profit 70,844 58,253 82,893 85,330 Net earnings (loss) (2,421) 1,590 10,569 14,034 Basic EPS (loss) (0.09) 0.06 0.41 0.54 Diluted EPS (loss) (0.09) 0.06 0.40 0.53
Three Months Ended 2004 Nov. 30 Feb. 29 May 31 Aug. 31 Net sales $ 830,007 $ 1,068,060 $ 1,407,206 $ 1,463,054 Gross profit 92,519 128,615 202,169 184,298 Net earnings 12,628 21,155 50,884 47,354 Basic EPS 0.45 0.74 1.75 1.62 Diluted EPS 0.44 0.71 1.69 1.56
Three Months Ended 2003 Nov. 30 Feb. 28 May 31 Aug. 31 Net sales $ 636,179 $ 660,816 $ 774,151 $ 804,739 Gross profit 61,060 67,919 74,419 85,641 Net earnings 2,205 2,933 3,022 10,744 Basic EPS 0.08 0.10 0.11 0.38 Diluted EPS 0.08 0.10 0.11 0.38
Three Months Ended 2002 Nov. 30 Feb. 28 May 31 Aug. 31 Net sales $ 572,168 $ 574,325 $ 651,604 $ 681,844 Gross profit 78,095 74,880 92,120 72,319 Net earnings 8,482 6,572 16,433 9,038 Basic EPS 0.32 0.24 0.59 0.32 Diluted EPS 0.32 0.24 0.56 0.31 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. Thefinal determination of inventory quantities and prices resulted in $25.3 million, $857 thousand and $1.1 million after-tax expense in the fourthquarter 2003. Fourth quarterquarters of 2004, 2003 and 2002,net earnings decreased $1.1 million after the final determination of quantities and prices was made. Fourth quarter 2001 net earnings were not significantly impacted. In recording accruals for workers' compensation expense, management relies on prior years' experience and information from third party administrators in making estimates. Results at the end of fiscal year 2002 and 2001 indicated a decline in the number of claims resulting in a $1.0 million and $2.1 million reduction, respectively, in the accrual during the fourth quarters. During the third quarter of fiscal 2003, a subsidiary of the Company was notified that a customer, now in bankruptcy proceedings, alleged the subsidiary received payments from the customer within 90 days of bankruptcy filing which are voidable and should be returned to the bankruptcy estate. The payments were for materials and services sold by the subsidiary to the customer. The company had accrued $1 million as of May 31, 2003 relating to this matter. During the three months ended August 31, 2003, this dispute was settled subject to Bankruptcy Court approval for $118 thousand. Following a revised Court ruling, the Company reduced its litigation accrual by $2.5 million during the fourth quarter 2001. 66NOTE 15. SUBSEQUENT EVENTS In November 2003, the Company repurchased $89 million of its 7.20% notes due in 2005. As a result of this debt repurchase, the Company will record a pre-tax charge of approximately $2.8 million. Also, in November 2003, the Company issued $200 million of fixed rate notes due in November 2013. The interest rate is 5.625%. Interest is payable semiannually. The Company had entered into an interest rate lock, resulting in an effective rate of 5.644%. 67respectively. 63
REPORT OF INDEPENDENT
AUDITORS' REPORTREGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders
Commercial Metals Company
Dallas, TexasWe have audited the accompanying consolidated balance sheets of Commercial Metals Company and subsidiaries (the Company) at August 31,
20032004 and2002,2003, and the related consolidated statements of earnings,stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended August 31,2003.2004. These financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with
auditingthe standardsgenerally accepted inof theUnited States of America.Public Company Accounting Oversight Board (United States). 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 Metalsthe Companyand subsidiariesat August 31,20032004 and2002,2003, and the results of their operations and their cash flows for each of the three years in the period ended August 31,20032004, in conformity with accounting principles generally accepted in the United States of America./s//s/ DELOITTE & TOUCHE LLP
Dallas, Texas
November5, 2003 (November 13, 2003, as to Note 15) 687, 2004 64
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The term
"disclosure“disclosure controls andprocedures"procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report, and they have concluded that as of that date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.No change to our internal control over financial reporting occurred during our last fiscal quarter of
20032004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATION
Not applicable.
