FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterthe quarterly period ended November 30, 2003February 29, 2004
Commission File Number 1-4304
COMMERCIAL METALS COMPANY
Delaware | 75-0725338 | |
(State or other Jurisdiction of | (I.R.S. Employer | |
incorporation of organization) | Identification Number) |
6565 N. MacArthur Blvd.
Irving, Texas 75039
(Address of principal executive offices)
(Zip Code)
(214) 689-4300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | No | |
[X] | [ ] |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes | No | |
[X] | [ ] |
As of January 9,April 6, 2004 there were 28,495,88829,030,030 shares of the Company’s common stock issued and outstanding excluding 3,769,2783,235,136 shares held in the Company’s treasury.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS PAGE NO. November 30, 2003February 29, 2004 and August 31, 2003 2-3 November 30,February 29, 2004 and February 28, 2003 and 2002 4 ThreeSix months ended November 30,February 29, 2004 and February 28, 2003 and 2002 5 ThreeSix months ended November 30, 2003February 29, 2004 6 7-137-15 14-2216-25 2226 2226 23-2427-29 2530 31-37 26Amendment to Restated Certificate of IncorporationCertification Pursuant to Section 302 Certification Pursuant to Section 302 Certification Pursuant to Section 906 Certification Pursuant to Section 906
1
PART I — FINANCIAL INFORMATION
ITEM 1 –— FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
February 29, | August 31, | |||||||
2004 | 2003 | |||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 59,128 | $ | 75,058 | ||||
Accounts receivable (less allowance for collection losses of $16,662 and $9,275) | 528,266 | 397,490 | ||||||
Inventories | 475,529 | 310,816 | ||||||
Other | 58,927 | 61,053 | ||||||
TOTAL CURRENT ASSETS | 1,121,850 | 844,417 | ||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
Land | 36,588 | 34,617 | ||||||
Buildings | 164,969 | 127,780 | ||||||
Equipment | 812,931 | 747,207 | ||||||
Leasehold improvements | 39,745 | 38,117 | ||||||
Construction in process | 21,858 | 15,503 | ||||||
1,076,091 | 963,224 | |||||||
Less accumulated depreciation and amortization | (618,617 | ) | (588,842 | ) | ||||
457,474 | 374,382 | |||||||
GOODWILL | 31,681 | 6,837 | ||||||
OTHER ASSETS | 62,230 | 49,770 | ||||||
$ | 1,673,235 | $ | 1,275,406 | |||||
November 30, | August 31, | ||||||||||
2003 | 2003 | ||||||||||
CURRENT ASSETS: | |||||||||||
Cash and cash equivalents | $ | 133,544 | $ | 75,058 | |||||||
Accounts receivable (less allowance for collection losses of $10,036 and $9,275) | 445,808 | 397,490 | |||||||||
Inventories | 362,192 | 310,816 | |||||||||
Other | 55,927 | 61,053 | |||||||||
TOTAL CURRENT ASSETS | 997,471 | 844,417 | |||||||||
PROPERTY, PLANT AND EQUIPMENT: | |||||||||||
Land | 34,592 | 34,617 | |||||||||
Buildings | 128,851 | 127,780 | |||||||||
Equipment | 749,391 | 747,207 | |||||||||
Leasehold improvements | 38,266 | 38,117 | |||||||||
Construction in process | 20,015 | 15,503 | |||||||||
971,115 | 963,224 | ||||||||||
Less accumulated depreciation and amortization | (602,693 | ) | (588,842 | ) | |||||||
368,422 | 374,382 | ||||||||||
OTHER ASSETS | 53,446 | 56,607 | |||||||||
$ | 1,419,339 | $ | 1,275,406 | ||||||||
See notes to unaudited condensed consolidated financial statements.
2
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
February 29, | August 31, | |||||||
2004 | 2003 | |||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable — trade | $ | 280,401 | $ | 225,880 | ||||
Accounts payable — documentary letters of credit | 143,895 | 74,782 | ||||||
Accrued expenses and other payables | 156,534 | 126,971 | ||||||
Income taxes payable | 1,179 | 1,718 | ||||||
Notes payable — CMCZ | 46,715 | — | ||||||
Short-term trade financing arrangement | 9,000 | 15,000 | ||||||
Current maturities of long-term debt | 804 | 640 | ||||||
TOTAL CURRENT LIABILITIES | 638,528 | 444,991 | ||||||
DEFERRED INCOME TAXES | 50,045 | 44,419 | ||||||
OTHER LONG-TERM LIABILITIES | 32,811 | 24,066 | ||||||
LONG-TERM DEBT | 362,902 | 254,997 | ||||||
MINORITY INTEREST | 30,651 | — | ||||||
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 28,825,642 and 27,994,690 shares | 161,326 | 161,326 | ||||||
Additional paid-in capital | 4,083 | 863 | ||||||
Accumulated other comprehensive income | 10,089 | 2,368 | ||||||
Retained earnings | 431,132 | 401,869 | ||||||
606,630 | 566,426 | |||||||
Less treasury stock, 3,439,524 and 4,270,476 shares at cost | (48,332 | ) | (59,493 | ) | ||||
558,298 | 506,933 | |||||||
$ | 1,673,235 | $ | 1,275,406 | |||||
November 30, | August 31, | |||||||||||
2003 | 2003 | |||||||||||
CURRENT LIABILITIES: | ||||||||||||
Accounts payable - trade | $ | 230,293 | $ | 225,880 | ||||||||
Accounts payable–documentary letters of credit | 93,963 | 74,782 | ||||||||||
Accrued expenses and other payables | 118,673 | 126,971 | ||||||||||
Income taxes payable | 2,208 | 1,718 | ||||||||||
Short-term trade financing arrangement | 12,000 | 15,000 | ||||||||||
Current maturities of long-term debt | 618 | 640 | ||||||||||
TOTAL CURRENT LIABILITIES | 457,755 | 444,991 | ||||||||||
DEFERRED INCOME TAXES | 43,669 | 44,419 | ||||||||||
OTHER LONG-TERM LIABILITIES | 27,069 | 24,066 | ||||||||||
LONG-TERM DEBT | 362,365 | 254,997 | ||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||
Capital stock: | ||||||||||||
Preferred stock | — | — | ||||||||||
Common stock, par value $5.00 per share: | ||||||||||||
Authorized 40,000,000 shares; issued 32,265,166 shares; outstanding 28,325,301 and 27,994,690 shares | 161,326 | 161,326 | ||||||||||
Additional paid-in capital | 1,966 | 863 | ||||||||||
Accumulated other comprehensive income | 7,841 | 2,368 | ||||||||||
Retained earnings | 412,254 | 401,869 | ||||||||||
583,387 | 566,426 | |||||||||||
Less treasury stock, 3,939,865 and 4,270,476 shares at cost | (54,906 | ) | (59,493 | ) | ||||||||
528,481 | 506,933 | |||||||||||
$ | 1,419,339 | $ | 1,275,406 | |||||||||
See notes to unaudited condensed consolidated financial statements.