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 our definitive proxy statement for the annual meeting of stockholders to be held January
22, 2004,27, 2005, which will be filed no later than 120 days after the close of our fiscal year. The following is a listing of employees we believe to be our"Executive Officers"“Executive Officers” as of November17, 2003,1, 2004, as defined under Rule 3b-7 of the Securities Exchange Act of 1934:
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE - -------------------- ------------------------------------------ --- -------------Louis A. Federle Treasurer 55 1979 Harry J. Heinkele Vice President and Secondary Metals 71 1981 Processing Division - President A. Leo Howell Vice President and 82 1977 Howell Metal Company - President, Director Binh K. Huynh Vice President and 52 2002 CMC Steel Group - Executive Vice President William B. Larson Vice President and 50 1995 Chief Financial Officer Murray R. McClean Vice President and Marketing and 55 1995 Distribution Segment - President69
Malinda G. Passmore Controller 44 1999 Stanley A. Rabin Chairman of the Board, 65 1974 President and Chief Executive Officer, Director Russell B. Rinn Vice President and 46 2002 CMC Steel Group - West President Clyde P. Selig Vice President and 71 1981 CMC Steel Group - President and Chief Executive Officer, Director Jeffrey H. Selig Vice President and 48 2002 CMC Steel Group - East President David M. Sudbury Vice President, Secretary and 58 1976 General Counsel65
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE Louis A. Federle Treasurer 56 1979 A. Leo Howell Vice President and Howell Metal Company — President, Director 83 1977 Binh K. Huynh Vice President and CMC Steel Group — Executive Vice President 53 2002 William B. Larson Vice President and Chief Financial Officer 51 1995 Murray R. McClean Executive Vice President and Chief Operating Officer 56 1995 Malinda G. Passmore Controller 45 1999 Allan R. Postel Vice President and Secondary Metals Processing Division — President 56 2004 Stanley A. Rabin Chairman of the Board, President and Chief Executive Officer, Director 66 1974 Russell B. Rinn Vice President and CMC Steel Group — Chief Operating Officer 46 2002 Clyde P. Selig Vice President and CMC Steel Group — President and Chief Executive Officer, Director 72 1981 Jeffrey H. Selig Vice President and CMC Steel Group — East President 49 2002 David M. Sudbury Vice President, Secretary and General Counsel 59 1976 Hanns Zoellner Vice President and Marketing and Distribution Segment — President 56 2004 Our board of directors, or a subsidiary, usually employs the executive officers at its first meeting after our annual stockholders meeting. Our executive officers continue to serve for terms set from time to time by the board of directors in its discretion.
We have employed all of our executive officers in the positions indicated above or in positions of similar responsibility for more than five
years, except for Ms. Passmore. We employed Ms. Passmore in April 1999 as Controller. From January 1998 until April 1999, she was President and CEO of System Health Providers, Inc., and its 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 toyears. On September1996.20, 2004, we appointed Mr.Federle became our Treasurer in April 1999. Mr. Federle has been employed with us since 1977 and our Assistant Treasurer since 1979. In June 1991, we employed Mr. LarsonMcClean as ourAssistant Controller. In March 1995, we named Mr. Larson as our Controller, and in April 1999, he was electedExecutive Vice President and ChiefFinancial Officer. As of September 1, 1999, we electedOperating Officer and named Mr. Zoellner to replace Mr. McCleanto the newly created positionas President of our Marketing and Distribution Segment. Mr. McClean had served as President of the Marketing and DistributionSegment.Segment from September 1, 1999 to September 20, 2004. Mr.McClean has been employed with us since 1985 andZoellner had previously served as President of the International Division — Europe, having been employed by the division initially in 1981 and continuously since 1991. Mr. Postel was named President of theMarketing and DistributionSecondary Metals Processing Segment in September, 2004 following the retirement of Harry J. Heinkele from that position. Mr. Postel had served as Chief Operating Officer of the segment since1993. InMarch,1999, Mr. Rabin was elected to2004 and has been employed in positions of increasing responsibility in theadditional position of Chairman of the Board.Secondary Metals Processing Division since 1974. In June 2002, Clyde P. Selig was named Chief Executive Officer of the CMC Steel Group in66
addition to his existing duties as CMC Steel Group President. Jeffrey H. Selig is Clyde P.
Selig'sSelig’s nephew. There are no other family relationships among our officers or among the executive officers and directors.We have adopted a Financial Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, Corporate Controller and any of our other officers that may function as a Chief Accounting Officer. We hereby undertake to provide to any person without charge, upon request, a copy of our Financial Code of Ethics. Requests may be directed to Commercial Metals Company, 6565 N. MacArthur Blvd., Suite 800, Irving, Texas 75039, Attention: Corporate Secretary, or by
calling(214)calling (214) 689-4300.ITEM 11. EXECUTIVE COMPENSATION
Information required in response to this Item 11 is incorporated by reference into this annual report from our definitive proxy statement for the annual meeting of stockholders to be held January
22, 2004.27, 2005. We will file our definitive proxy statement no later than 120 days after the close of our fiscal year.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
70The information required in response to this Item 12 is incorporated by reference into this annual report from our definitive proxy statement for the annual meeting of stockholders to be held January
22, 2004.27, 2005. We will file our definitive proxy statement no later than 120 days after the close of our fiscal year.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, information required in response to this Item 13 is incorporated by reference into this annual report from our definitive proxy statement for the annual meeting of stockholders to be held January
22, 2004.27, 2005. We will file our definitive proxy statement no later than 120 days after the close of our fiscal year.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in response to this Item 14 is incorporated by reference into this annual report from our definitive proxy statement for the annual meeting of stockholders to be held January
22, 2004.27, 2005. We will file our definitive proxy statement no later than 120 days after the close of our fiscal year.67
PART IV
ITEM 15. 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 required to be filed by Item 601 of Regulation S-K:
1. All financial statements are included at Item 8 above. 2. All financial statement 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 required to be filed by Item 601 of Regulation S-K:
EXHIBIT
NO.DESCRIPTION
2a Agreement and Plan of Merger among Commercial Metals Company, LAI Acquisition Company, Lofland Acquisition, Inc., The Lofland Company, E.F. Private Equity Partners (Americas) L.P. and the Texas Growth Fund-1995 Trust dated December 23, 2003 (filed as Exhibit 2(b) to Commercial Metals’ Form S-4 filed January 27, 2004 (File NO. DESCRIPTION - ----------- -----------3333-112243) and incorporated herein by reference). 2b Share Purchase Agreement dated July 22, 2003, between Impexmetal, S.A. and Commercial Metals (International) AG (filed as Exhibit 2.1 to Commercial Metals’ Form 10-Q for the quarter ending November 30, 2003). 3(i) Restated Certificate of Incorporation (Filed(filed as Exhibit 3(i) to CommercialMetals'Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).3(i)a Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (Filed(filed as Exhibit 3(i)a to CommercialMetals'Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).71
3(i)b Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (Filed(filed as Exhibit 3(i)b to CommercialMetals'Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).3(i)c Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Filed(filed as Exhibit 2 to CommercialMetals'Metals’ Form 8-A filed August 3, 1999 and incorporated herein by reference).3(ii) By-Laws (Filed as Exhibit 3(ii) to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002Amended and incorporated herein by reference)Restated Bylaws (filed herewith).4(i)a Indenture between Commercial Metals and Chase Manhattan Bank dated as of July 31, 1995 (Filed(filed as Exhibit 4.1 to CommercialMetals'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 Commercial Metals and ChaseMellon Shareholder Services, LLC, as Rights Agent (Filed(filed as Exhibit 1 to CommercialMetals'Metals’ Form68
8-A filed August 3, 1999 and incorporated herein by reference). 4(i)c Form of Note for Commercial Metals'Metals’ 7.20% Senior Notes due 2005(Filed(filed as Exhibit 4(i)c to CommercialMetals'Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).4(i)d Form of Note for Commercial Metals'Metals’ 6.80% Senior Notes due 2007(Filed(filed as Exhibit 4(i)d to CommercialMetals'Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).4(i)e Officers'Officers’ Certificate, dated August 4, 1997, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.80% Senior Notes due 2007 (Filed(filed as Exhibit 4(i)e to CommercialMetals'Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).4(i)f Form of Note for Commercial Metals'Metals’ 6.75% Senior Notes due 2009(Filed(filed as Exhibit 4(i)f to CommercialMetals'Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).72