3
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands except share data)
Three months ended | |||||||||
November 30, | |||||||||
2003 | 2002 | ||||||||
NET SALES | $ | 830,007 | $ | 636,179 | |||||
COSTS AND EXPENSES: | |||||||||
Cost of goods sold | 737,488 | 575,119 | |||||||
Selling, general and administrative expenses | 64,620 | 53,567 | |||||||
Interest expense | 5,094 | 3,994 | |||||||
Loss on reacquisition of debt | 2,792 | — | |||||||
809,994 | 632,680 | ||||||||
EARNINGS BEFORE INCOME TAXES | 20,013 | 3,499 | |||||||
INCOME TAXES | 7,385 | 1,294 | |||||||
NET EARNINGS | $ | 12,628 | $ | 2,205 | |||||
Basic earnings per share | $ | 0.45 | $ | 0.08 | |||||
Diluted earnings per share | $ | 0.44 | $ | 0.08 | |||||
Cash dividends per share | $ | 0.08 | $ | 0.08 | |||||
Average basic shares outstanding | 28,145,679 | 28,486,578 | |||||||
Average diluted shares outstanding | 28,999,960 | 28,963,733 |
Three Months Ended | Six Months Ended | |||||||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
NET SALES | $ | 1,068,060 | $ | 660,816 | $ | 1,898,067 | $ | 1,296,995 | ||||||||
COSTS AND EXPENSES: | ||||||||||||||||
Cost of goods sold | 939,445 | 592,896 | 1,676,933 | 1,168,015 | ||||||||||||
Selling, general and administrative expenses | 87,195 | 60,132 | 151,815 | 113,699 | ||||||||||||
Interest expense | 6,895 | 3,131 | 11,989 | 7,125 | ||||||||||||
Loss on reacquisition of debt | 280 | — | 3,072 | — | ||||||||||||
1,033,815 | 656,159 | 1,843,809 | 1,288,839 | |||||||||||||
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST | 34,245 | 4,657 | 54,258 | 8,156 | ||||||||||||
INCOME TAXES | 11,876 | 1,724 | 19,261 | 3,018 | ||||||||||||
EARNINGS BEFORE MINORITY INTEREST | 22,369 | 2,933 | 34,997 | 5,138 | ||||||||||||
MINORITY INTEREST | 1,214 | — | 1,214 | — | ||||||||||||
NET EARNINGS | $ | 21,155 | $ | 2,933 | $ | 33,783 | $ | 5,138 | ||||||||
Basic earnings per share | $ | 0.74 | $ | 0.10 | $ | 1.19 | $ | 0.18 | ||||||||
Diluted earnings per share | $ | 0.71 | $ | 0.10 | $ | 1.15 | $ | 0.18 | ||||||||
Cash dividends per share | $ | 0.08 | $ | 0.08 | $ | 0.16 | $ | 0.16 | ||||||||
Average basic shares outstanding | 28,639,349 | 28,320,223 | 28,392,516 | 28,403,401 | ||||||||||||
Average diluted shares outstanding | 29,878,156 | 28,825,167 | 29,439,058 | 28,894,450 |
See notes to unaudited condensed consolidated financial statements.
4
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended | ||||||||
February 29, | February 28, | |||||||
2004 | 2003 | |||||||
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES: | ||||||||
Net earnings | $ | 33,783 | $ | 5,138 | ||||
Adjustments to reconcile net earnings to cash used by operating activities: | ||||||||
Depreciation and amortization | 33,993 | 30,271 | ||||||
Loss on reacquisition of debt | 3,072 | — | ||||||
Provision for losses on receivables | 3,790 | 1,257 | ||||||
Tax benefits from stock plans | 1,472 | 101 | ||||||
Minority interest | 1,214 | — | ||||||
Deferred income taxes | 974 | 998 | ||||||
Net loss (gain) on sale of property and other | (116 | ) | 763 | |||||
Changes in operating assets and liabilities, net of effect of acquisitions: | ||||||||
Accounts receivable | (142,728 | ) | (9,587 | ) | ||||
Accounts receivable sold | 55,671 | 30,550 | ||||||
Inventories | (141,517 | ) | (56,879 | ) | ||||
Other assets | 23,645 | (14,012 | ) | |||||
Accounts payable, accrued expenses, other payables and income taxes | 42,188 | (44,071 | ) | |||||
Other long-term liabilities | 3,820 | 3,394 | ||||||
Net Cash Used By Operating Activities | (80,739 | ) | (52,077 | ) | ||||
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (14,572 | ) | (22,564 | ) | ||||
Sale of property, plant and equipment | 420 | 162 | ||||||
Acquisitions of CMCZ and Lofland, net of cash acquired | (99,793 | ) | — | |||||
Net Cash Used By Investing Activities | (113,945 | ) | (22,402 | ) | ||||
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES: | ||||||||
Increase in documentary letters of credit | 69,113 | 9,395 | ||||||
Payments on short-term trade financing arrangement | (6,000 | ) | — | |||||
Proceeds from issuance of long-term debt | 200,000 | — | ||||||
Payments on long-term debt | (91,516 | ) | (33 | ) | ||||
Proceeds from notes payable — CMCZ | 4,966 | — | ||||||
Stock issued under incentive and purchase plans | 12,909 | 4,533 | ||||||
Treasury stock acquired | — | (9,191 | ) | |||||
Dividends paid | (4,520 | ) | (4,550 | ) | ||||
Debt reacquisition and issuance costs | (4,989 | ) | — | |||||
Net Cash From Financing Activities | 179,963 | 154 | ||||||
Effect of exchange rate changes on cash | (1,209 | ) | (326 | ) | ||||
Decrease in Cash and Cash Equivalents | (15,930 | ) | (74,651 | ) | ||||
Cash and Cash Equivalents at Beginning of Year | 75,058 | 124,397 | ||||||
Cash and Cash Equivalents at End of Period | $ | 59,128 | $ | 49,746 | ||||
Three months ended | ||||||||||
November 30, | ||||||||||
2003 | 2002 | |||||||||
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES: | ||||||||||
Net earnings | $ | 12,628 | $ | 2,205 | ||||||
Adjustments to reconcile net earnings to cash used by operating activities: | ||||||||||
Depreciation and amortization | 15,123 | 15,226 | ||||||||
Loss on reacquisition of debt | 2,792 | — | ||||||||
Provision for losses on receivables | 941 | 369 | ||||||||
Net loss (gain) on sale of property | (101 | ) | 211 | |||||||
Deferred income taxes | (750 | ) | 101 | |||||||
Tax benefits from stock plans | 1,042 | 5 | ||||||||
Changes in operating assets and liabilities: | ||||||||||
Decrease (increase) in accounts receivable | (51,916 | ) | (12,291 | ) | ||||||
Funding from accounts receivable sold | 2,657 | 12,961 | ||||||||
Decrease (increase) in inventories | (51,376 | ) | (25,537 | ) | ||||||
Decrease (increase) in other assets | 10,038 | (1,905 | ) | |||||||
Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes | (3,395 | ) | (46,624 | ) | ||||||
Increase (decrease) in other long-term liabilities | 3,003 | 2,228 | ||||||||
Net Cash Flows Used By Operating Activities | (59,314 | ) | (53,051 | ) | ||||||
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES: | ||||||||||
Purchases of property, plant and equipment | (7,143 | ) | (9,658 | ) | ||||||
Sale of property, plant and equipment | 101 | — | ||||||||
Net Cash Used By Investing Activities | (7,042 | ) | (9,658 | ) | ||||||
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES: | ||||||||||
Additional (payments on) documentary letters of credit | 19,181 | 1,976 | ||||||||
Payments on short-term trade financing arrangement | (3,000 | ) | — | |||||||
Proceeds from issuance of long-term debt | 200,000 | — | ||||||||
Payments on long-term debt | (89,035 | ) | (16 | ) | ||||||
Stock issued under incentive and purchase plans | 4,648 | 26 | ||||||||
Treasury stock acquired | — | (1,613 | ) | |||||||
Dividends paid | (2,243 | ) | (2,281 | ) | ||||||
Debt reacquisition and issuance costs | (4,709 | ) | — | |||||||
Net Cash From (used by) Financing Activities | 124,842 | (1,908 | ) | |||||||
Increase (Decrease) in Cash and Cash Equivalents | 58,486 | (64,617 | ) | |||||||
Cash and Cash Equivalents at Beginning of Year | 75,058 | 124,397 | ||||||||
Cash and Cash Equivalents at End of Period | $ | 133,544 | $ | 59,780 | ||||||
See notes to unaudited condensed consolidated financial statements.