4(i)g Officers'Officers’ Certificate, dated February 23, 1999, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.75% Senior Notes due 2009 (Filed(filed as Exhibit 4(i)g to CommercialMetals'Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).4(i)h** Exchange and Registration Rights Agreement, dated November 13, 2003, by and among Goldman, Sachs & Co., Banc of America Securities LLC, Tokyo-Mitsubishi International plc, ABN AMRO Incorporated and Commercial Metals (Filed herewith)(filed as Exhibit 4(i)h to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2003 and incorporated herein by reference).4(i)i** Supplemental Indenture, dated as of November 12, 2003, to Indenture dated as of July 31, 1995, by and between Commercial Metals and JPMorgan Chase Bank (Filed herewith)(filed as Exhibit 4(i)i to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2003, and incorporated herein by reference).10(i)a Purchase and Sale Agreement dated June 20, 2001, between various entities listed on Schedule 1 as Originators and CMC Receivables, Inc. (Filed(filed as Exhibit (10)(a) to CommercialMetals'Metals’ Form 10-Q for the period ended May 31, 2001 and incorporated herein by reference).10(i) b Receivables Purchase Agreement dated June 20, 2001, among CMC Receivables, Inc., as Seller, Three Rivers Funding Corporation, as Buyer, and Commercial Metals Company as Servicer (Filed as Exhibit (10)(b) to Commercial Metals' Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). 10(i)c*b**Purchase Agreement, dated November 7, 2003, by and among Goldman, Sachs & Co., Banc of America Securities LLC, Tokyo-Mitsubishi International plc, ABN AMRO Incorporated and Commercial Metals (Filed herewith)(filed as Exhibit 10(i)c to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2003, and incorporated herein by reference).10(i) d $129,500,000c$129,500,000 Amended and Restated 364-Day Revolving Credit Agreement dated as of August 8, 2002 which terminated August 8, 2003 (Filed(filed as Exhibit 10(i)d to CommercialMetals'Metals’ Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference).10(i)d** $275,000,000 3 Year Credit Agreement, dated August 8, 2003, by and among Commercial Metals, Bank of America, N.A., The Bank of Tokyo-Mitsubishi, Ltd., ABN AMRO Bank N.V., Mellon Bank, N.A., BNP Paribas, Banc of America Securities LLC and the other lending parties listed therein (filed as Exhibit 10(i)e to Commercial Metals’ Form 10-K for 7369
the fiscal year ended August 31, 2003, and incorporated herein by reference). 10(i) e**eFirst Amendment dated March 15, 2004, to the $275,000,000 3 Year Credit Agreement, dated August 8, 2003, by and among Commercial Metals, Bank of America, N.A., The Bank of Tokyo-Mitsubishi, Ltd., ABN AMRO Bank N.V., Mellon Bank, N.A., BNP Paribas, Banc of America Securities LLC and the other lending parties listed therein (Filed herewith). 10(iii)a* Employment Agreement of Murray R. McClean as amended through October 2, 2002 (Filed as Exhibit (10)(iii) to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2000, and incorporated herein by reference). 10(iii)b* Amendment to Employment Agreement of Murray R. McClean dated March 28, 2001, (Filed as Exhibit (10)(iii)b to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated herein by reference). 10(iii)c* Key Employee Long-Term Performance Plan description (Filed as Exhibit (10)(iii)c to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). 10(iii)d* Key Employee Annual Incentive Plan description (Filed as Exhibit (10)(iii)d to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). 10(iii)e* Employment and Consulting Agreement of Marvin Selig dated as of June 7, 2002 (Filed as Exhibit 10(iii)e to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference). 10(iii)f* 1999 Non-Employee Director Stock Option Plan (Filed as Exhibit 10(iii)f to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 12 Statement re computation of earnings to fixed charges (Filed herewith). 21 Subsidiaries of Registrant (Filed herewith). 23 Independent Auditors' consent to incorporation by reference of report dated November 24, 2003, accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 2003, into previously filed Registration Statements No. 033-61073, No. 033-61075, No. 333-27967 and No. 333-42648 on Form S-8 and Registration Statements No. 33-60809 and No. 333-61379 on Form S-3 (Filed herewith).74