5
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands except share data)
Common Stock | Accumulated | Treasury Stock | ||||||||||||||||||||||||||||||||
Add’l | Other | |||||||||||||||||||||||||||||||||
Number of | Paid-in | Comprehensive | Retained | Number of | ||||||||||||||||||||||||||||||
Shares | Amount | Capital | Income | Earnings | Shares | Amount | Total | |||||||||||||||||||||||||||
Balance September 1, 2003: | 32,265,166 | $ | 161,326 | $ | 863 | $ | 2,368 | $ | 401,869 | (4,270,476 | ) | $ | (59,493 | ) | $ | 506,933 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net earnings for three months ended November 30, 2003 | 12,628 | 12,628 | ||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | 5,434 | 5,434 | ||||||||||||||||||||||||||||||||
Unrealized loss on derivatives, net of taxes of $21 | 39 | 39 | ||||||||||||||||||||||||||||||||
Comprehensive income | 18,101 | |||||||||||||||||||||||||||||||||
Cash dividends | (2,243 | ) | (2,243 | ) | ||||||||||||||||||||||||||||||
Stock issued under incentive and purchase plans | 61 | 330,611 | 4,587 | 4,648 | ||||||||||||||||||||||||||||||
Tax benefits from stock plans | 1,042 | 1,042 | ||||||||||||||||||||||||||||||||
Balance November 30, 2003 | 32,265,166 | $ | 161,326 | $ | 1,966 | $ | 7,841 | $ | 412,254 | (3,939,865 | ) | $ | (54,906 | ) | $ | 528,481 | ||||||||||||||||||
Common Stock | Accumulated | Treasury Stock | ||||||||||||||||||||||||||||||
Add'l | Other | |||||||||||||||||||||||||||||||
Number of | Paid-in | Comprehensive | Retained | Number of | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Income | Earnings | Shares | Amount | Total | |||||||||||||||||||||||||
Balance September 1, 2003: | 32,265,166 | $ | 161,326 | $ | 863 | $ | 2,368 | $ | 401,869 | (4,270,476 | ) | $ | (59,493 | ) | $ | 506,933 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net earnings for six months ended February 29, 2004 | 33,783 | 33,783 | ||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | 6,647 | 6,647 | ||||||||||||||||||||||||||||||
Unrealized gain on derivative, net of taxes of $592 | 1,074 | 1,074 | ||||||||||||||||||||||||||||||
Comprehensive income | 41,504 | |||||||||||||||||||||||||||||||
Cash dividends | (4,520 | ) | (4,520 | ) | ||||||||||||||||||||||||||||
Stock issued under incentive and purchase plans | 1,748 | 830,952 | 11,161 | 12,909 | ||||||||||||||||||||||||||||
Tax benefits from stock plans | 1,472 | 1,472 | ||||||||||||||||||||||||||||||
Balance February 29, 2004 | 32,265,166 | $ | 161,326 | $ | 4,083 | $ | 10,089 | $ | 431,132 | (3,439,524 | ) | $ | (48,332 | ) | $ | 558,298 | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
6
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A –— QUARTERLY FINANCIAL DATA
In the opinion of management, theThe accompanying unaudited condensed consolidated financial statements containhave been prepared on a basis consistent with that used in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended August 31, 2003, and include all adjustments (consisting of only normal recurring accruals)adjustments necessary to present fairly the financial position ascondensed consolidated balance sheet and statements of November 30 and August 31, 2003 and the results of operations andearnings, cash flows and stockholders’ equity for the three months ended November 30, 2003 and 2002.periods indicated. The results of operations for the three and six month periods are not necessarily indicative of the results to be expected for a full year. These interim financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended August 31, 2003 included in its Form 10-K filed with the Securities and Exchange Commission (SEC).
NOTE B –— ACCOUNTING POLICIES
Stock-Based Compensation
The 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. If the Company had used the fair value based method of accounting, net earnings and earnings per share would have been reducedadjusted to the pro-forma amounts listed in the table below. The Black-Scholes option pricing model was used to calculate the pro forma stock-based compensation costs. For purposes of the pro forma disclosures, the assumed compensation expense is amortized over the options’ vesting periods. The pro forma information is consistent with assumptions used in the year end information.
Three months ended | Six months ended | |||||||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||||||
(in thousands, except per share amounts) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Net earnings-as reported | $ | 21,155 | $ | 2,933 | $ | 33,783 | $ | 5,138 | ||||||||
Pro forma stock-based compensation cost | 316 | 406 | 657 | 739 | ||||||||||||
Net earnings-pro forma | $ | 20,839 | $ | 2,527 | $ | 33,126 | $ | 4,399 | ||||||||
Net earnings per share-as reported: | ||||||||||||||||
Basic | $ | 0.74 | $ | 0.10 | $ | 1.19 | $ | 0.18 | ||||||||
Diluted | $ | 0.71 | $ | 0.10 | $ | 1.15 | $ | 0.18 | ||||||||
Net earnings per share-pro forma: | ||||||||||||||||
Basic | $ | 0.73 | $ | 0.09 | $ | 1.17 | $ | 0.15 | ||||||||
Diluted | $ | 0.70 | $ | 0.09 | $ | 1.13 | $ | 0.15 |
(in thousands, except per share amounts)
Three months ended | |||||||||
November 30, | |||||||||
2003 | 2002 | ||||||||
Net earnings-as reported | $ | 12,628 | $ | 2,205 | |||||
Pro forma stock-based compensation cost | 335 | 334 | |||||||
Net earnings-pro forma | $ | 12,293 | $ | 1,871 | |||||
Net earnings per share-as reported: | |||||||||
Basic | $ | 0.45 | $ | 0.08 | |||||
Diluted | $ | 0.44 | $ | 0.08 | |||||
Net earnings per share-pro forma: | |||||||||
Basic | $ | 0.44 | $ | 0.07 | |||||
Diluted | $ | 0.43 | $ | 0.07 |
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform to the classifications used in the current period.
Accounts Payable — Documentary Letters of Credit
In order to facilitate certain trade transactions, especially international, we utilizethe Company utilizes documentary letters of credit to provide assurance of payment to ourits 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. OurThe 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 ourthe Company’s suppliers choose to discount the future dated obligation, wethe Company may absorb 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
7
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
classified as Accounts Payable – Documentary Letters of Credit and the related discount charges are included as a component of interest expense in the condensed consolidated financial statements.