31a Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed herewith).31b Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant10(i)f Second Amendment dated October 7, 2004, to Section 302 oftheSarbanes-Oxley Act of 2002 (filed herewith). 32a Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32b Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).- ------------ * Denotes management contract or compensatory plan. ** Does not contain Schedules or exhibits. A copy of any such Schedules or exhibits will be furnished to the Securities and Exchange Commission upon request. (b)We filed a Form 8-K on July 23, 2003, under Item 5, announcing our entry into a definitive agreement for the purchase of a controlling interest in Huta Zawiercie S.A., of Zawiercie, Poland. 75SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMERCIAL METALS COMPANY /s/ Stanley A. Rabin ---------------------------------------- By: Stanley A. Rabin Chairman of the Board, President and Chief Executive Officer Date: November 24, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ Stanley A. Rabin /s/ Moses Feldman - -------------------------------------------- ------------------------------------------- Stanley A. Rabin, November 24, 2003 Moses Feldman, November 24, 2003 Chairman of the Board, President Director and Chief Executive Officer /s/ A. Leo Howell /s/ Ralph E. Loewenberg - -------------------------------------------- ------------------------------------------- A. Leo Howell, November 24, 2003 Ralph E. Loewenberg, November 24, 2003 Director Director /s/ Anthony A. Massaro /s/ Robert D. Neary - -------------------------------------------- ------------------------------------------- Anthony A. Massaro, November 24, 2003 Robert D. Neary, November 24, 2003 Director Director /s/ Dorothy G. Owen /s/ Clyde P. Selig - -------------------------------------------- ------------------------------------------- Dorothy G. Owen, November 24, 2003 Clyde P. Selig, November 24, 2003 Director Director /s/ Robert R. Womack /s/ William B. Larson - -------------------------------------------- ------------------------------------------- Robert R. Womack, November 24, 2003 William B. Larson, November 24, 2003 Director Vice President and Chief Financial Officer /s/ Malinda G. Passmore - -------------------------------------------- Malinda G. Passmore, November 24, 2003 Controller76INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders of Commercial Metals Company Dallas, Texas We have audited the consolidated financial statements of Commercial Metals Company and subsidiaries as of August 31, 2003 and 2002, and for each of the three years in the period ended August 31, 2003, and have issued our report thereon dated November 5, 2003 (November 13, 2003 as to Note 15); 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 15. 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 November 5, 2003 (November 13, 2003 as to Note 15)SCHEDULE VIII COMMERCIAL METALS COMPANY AND SUBSIDIARIES --------------- VALUATION AND QUALIFYING ACCOUNTS --------------- YEARS ENDED AUGUST 31, 2003, 2002 AND 2001 --------------- (In thousands) Allowance for collection losses deducted from accounts receivable:
BALANCE, CHARGED TO CHARGED TO DEDUCTIONS BEGINNING PROFIT AND LOSS OTHER ACCOUNTS FROM RESERVES BALANCE END YEAR OF YEAR OR INCOME (A) (B) OF YEAR - ---- --------- --------------- -------------- --------------- -----------2001 7,868 4,371 264 4,545 7,958 2002 7,958 3,985 591 3,657 8,877 2003 8,877 5,162 578 5,342 9,275(A) Recoveries of accounts written off and acquired allowance. (B) Write-off of uncollectible accounts. 78INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- -----------3(i) Restated Certificate of Incorporation (Filed as Exhibit 3(i) to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 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 Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 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 Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 3(i)c Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Filed as Exhibit 2 to Commercial Metals' Form 8-A filed August 3, 1999 and incorporated herein by reference). 3(ii) By-Laws (Filed as Exhibit 3(ii) to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein 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 Commercial Metals and ChaseMellon Shareholder Services, LLC, as Rights Agent (Filed as Exhibit 1 to Commercial Metals' Form 8-A filed August 3, 1999 and incorporated herein by reference). 4(i)c Form of Note for Commercial Metals' 7.20% Senior Notes due 2005 (Filed as Exhibit 4(i)c to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference).79
4(i)d Form of Note for Commercial Metals' 6.80% Senior Notes due 2007 (Filed as Exhibit 4(i)d to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)e Officers' Certificate, dated August 4, 1997, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.80% Senior Notes due 2007 (Filed as Exhibit 4(i)e to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)f Form of Note for Commercial Metals' 6.75% Senior Notes due 2009 (Filed as Exhibit 4(i)f to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)g Officers' Certificate, dated February 23, 1999, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.75% Senior Notes due 2009 (Filed as Exhibit 4(i)g to Commercial Metals' Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)h** Exchange and Registration Rights Agreement, dated November 13, 2003, by and among Goldman, Sachs & Co., Banc of America Securities LLC, Tokyo-Mitsubishi International plc, ABN AMRO Incorporated and Commercial Metals (Filed herewith). 