NOTE C –— 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 incurred $1.7 million of directly related costs. CMCZ operates a steel minimill similar to those operated by the Company’s steel group with total annual capacity of over 1 million metric tons consisting of rebar and wire 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 Company might have against the sellers for up to eighteen months post-acquisition. 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 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 the Company’s existing Texas rebar fabrication and construction-related product sales operations and expands the Company’s service areas in each of the neighboring states.
The following is a summary of the allocation of purchase price as of the date of the acquisitions (in thousands). Although the Company does not anticipate any material changes, these purchase price allocations may be revised following the completion of the valuation process. The minority interest in CMCZ is recorded at historical cost.
CMCZ | Lofland | Total | ||||||||||
Accounts receivable | $ | 42,355 | $ | 18,894 | $ | 61,249 | ||||||
Inventories | 30,360 | 5,150 | 35,510 | |||||||||
Property, plant and equipment | 87,444 | 10,242 | 97,686 | |||||||||
Goodwill | — | 24,876 | 24,876 | |||||||||
Other intangible assets | 3,451 | 9,700 | 13,151 | |||||||||
Other assets | 8,298 | 1,239 | 9,537 | |||||||||
Liabilities | (46,597 | ) | (20,135 | ) | (66,732 | ) | ||||||
Debt | (45,717 | ) | — | (45,717 | ) | |||||||
Minority interest | (29,767 | ) | — | (29,767 | ) | |||||||
$ | 49,827 | $ | 49,966 | $ | 99,793 | |||||||
Inventory costs for Lofland and CMCZ are determined on the first-in, first out (FIFO) method. The intangible assets acquired include customer base, non-competition agreement, favorable land leases and production backlog, all of which have finite lives and will be amortized over lives from one year (for the backlog) to 96 years (for the favorable land leases), with a weighted average life of 34 years. Also, the acquisition of Lofland resulted in a brand name of $2.3 million with an indefinite life. From the estimates reported at November 30, 2003, Lofland’s other intangible assets decreased by $3.3 million and goodwill increased by $10.3 million primarily due to changes in the estimated valuation of the customer base and the non-competition agreement and assessment of deferred tax impacts. From November 30, 2003, the estimated valuations of CMCZ’s inventories decreased by approximately $2.6 million and property, plant and equipment increased by $2.8 million. For tax purposes, the Company expects to be able to deduct approximately $4 million of goodwill related to carry-over tax attributes. The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows: 2004 — $1.9 million; 2005 — $1.6 million; 2006 — $1.2 million; 2007 — $1.0 million
8
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
and 2008 — $326 thousand. The fair value estimates were determined either on a market-based or income-based approach.
The following 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 period. 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 assumed debt. The Company considers its investment in Poland to be permanent, and therefore does not provide for U.S. income taxes on the earnings of CMCZ. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed dates.
Three months ended | Six months ended | |||||||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||||||
(in thousands except per share data) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Net sales | $ | 1,075,356 | $ | 739,966 | $ | 2,014,730 | $ | 1,456,798 | ||||||||
Net earnings | 20,977 | 1,188 | 34,607 | 3,671 | ||||||||||||
Diluted earnings per common share | 0.70 | 0.04 | 1.18 | 0.13 |
NOTE D — SALES OF ACCOUNTS RECEIVABLE
The Company has an accounts receivable securitization program (Securitization Program) which it utilizes as a cost-effective, short-term financing alternative. Under the Securitization Program, the Company and several of its subsidiaries (the Originators) periodically sell accounts receivable to the Company’s wholly-owned consolidated special purpose subsidiary (CMCR). CMCR is structured to be a bankruptcy-remote entity. CMCR, in turn, sells an undivided percentage ownership interest (Participation Interest) in the pool of receivables to an affiliate of a third party financial institution (Buyer). CMCR may sell undivided interests of up to $130 million, depending on the Company’s level of financing needs.
At November 30February 29, 2004 and August 31, 2003, uncollected accounts receivable of $159$183 million and $152 million, respectively, had been sold to CMCR, and theCMCR. The Company’s undivided interest in these receivables (representing the Company’s retained interest) was 70% and 100%. at February 29, 2004 and August 31, 2003 respectively. At November 30 andFebruary 29, 2004 the Buyer owned $55 million in Participation Interests in CMCR’s accounts receivable pool, which was reflected as a reduction in accounts receivable on the Company’s condensed consolidated balance sheet. At August 31, 2003, no Participation Interests in CMCR’s accounts receivable pool were owned by the Buyer and, therefore, none were reflected as a reduction in accounts receivable on the Company’s consolidated balance sheets.Buyer.
Discounts (losses) on the sales of accounts receivable to the Buyer under this Program were $116$332 thousand and $123$448 thousand for the three and six months ended November 30,February 29, 2004, respectively, and $188 thousand and $311 thousand for the three and six months ended February 28, 2003, and 2002, respectively. These losses primarily represented the costs of funds and were included in selling, general and administrative expenses.
In addition to the Securitization Program described above, the Company’s international subsidiaries periodically sell accounts receivable. Uncollected accounts receivable that had been sold under these arrangements and removed from the consolidated balance sheets were $23.5$21.5 million and $20.8 million at November 30February 29, 2004 and August 31, 2003, respectively.
NOTE D –E — INVENTORIES
Before deduction of last-in, first-out (LIFO) inventory valuation reserves of $18.7$28.2 million and $17.4 million at November 30February 29, 2004 and August 31, 2003, respectively, inventories valued under the first-in, first-out method approximated replacement cost. Approximately $46.3 million and $20.5 million were in raw materials at February 29, 2004 and August 31, 2003, respectively. The majority of the Company’s inventories are in finished goods, with minimal work in process. Approximately $28.6 million and $20.5 million were in raw materials at November 30 and August 31, 2003, respectively.
NOTE E – LONG TERM DEBT9
Long-term debt (in thousands) was as follows:
November 30, | August 31, | |||||||
2003 | 2003 | |||||||
7.20% notes due 2005 | $ | 11,566 | $ | 104,185 | ||||
6.80% notes due 2007 | 50,000 | 50,000 | ||||||
6.75% notes due 2009 | 100,000 | 100,000 | ||||||
5.625% notes due 2013 | 200,000 | — | ||||||
Other | 1,417 | 1,452 | ||||||
362,983 | 255,637 | |||||||
Less current maturities | 618 | 640 | ||||||
$ | 362,365 | $ | 254,997 | |||||
8
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE F — LONG TERM DEBT
Long-term debt (in thousands) was as follows:
February 29, | August 31, | |||||||
2004 | 2003 | |||||||
7.20% notes due 2005 | $ | 10,455 | $ | 104,185 | ||||
6.80% notes due 2007 | 50,000 | 50,000 | ||||||
6.75% notes due 2009 | 100,000 | 100,000 | ||||||
5.625% notes due 2013 | 200,000 | — | ||||||
Other | 3,251 | 1,452 | ||||||
363,706 | 255,637 | |||||||
Less current maturities | 804 | 640 | ||||||
$ | 362,902 | $ | 254,997 | |||||
In November 2003, the Company purchasedrepurchased $89 million of its 7.20% notes due in 2005. In February 2004, the Company repurchased $1 million of the 7.20% notes. The Company recorded a pre-tax chargecharges of $2.8$280 thousand and $3.1 million for the three and six months ended February 29, 2004, respectively, resulting from the cash paymentpayments made to retire the notes, whichnotes. 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. Interest is payable semiannually. The Company had entered into an interest rate lock on $100 million 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 the Company’s long term debt from a fixed interest rate to a floating interest rate. The impact of these swaps adjusted the amount of fixed rate and floating rate debt and reduced overall financing costs. TheseAt February 29, 2004, these hedges remained in effect and were highly effective for the $11$10 million remaining debt at November 30, 2003.on the 7.20% notes. The swaps effectively converted the interest rate on the $100 million notes ($1110 million remaining at November 30, 2003)February 29, 2004) due July 2005 from the fixed rate of 7.20% to the six month LIBOR (determined in arrears) plus a spread of 2.02%. The interest rate is set on January 15th and July 15th, and for the quarterthree and six months ended November 30, 2003,February 29, 2004, was estimated to be an annualized rate of 3.38%3.43%. The total fair value of both swaps, including accrued interest, was $566$500 thousand and $4.6 million at November 30February 29, 2004 and August 31, 2003, respectively. The swaps are recorded in other long-term assets, with a corresponding increase in the 7.20% long-term notes, representing the change in fair value of the hedged debt.
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 and interest payments in eight equal semi-annual installments beginning in September 2005. Interest is accrued at the Warsaw Interbank Offered Rate (WIBOR) plus 1.25% and was fixed at 6.71% for three months. The term note is collateralized by CMCZ’s 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 ($15.4 million) bearing interest at WIBOR plus 0.8% and collateralized by CMCZ’s accounts receivable. The facility was drawn down in stages, and the interest rate, which resets daily, was approximately 5.65%. The proceeds were used by CMCZ to payoff the remainder of the notes payable and for working capital. The term note and the revolving credit facility contain certain financial covenants for CMCZ. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt.
10
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE F –G — EARNINGS PER SHARE
In calculating earnings per share, there were no adjustments to net earnings to arrive at incomeearnings for the three or six months ended November 30, 2003February 29, 2004 or 2002.February 28, 2003. The reconciliation of the denominators of earnings per share calculations are as follows:
Three months ended | ||||||||
November 30, | ||||||||
2003 | 2002 | |||||||
Shares outstanding for basic earnings per share | 28,145,679 | 28,486,578 | ||||||
Effect of dilutive securities-stock options/purchase plans | 854,281 | 477,155 | ||||||
Shares outstanding for diluted earnings per share | 28,999,960 | 28,963,733 |
Three months ended | Six months ended | |||||||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Shares outstanding for basic earnings per share | 28,639,349 | 28,320,223 | 28,392,516 | 28,403,401 | ||||||||||||
Effect of dilutive securities-stock options/purchase plans | 1,238,807 | 504,944 | 1,046,542 | 491,049 | ||||||||||||
Shares outstanding for diluted earnings per share | 29,878,156 | 28,825,167 | 29,439,058 | 28,894,450 | ||||||||||||
All stockStock options with total share commitments of 3,507,84335,247 at November 30, 2003February 29, 2004 were dilutiveanti-dilutive based on the average share price for the quarter of $22.14.$28.57. Stock options with total share commitments of 70,6901,208,863 were anti-dilutive at November 30, 2002February 28, 2003 based on the average share price of $17.48$15.42 for the quarter. All stock options expire by 2010.2011.
At November 30, 2003,February 29, 2004, the Company had authorization to purchase 1,116,152 of its common shares.
In January 2004, the Company’s stockholders increased the aggregate number of shares of common stock that are authorized for issuance to 100,000,000.
On March 5, 2004, the Company granted additional stock options with total share commitments of 857,325 at $31.125 per share.
NOTE G–H- DERIVATIVES AND RISK MANAGEMENT
The Company’s worldwide operations and product lines expose it to risks from fluctuations in foreign currency exchange rates and metals commodity prices. The objective of the Company’s risk management program is to mitigate these risks using futures or forward contracts (derivative instruments). The Company enters into metal commodity forward contracts to mitigate the risk of unanticipated declines in gross margin due to the volatility of the commodities’ prices, and enters into foreign currency forward contracts, which match the expected settlements for purchases and sales denominated in foreign currencies. The Company designates only those contracts as hedges for accounting purposes, which closely match the terms of the underlying transaction. These hedges resulted in substantially no ineffectiveness in the statements of earnings for the three or six months ended November 30, 2003February 29, 2004 and 2002.February 28, 2003. 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.
9The following chart shows the impact on the condensed consolidated statements of earnings of the changes in fair value of these economic hedges (in thousands):
Three months ended | Six months ended | |||||||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Earnings (Expense) | Earnings (Expense) | |||||||||||||||
Cost of goods sold (commodity instruments) | $ | 2,160 | $ | 158 | $ | 1,271 | $ | 497 | ||||||||
Net sales (foreign currency instruments) | (859 | ) | 427 | (1,574 | ) | (653 | ) |
11
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
they are essential economic hedges. The changes in fair value ofcompany’s derivative instruments were recorded as follows on the commodity hedging instruments resulted in a $889 thousand increase and a $339 thousand decrease in cost of goods sold for the three months ended November 30, 2003 and 2002, respectively. The Company also recognized a $715 thousand and a $1.1 million reduction in net sales relating primarily to foreign currency instruments for the three months ended November 30, 2003 and 2002, respectively. At November 30 and August 31, 2003, derivative assets recorded in other current assets were $4.8 million and $1.8 million, respectively. Derivative liabilities of $6.3 million and $1.7 million, respectively, were included in other current liabilities.condensed consolidated balance sheets (in thousands):
February 29, | August 31, | |||||||
2004 | 2003 | |||||||
Derivative assets (other current assets) | $ | 5,410 | $ | 1,809 | ||||
Derivative liabilities (other payables) | 5,602 | 1,690 |
The Company recognized a gain of $1.5 million during the threesix months ended November 30, 2003February 29, 2004, relating to the forward purchase of Polish Zlotys in connection with the acquisition of Huta Zawiercie S.A.CMCZ. This was recorded in net sales for the threesix months ended November 30, 2003.February 29, 2004.
All of the instruments are highly liquid, and none are entered into for trading purposes.
See Note E,F, Long-Term Debt, regarding the Company’s interest rate risk management strategies.
NOTE H –I — CONTINGENCIES
There were no material developments relating to the Company’s contingencies during the three or six months ended November 30, 2003.February 29, 2004. See Note 9, Commitments and Contingencies, to the consolidated financial statements for the year ended August 31, 2003.
In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. Management believes that adequate provision has been made in the condensed consolidated 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 not entered into or modified any significant guarantees since December 31, 2002, and therefore no liability was recorded at November 30, 2003.February 29, 2004. The Company’s existing guarantees have been given at the request of a customer and its surety bond issuer.issurer. 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 November 30, 2003,February 29, 2004, the surety had issued bonds in the total amount (without reduction for the work performed to date) of $11.9$10.0 million, which are subject to the Company’s guarantee obligation under the indemnity agreement. The fair value of these guarantees is not significant.