4(i)i** Supplemental Indenture, dated as of November 12, 2003, to Indenture dated as of July 31, 1995, by and between Commercial Metals and JPMorgan Chase Bank (Filed herewith). 10(i)a Purchase and Sale Agreement dated June 20, 2001, between various entities listed on Schedule 1 as Originators and CMC Receivables, Inc. (Filed as Exhibit (10)(a) to Commercial Metals' Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference). 10(i)b Receivables Purchase Agreement dated June 20, 2001, among CMC Receivables, Inc., as Seller, Three Rivers Funding Corporation, as Buyer, and Commercial Metals Company as Servicer (Filed as Exhibit (10)(b) to Commercial Metals' Form 10-Q for the period ended May 31, 2001, and incorporated herein by reference).80
10(i)c** Purchase Agreement, dated November 7, 2003, by and among Goldman, Sachs & Co., Banc of America Securities LLC, Tokyo-Mitsubishi International plc, ABN AMRO Incorporated and Commercial Metals (Filed herewith). 10(i)d $129,500,000 Amended and Restated 364-Day Revolving Credit Agreement dated as of August 8, 2002 (Filed as Exhibit 10(i)d to Commercial Metals' Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference). 10(i)e**$275,000,000 3 Year Credit Agreement, dated August 8, 2003, by and among Commercial Metals, Bank of America, N.A., The Bank of Tokyo-Mitsubishi, Ltd., ABN AMRO Bank N.V., Mellon Bank, N.A., BNP Paribas, Banc of America Securities LLC and the other lending parties listed therein(Filed(filed herewith).10(i)g Amended and Restated Receivables Purchase Agreement dated as of April 22, 2004, among CMC Receivables, Inc., as Sellers, Liberty Street Funding Corp. and Three Rivers Funding Corporation, as Buyers, The Bank of Nova Scotia and Mellon Bank, N.A., as Managing Agents, Mellon Bank, N.A., as Administrative Agent and Commercial Metals Company as Servicer (filed as Exhibit 10(i)f to Commercial Metals’ Form 10-Q for the quarter ending May 31, 2004, and incorporated herein by reference). 10(i)h Amendment to Purchase and Sale Agreement dated April 22, 2004, among CMC Receivables, Inc., CMC Steel Fabricators, Inc., Commercial Metals Company, Howell Metal Company, Owen Electric Steel Company of South Carolina, SMI Steel Inc. and Structural Metals, Inc. (filed as Exhibit 10(i)g to Commercial Metals’ Form 10-Q for the quarter ending May 31, 2004, and incorporated herein by reference). 10(iii)a* Employment Agreement of Murray R. McClean as amended through October 2, 2002 (Filed(filed as Exhibit (10)(iii) to CommercialMetals'Metals’ Form 10-K for the fiscal year ended August 31, 2000, and incorporated herein by reference).10(iii)b* Amendment to Employment Agreement of Murray R. McClean dated March 28, 2001 (Filed(filed as Exhibit (10)(iii)b to CommercialMetals'Metals’ Form 10-K for the fiscal year ended August 31, 2001, and incorporated herein by reference).10(iii)c* Key Employee Long-Term Performance Plan description (Filed(filed as Exhibit (10)(iii)c to CommercialMetals'Metals’ Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference).10(iii)d* Key Employee Annual Incentive Plan description (Filed(filed as Exhibit (10)(iii)d to CommercialMetals'Metals’ Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference).81
10(iii)e* Employment and Consulting Agreement of Marvin Selig dated as of June 7, 2002 (Filed(filed as Exhibit 10(iii)e to CommercialMetals'Metals’ Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference).10(iii)f* Amended and Restated 1999 Non-Employee Director Stock Option Plan (Filed(filed herewith).10(iii)g* Consulting and Non-Competition Agreement, between Commercial Metals Company and Harry J. Heinkele dated as of September 24, 2004 (filed as Exhibit 10(iii)f10.1 to CommercialMetals'Metals’ Form10-K/A for the fiscal year ended August 31, 20028-K filed September 29, 2004, and incorporated herein by reference).10(iii)h* Employment Agreement between Commercial Metals (International) AG and Hanns Zoellner dated January 2, 1998 (filed herewith). 70
12 Statement re computation of earnings to fixed charges (Filed(filed herewith).21 Subsidiaries of Registrant (Filed(filed herewith).23 Consent of Independent Auditors' consentRegistered Public Accounting Firm to incorporation by reference of report dated November24, 2003,7, 2004, accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31,2003,2004, into previously filed Registration Statements No. 033-61073, No. 033-61075, No. 333-27967 and No. 333-42648 on Form S-8 and Registration Statements No. 33-60809 and No. 333-61379 on Form S-3(Filed(filed herewith).31a Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31b Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32a Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32b Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). - ------------* Denotes management contract or compensatory plan.
**** Does not contain Schedules or exhibits. A copy of any such Schedules or exhibits will be furnished to the Securities and Exchange Commission upon request.