The Company charged $1 million to selling, general and administrative expense during the three months ended February 28, 2003 relating to payments from a customer within 90 days of its bankruptcy filing, which were potentially voidable. This dispute was settled during the three months ended August 31, 2003 for $118 thousand.
NOTE I – SUBSEQUENT ACQUISITIONSJ — BUSINESS SEGMENTS
OnFollowing the acquisitions of CMCZ and Lofland in December 3, 2003 the Company’s international Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A.(see Note C - Acquisitions), of Zawiercie, Poland for 200 million Polish Zlotys ($51.9 million). In connection with the acquisition, the Company also assumed debt of 180 million Polish Zlotys ($46.7 million), acquired $4.8 million in cash and incurred $1.7 million of directly related costs. Huta Zawiercie operates a steel minimill similar to those operated by the Company’s steel group with annual capacity of about 1 million metric tons consisting mainly of rebar and wire rod products. With this acquisition, the Company has become a significant manufacturer of rebarfive reportable segments: domestic mills, CMCZ, fabrication, recycling and wire rod in a key Central European market.marketing and distribution. Prior period results have been revised to be consistent with the current segment presentation.
1012
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On December 23, 2003,The domestic mills segment includes the Company acquired 100%Company’s domestic steel minimills (including the scrap processing facilities which directly support these mills) and the copper tube minimill. 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 not similar to that of the stock of Lofland Acquisition, Inc. (Lofland) for $48.8 million cash.Company’s domestic minimills. The Company also incurred approximately $1.0 million of external costs directly related to this acquisition. Lofland is the sole stockholderfabrication segment consists of the Lofland Companysteel group’s other steel and subsidiaries which operate steel reinforcing barjoist fabrication operations (including Lofland), fence post manufacturing plants, construction-related and construction-related product sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. This acquisition complements the Company’s existing Texas rebar fabrication and construction-related product sales operations and expands the Company’s service areas in each of the neighboring states.
The following is a summary of the preliminary allocation of purchase price as of the date of the acquisitions (in thousands) presented in conformity with U.S. GAAP. The purchase price allocations have been prepared on a preliminary basis, and changes may be made following the completion of the valuation of the net assets by independent appraisers.
Huta | ||||||||||||
Zawiercie | Lofland | Total | ||||||||||
Accounts receivable | $ | 42,907 | $ | 19,125 | $ | 62,032 | ||||||
Inventories | 32,958 | 5,138 | 38,096 | |||||||||
Property, plant and equipment | 84,650 | 10,316 | 94,966 | |||||||||
Intangible assets | 3,044 | 27,616 | 30,660 | |||||||||
Other assets | 6,164 | 133 | 6,297 | |||||||||
Accounts payable and accrued expenses | (46,126 | ) | (12,550 | ) | (58,676 | ) | ||||||
Debt | (46,674 | ) | — | (46,674 | ) | |||||||
Minority interest | (28,110 | ) | — | (28,110 | ) | |||||||
$ | 48,813 | $ | 49,778 | $ | 98,591 | |||||||
The intangible assets acquired include customer base, favorable land leases and production backlog, all of which have finite lives and will be amortized over lives from one year (for the backlog) to 96 years (for the favorable land leases). Also,other products. Following the acquisition of Lofland, will result in goodwillthe Company’s chief operating decision maker began reviewing the results of approximately $15 millionfabrication operations separately, thus necessitating the reporting of these operations as a separate segment. The recycling and a trade name with an indefinite life.marketing and distribution segments are as they have been previously reported. The Company expects to be able to deduct approximately $4 million goodwill for tax purposes. The estimated aggregate amortization expense for eachcorporate and eliminations segment contains eliminations of intersegment transactions, expenses of the five succeeding fiscal years is as follows: 2004 - $2.4 million; 2005 - $1.7 million; 2006 through 2008 - $1.3 million per year. The fair value estimates are being determined either on a market-based or income-based approach.Company’s corporate headquarters and interest expense relating to our long-term public debt and commercial paper program.
11
COMMERCIAL METALS COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE J – BUSINESS SEGMENTS
The following is a summary of certain financial information by reportable segment (in thousands):
Three months ended November 30, 2003 | ||||||||||||||||||||
Marketing & | Corp. & | |||||||||||||||||||
Manufacturing | Recycling | Distribution | Elim. | Consolidated | ||||||||||||||||
Net sales – unaffiliated customers | $ | 377,806 | $ | 120,484 | $ | 331,689 | $ | 28 | $ | 830,007 | ||||||||||
Inter-segments sales | 820 | 11,408 | 8,692 | (20,920 | ) | — | ||||||||||||||
378,626 | 131,892 | 340,381 | (20,892 | ) | 830,007 | |||||||||||||||
Adjusted operating profit (loss) | 20,325 | 5,734 | 6,267 | (7,103 | ) | 25,223 | ||||||||||||||
Total assets – November 30, 2003 | 764,927 | 117,383 | 399,388 | 137,641 | 1,419,339 |
Three months ended November 30, 2002 | ||||||||||||||||||||
Marketing & | Corp. & | |||||||||||||||||||
Manufacturing | Recycling | Distribution | Elim. | Consolidated | ||||||||||||||||
Net sales – unaffiliated customers | $ | 295,530 | $ | 89,707 | $ | 250,736 | $ | 206 | $ | 636,179 | ||||||||||
Inter-segments sales | 800 | 6,649 | 5,627 | (13,076 | ) | — | ||||||||||||||
296,330 | 96,356 | 256,363 | (12,870 | ) | 636,179 | |||||||||||||||
Adjusted operating profit (loss) | 3,744 | 1,404 | 4,431 | (1,963 | ) | 7,616 | ||||||||||||||
Total assets – November 30, 2002 | 707,307 | 95,342 | 293,264 | 90,736 | 1,186,649 |
Three months ended February 29, 2004 | ||||||||||||||||||||||||||||
Domestic | Mktg. & | Corp. | ||||||||||||||||||||||||||
Mills | CMCZ | Fabrication | Recycling | Distrib. | & Elim. | Consol. | ||||||||||||||||||||||
Net sales — unaffiliated customers | $ | 190,687 | $ | 88,867 | $ | 216,998 | $ | 175,206 | $ | 396,212 | $ | 90 | $ | 1,068,060 | ||||||||||||||
Inter-segment sales | 60,276 | 25,624 | 2,972 | 14,669 | 6,905 | (110,446 | ) | — | ||||||||||||||||||||
250,963 | 114,491 | 219,970 | 189,875 | 403,117 | (110,356 | ) | 1,068,060 | |||||||||||||||||||||
Adjusted operating profit (loss) | 15,985 | 6,221 | (1,224 | ) | 17,702 | 8,825 | (6,037 | ) | 41,472 |
Three months ended February 28, 2003 | ||||||||||||||||||||||||
Domestic | Mktg. & | Corp. | ||||||||||||||||||||||
Mills | Fabrication | Recycling | Distrib. | & Elim. | Consol. | |||||||||||||||||||
Net sales — unaffiliated customers | $ | 135,771 | $ | 170,968 | $ | 93,952 | $ | 259,967 | $ | 158 | $ | 660,816 | ||||||||||||
Inter-segment sales | 38,589 | 648 | 6,516 | 4,839 | (50,592 | ) | — | |||||||||||||||||
174,360 | 171,616 | 100,468 | 264,806 | (50,434 | ) | 660,816 | ||||||||||||||||||
Adjusted operating profit (loss) | 4,597 | (3,449 | ) | 4,050 | 4,919 | (2,141 | ) | 7,976 |
1213
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended February 29, 2004 | ||||||||||||||||||||||||||||
Domestic | Mktg. & | Corp. | ||||||||||||||||||||||||||
Mills | CMCZ | Fabrication | Recycling | Distrib. | & Elim. | Consol. | ||||||||||||||||||||||
Net sales — unaffiliated customers | $ | 356,053 | $ | 88,867 | $ | 429,438 | $ | 295,690 | $ | 727,901 | $ | 118 | $ | 1,898,067 | ||||||||||||||
Inter-segment sales | 107,437 | 25,624 | 4,160 | 26,077 | 15,597 | (178,895 | ) | — | ||||||||||||||||||||
463,490 | 114,491 | 433,598 | 321,767 | 743,498 | (178,777 | ) | $ | 1,898,067 | ||||||||||||||||||||
Adjusted operating profit (loss) | 30,594 | 6,221 | 4,492 | 23,436 | 15,092 | (13,140 | ) | 66,695 | ||||||||||||||||||||
Total assets-February 29, 2004 | 417,855 | 182,249 | 421,837 | 140,418 | 452,194 | 58,682 | 1,673,235 |
Six months ended February 28, 2003 | ||||||||||||||||||||||||
Domestic | Mktg. & | Corp. | ||||||||||||||||||||||
Mills | Fabrication | Recycling | Distrib. | & Elim. | Consol. | |||||||||||||||||||
Net sales — unaffiliated customers | $ | 259,209 | $ | 343,060 | $ | 183,659 | $ | 510,703 | $ | 364 | $ | 1,296,995 | ||||||||||||
Inter-segment sales | 74,447 | 960 | 13,165 | 10,466 | (99,038 | ) | — | |||||||||||||||||
333,656 | 344,020 | 196,824 | 521,169 | (98,674 | ) | 1,296,995 | ||||||||||||||||||
Adjusted operating profit (loss) | 8,282 | (3,390 | ) | 5,454 | 9,350 | (4,104 | ) | 15,592 | ||||||||||||||||
Total assets-February 28, 2003 | 392,521 | 316,707 | 96,769 | 312,025 | 76,902 | 1,194,924 |
The following table provides a reconciliation of the non-GAAP measure, adjusted operating profit (loss), to net earnings (loss), (in thousands):
Three months ended November 30, 2003 | ||||||||||||||||||||
Marketing & | Corp. & | |||||||||||||||||||
Manufacturing | Recycling | Distribution | Elim. | Consolidated | ||||||||||||||||
Net earnings (loss) | $ | 12,509 | $ | 3,868 | $ | 4,919 | $ | (8,668 | ) | $ | 12,628 | |||||||||
Income taxes | 7,745 | 1,846 | 1,271 | (3,477 | ) | 7,385 | ||||||||||||||
Interest expense | 30 | 1 | 47 | 5,016 | 5,094 | |||||||||||||||
Discounts on sales of accounts receivable | 41 | 19 | 30 | 26 | 116 | |||||||||||||||
Adjusted operating profit (loss) | $ | 20,325 | $ | 5,734 | $ | 6,267 | $ | (7,103 | ) | $ | 25,223 | |||||||||
Three months ended November 30, 2002 | ||||||||||||||||||||
Marketing & | Corp. & | |||||||||||||||||||
Manufacturing | Recycling | Distribution | Elim. | Consolidated | ||||||||||||||||
Net earnings (loss) | $ | 2,283 | $ | 900 | $ | 2,827 | $ | (3,805 | ) | $ | 2,205 | |||||||||
Income taxes | 1,387 | 485 | 1,543 | (2,121 | ) | 1,294 | ||||||||||||||
Interest expense | 33 | 1 | 22 | 3,938 | 3,994 | |||||||||||||||
Discounts on sales of accounts receivable | 41 | 18 | 39 | 25 | 123 | |||||||||||||||
Adjusted operating profit (loss) | $ | 3,744 | $ | 1,404 | $ | 4,431 | $ | (1,963 | ) | $ | 7,616 | |||||||||
Three months ended February 29, 2004 | ||||||||||||||||||||||||||||
Domestic | Mktg. & | Corp. | ||||||||||||||||||||||||||
Mills | CMCZ | Fabrication | Recycling | Distrib. | & Elim. | Consol. | ||||||||||||||||||||||
Net earnings (loss) | $ | 9,817 | $ | 2,824 | $ | (732 | ) | $ | 11,879 | $ | 6,298 | $ | (8,931 | ) | $ | 21,155 | ||||||||||||
Minority interest | — | 1,214 | — | — | — | — | 1,214 | |||||||||||||||||||||
Income taxes (benefit) | 6,121 | 1,288 | (550 | ) | 5,805 | 2,173 | (2,961 | ) | 11,876 | |||||||||||||||||||
Interest expense | 21 | 895 | 54 | — | 323 | 5,602 | 6,895 | |||||||||||||||||||||
Discounts on sales of accounts receivable | 26 | — | 4 | 18 | 31 | 253 | 332 | |||||||||||||||||||||
Adjusted operating profit (loss) | $ | 15,985 | $ | 6,221 | $ | (1,224 | ) | $ | 17,702 | $ | 8,825 | $ | (6,037 | ) | $ | 41,472 | ||||||||||||
Three months ended February 28, 2003 | ||||||||||||||||||||||||
Domestic | Mktg. & | Corp. | ||||||||||||||||||||||
Mills | Fabrication | Recycling | Distrib. | & Elim. | Consol. | |||||||||||||||||||
Net earnings (loss) | $ | 3,071 | $ | (2,348 | ) | $ | 2,565 | $ | 4,304 | $ | (4,659 | ) | $ | 2,933 | ||||||||||
Income taxes (benefit) | 1,487 | (1,137 | ) | 1,465 | 501 | (592 | ) | 1,724 | ||||||||||||||||
Interest expense | 2 | 31 | (1 | ) | 77 | 3,022 | 3,131 | |||||||||||||||||
Discounts on sales of accounts receivable | 37 | 5 | 21 | 37 | 88 | 188 | ||||||||||||||||||
Adjusted operating profit (loss) | $ | 4,597 | $ | (3,449 | ) | $ | 4,050 | $ | 4,919 | $ | (2,141 | ) | $ | 7,976 | ||||||||||
1314
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended February 29, 2004 | ||||||||||||||||||||||||||||
Domestic | Mktg. & | Corp. | ||||||||||||||||||||||||||
Mills | CMCZ | Fabrication | Recycling | Distrib. | & Elim. | Consol. | ||||||||||||||||||||||
Net earnings (loss) | $ | 18,860 | $ | 2,824 | $ | 2,734 | $ | 15,747 | $ | 11,217 | $ | (17,599 | ) | $ | 33,783 | |||||||||||||
Minority interest | — | 1,214 | — | — | — | — | 1,214 | |||||||||||||||||||||
Income taxes (benefit) | 11,640 | 1,288 | 1,676 | 7,651 | 3,444 | (6,438 | ) | 19,261 | ||||||||||||||||||||
Interest expense | 32 | 895 | 73 | 1 | 370 | 10,618 | 11,989 | |||||||||||||||||||||
Discounts on sales of accounts receivables | 62 | — | 9 | 37 | 61 | 279 | 448 | |||||||||||||||||||||
Adjusted operating profit (loss) | $ | 30,594 | $ | 6,221 | $ | 4,492 | $ | 23,436 | $ | 15,092 | $ | (13,140 | ) | $ | 66,695 | |||||||||||||
Six months ended February 28, 2003 | ||||||||||||||||||||||||
Domestic | Mktg. & | Corp. | ||||||||||||||||||||||
Mills | Fabrication | Recycling | Distrib. | & Elim. | Consol. | |||||||||||||||||||
Net earnings (loss) | $ | 5,321 | $ | (2,315 | ) | $ | 3,465 | $ | 7,131 | $ | (8,464 | ) | $ | 5,138 | ||||||||||
Income taxes (benefit) | 2,882 | (1,145 | ) | 1,950 | 2,044 | (2,713 | ) | 3,018 | ||||||||||||||||
Interest expense | 6 | 60 | — | 99 | 6,960 | 7,125 | ||||||||||||||||||