8271
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMERCIAL METALS COMPANY /s/ Stanley A. Rabin By: Stanley A. Rabin
Chairman of the Board,President and Chief Executive Officer Date: November 8, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ Stanley A. Rabin /s/ Moses Feldman Stanley A. Rabin, November 8, 2004
Chairman of the Board, President and Chief Executive OfficerMoses Feldman, November 8, 2004
Director/s/ A. Leo Howell /s/ Ralph E. Loewenberg A. Leo Howell, November 8, 2004
DirectorRalph E. Loewenberg, November 8, 2004
Director/s/ Anthony A. Massaro /s/ Robert D. Neary Anthony A. Massaro, November 8, 2004
DirectorRobert D. Neary, November 8, 2004
Director/s/ Dorothy G. Owen /s/ Clyde P. Selig Dorothy G. Owen, November 8, 2004
DirectorClyde P. Selig, November 8, 2004
Director/s/ Robert R. Womack /s/ J. David Smith Robert R. Womack, November 8, 2004
DirectorJ. David Smith, November 8, 2004
Director/s/ Harold L. Adams /s/ William B. Larson Harold L. Adams, November 8, 2004
DirectorWilliam B. Larson, November 8, 2004
Vice President and Chief Financial Officer/s/ Malinda G. Passmore
Controller72
Index to Exhibits
EXHIBIT
NO.DESCRIPTION
2a Agreement and Plan of Merger among Commercial Metals Company, LAI Acquisition Company, Lofland Acquisition, Inc., The Lofland Company, E.F. Private Equity Partners (Americas) L.P. and the Texas Growth Fund-1995 Trust dated December 23, 2003 (filed as Exhibit 2(b) to Commercial Metals’ Form S-4 filed January 27, 2004 (File NO. 3333-112243) and incorporated herein by reference). 2b Share Purchase Agreement dated July 22, 2003, between Impexmetal, S.A. and Commercial Metals (International) AG (filed as Exhibit 2.1 to Commercial Metals’ Form 10-Q for the quarter ending November 30, 2003). 3(i) Restated Certificate of Incorporation (filed as Exhibit 3(i) to Commercial Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 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 Commercial Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 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 Commercial Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 3(i)c Certificate of Designation, Preferences and Rights of Series A Preferred Stock (filed as Exhibit 2 to Commercial Metals’ Form 8-A filed August 3, 1999 and incorporated herein by reference). 3(ii) Amended and Restated Bylaws (filed herewith). 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 Commercial Metals and ChaseMellon Shareholder Services, LLC, as Rights Agent (filed as Exhibit 1 to Commercial Metals’ Form 8-A filed August 3, 1999 and incorporated herein by reference). 4(i)c Form of Note for Commercial Metals’ 7.20% Senior Notes due 2005 (filed as Exhibit 4(i)c to Commercial Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)d Form of Note for Commercial Metals’ 6.80% Senior Notes due 2007 (filed as Exhibit 4(i)d to Commercial Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)e Officers’ Certificate, dated August 4, 1997, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.80% Senior Notes due 2007 (filed as Exhibit 4(i)e to Commercial Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)f Form of Note for Commercial Metals’ 6.75% Senior Notes due 2009 (filed as Exhibit 4(i)f to Commercial Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)g Officers’ Certificate, dated February 23, 1999, pursuant to the Indenture dated as of July 31, 1995, relating to the 6.75% Senior Notes due 2009 (filed as Exhibit 4(i)g to Commercial Metals’ Form 10-K/A for the fiscal year ended August 31, 2002 and incorporated herein by reference). 4(i)h** Exchange and Registration Rights Agreement, dated November 13, 2003, by and among Goldman, Sachs & Co., Banc of America Securities LLC, Tokyo-Mitsubishi International plc, ABN AMRO Incorporated and Commercial Metals (filed as Exhibit 4(i)h to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2003 and incorporated herein by reference). 4(i)i** Supplemental Indenture, dated as of November 12, 2003, to Indenture dated as of July 31, 1995, by and between Commercial Metals and JPMorgan Chase Bank (filed as Exhibit 4(i)i to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2003, and incorporated herein by reference). 10(i)a Purchase and Sale Agreement dated June 20, 2001, between various entities listed on Schedule 1 as Originators and CMC Receivables, Inc. (filed as Exhibit (10)(a) to Commercial Metals’ Form 10-Q for the period ended May 31, 2001 and incorporated herein by reference). 10(i)b** Purchase Agreement, dated November 7, 2003, by and among Goldman, Sachs & Co., Banc of America Securities LLC, Tokyo-Mitsubishi International plc, ABN AMRO Incorporated and Commercial Metals (filed as Exhibit 10(i)c to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2003, and incorporated herein by reference). 10(i)c $129,500,000 Amended and Restated 364-Day Revolving Credit Agreement dated as of August 8, 2002 which terminated August 8, 2003 (filed as Exhibit 10(i)d to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference). 10(i)d** $275,000,000 3 Year Credit Agreement, dated August 8, 2003, by and among Commercial Metals, Bank of America, N.A., The Bank of Tokyo-Mitsubishi, Ltd., ABN AMRO Bank N.V., Mellon Bank, N.A., BNP Paribas, Banc of America Securities LLC and the other lending parties listed therein (filed as Exhibit 10(i)e to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2003, and incorporated herein by reference). 10(i)e First Amendment dated March 15, 2004, to the $275,000,000 3 Year Credit Agreement, dated August 8, 2003, by and among Commercial Metals, Bank of America, N.A., The Bank of Tokyo-Mitsubishi, Ltd., ABN AMRO Bank N.V., Mellon Bank, N.A., BNP Paribas, Banc of America Securities LLC and the other lending parties listed therein (filed herewith). 10(i)f Second Amendment dated October 7, 2004, to the $275,000,000 3 Year Credit Agreement, dated August 8, 2003, by and among Commercial Metals, Bank of America, N.A., The Bank of Tokyo-Mitsubishi, Ltd., ABN AMRO Bank N.V., Mellon Bank, N.A., BNP Paribas, Banc of America Securities LLC and the other lending parties listed therein (filed herewith). 10(i)g Amended and Restated Receivables Purchase Agreement dated as of April 22, 2004, among CMC Receivables, Inc., as Sellers, Liberty Street Funding Corp. and Three Rivers Funding Corporation, as Buyers, The Bank of Nova Scotia and Mellon Bank, N.A., as Managing Agents, Mellon Bank, N.A., as Administrative Agent and Commercial Metals Company as Servicer (filed as Exhibit 10(i)f to Commercial Metals’ Form 10-Q for the quarter ending May 31, 2004, and incorporated herein by reference). 10(i)h Amendment to Purchase and Sale Agreement dated April 22, 2004, among CMC Receivables, Inc., CMC Steel Fabricators, Inc., Commercial Metals Company, Howell Metal Company, Owen Electric Steel Company of South Carolina, SMI Steel Inc. and Structural Metals, Inc. (filed as Exhibit 10(i)g to Commercial Metals’ Form 10-Q for the quarter ending May 31, 2004, and incorporated herein by reference). 10(iii)a* Employment Agreement of Murray R. McClean as amended through October 2, 2002 (filed as Exhibit (10)(iii) to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2000, and incorporated herein by reference). 10(iii)b* Amendment to Employment Agreement of Murray R. McClean dated March 28, 2001 (filed as Exhibit (10)(iii)b to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2001, and incorporated herein by reference). 10(iii)c* Key Employee Long-Term Performance Plan description (filed as Exhibit (10)(iii)c to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). 10(iii)d* Key Employee Annual Incentive Plan description (filed as Exhibit (10)(iii)d to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2001, and incorporated hereby by reference). 10(iii)e* Employment and Consulting Agreement of Marvin Selig dated as of June 7, 2002 (filed as Exhibit 10(iii)e to Commercial Metals’ Form 10-K for the fiscal year ended August 31, 2002, and incorporated herein by reference). 10(iii)f* Amended and Restated 1999 Non-Employee Director Stock Option Plan (filed herewith). 10(iii)g* Consulting and Non-Competition Agreement, between Commercial Metals Company and Harry J. Heinkele dated as of September 24, 2004 (filed as Exhibit 10.1 to Commercial Metals’ Form 8-K filed September 29, 2004, and incorporated herein by reference). 10(iii)h* Employment Agreement between Commercial Metals (International) AG and Hanns Zoellner dated January 2, 1998 (filed herewith).
12 Statement re computation of earnings to fixed charges (filed herewith). 21 Subsidiaries of Registrant (filed herewith). 23 Consent of Independent Registered Public Accounting Firm to incorporation by reference of report dated November 7, 2004, accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 2004, into previously filed Registration Statements No. 033-61073, No. 033-61075, No. 333-27967 and No. 333-42648 on Form S-8 and Registration Statements No. 33-60809 and No. 333-61379 on Form S-3 (filed herewith). 31a Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31b Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32a Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32b Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). * Denotes management contract or compensatory plan.
** Does not contain Schedules or exhibits. A copy of any such Schedules or exhibits will be furnished to the Securities and Exchange Commission upon request.