Discounts on sales of accounts receivables | 73 | 10 | 39 | 76 | 113 | 311 | ||||||||||||||||||
Adjusted operating profit (loss) | $ | 8,282 | $ | (3,390 | ) | $ | 5,454 | $ | 9,350 | $ | (4,104 | ) | $ | 15,592 | ||||||||||
The following presents external net sales by major product information for the Company (in thousands):
Three months ended | Six months ended | |||||||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Steel products | $ | 635,142 | $ | 422,309 | $ | 1,136,760 | $ | 822,210 | ||||||||
Industrial materials | 137,070 | 55,071 | 234,105 | 109,280 | ||||||||||||
Other products | 295,848 | 183,436 | 527,202 | 365,505 | ||||||||||||
Net sales | $ | 1,068,060 | $ | 660,816 | $ | 1,898,067 | $ | 1,296,995 | ||||||||
15
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis should be read in conjunction with our Form 10-K filed with the SEC for the year ended August 31, 2003. CRITICAL ACCOUNTING POLICIES Our critical accounting policies are not different from the information set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K filed with the SEC for the year ended August 31, 2003 and are therefore not presented herein. CONSOLIDATED RESULTS OF OPERATIONS (in millions) We have included a financial statement measure in the table above that was not derived in accordance with generally accepted accounting principles (GAAP). EBITDA increased by 158% to $58.8 million and by 118% to $99.0 million for the three and six months February 29, 2004, respectively, as compared to 2003. The following financial events were significant during the 16 Three Months Ended November 30, 2003 2002 Net sales $ 830.0 $ 636.2 Net earnings 12.6 2.2 EBITDA 40.2 22.7 Three Months Ended Six Months Ended February 29, February 28, February 29, February 28, 2004 2003 2004 2003 Net sales $ 1,068.1 $ 660.8 $ 1,898.1 $ 1,297.0 Net earnings 21.2 2.9 33.8 5.1 EBITDA 58.8 22.8 99.0 45.5 EarningsWe use earnings before interest expense, income taxes, depreciation and amortization (EBITDA) isas a non-GAAP liquidityperformance measure. In calculating EBITDA, we exclude our largest recurring non-cash charge, depreciation and amortization. We use EBITDA as one guideline to assess our ability to pay our current debt obligations as they mature and a tool to calculate possible future levels of leverage capacity. Reconciliations to net earnings are provided below (in millions): Three Months Ended November 30, 2003 2002 Net earnings $ 12.6 $ 2.2 Income taxes 7.4 1.3 Interest expense 5.1 4.0 Depreciation and amortization 15.1 15.2 EBITDA $ 40.2 $ 22.7 Our management uses a non-GAAP measure, adjusted operating profit, to compare and evaluate the financial performance of our segments. See Note J, Business Segments, to the condensed consolidated financial statements. Adjusted operating profit is the sum of our earnings before income taxes, and financing costs. Adjusted operating profit provides a core operational earningsperformance measurement that compares segmentsresults without the need to adjust for federal, but more specifically state and local taxes which have considerable variation between domestic jurisdictions. Tax regulations in international operations add additional complexity. Also, we exclude interest cost in our calculation of adjusted operating profit.EBITDA. The results are therefore without consideration of financing alternatives of capital employed. See Note J, Business Segments,We use EBITDA as one guideline to assess our unlevered performance return on our investments. EBITDA is also the condensed consolidated financial statementstarget benchmark for a reconciliation of the non-GAAP measure, adjusted operating profit (loss)our long-term performance plan for management. Reconciliations to net earnings (loss).are provided below (in millions): Three Months Ended Six Months Ended February 29, February 28, February 29, February 28, 2004 2003 2004 2003 Net earnings $ 21.2 $ 2.9 $ 33.8 $ 5.1 Income taxes 11.9 1.7 19.3 3.0 Interest expense 6.9 3.1 12.0 7.1 Depreciation and amortization 18.8 15.1 33.9 30.3
EBITDA $ 58.8 $ 22.8 $ 99.0 $ 45.5 firstsecond quarter ended November 30, 2003:February 29, 2004:-– The improved market conditions that we experienced during the fourth quarter of fiscal 2003 continued duringWe reported our first quarter of fiscal 2004 for most of our businesses.highest net sales and net earnings ever. -– Steel group earnings increased primarily due to higher shipments, as realized product prices only kept upIn December 2003, we acquired a minimill in Poland and a rebar fabricator with the increasesoperations in input costs.14-The copper tube division reported increased gross margins due to higher volumesTexas and improved metal spreads.surrounding states, which significantly expanded our international manufacturing capabilities and enhanced our domestic market share in rebar fabrication. -– The recycling segment continued to be very profitable primarily due to improvementsunprecedented rise in the ferrousprice of steel scrap market overand a surge in non-ferrous scrap prices resulted in record profits for our recycling segment.– Selling price increases for our domestic mill products, along with high demand resulted in much higher profits in our domestic mill segment as compared to 2003.
– | Our new minimill in Poland experienced strong demand for its products and was profitable. | |||
– | Margins in our fabrication segment were compressed because of the rapid increase in input costs, but results were better than last year. | |||
Marketing and distribution’s adjusted operating profit was higher than last year’s | ||||
CONSOLIDATED DATA -
The LIFO method of inventory valuation decreased net earnings by $818 thousand and increased net earnings by $143 thousand (3 cents and 1 cent per diluted share) for the three months ended November 30, 2003 and 2002, respectively.
SEGMENT OPERATING DATA -— (in thousands)
See Note J — Business Segments, to the condensed consolidated financial statements.
Following our acquisitions in December 2003, we have revised our segment reporting. We have maintained our recycling and marketing and distribution segments, but presented our new Polish minimill, CMC Zawiercie (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) fabrication, including our new rebar acquisition. Following our acquisition of the rebar fabricator, we made internal management reporting changes, which necessitated this change in segment reporting.
Our management uses adjusted operating profit (loss), to compare and evaluate the financial performance of our segments. Adjusted operating profit is the sum of our earnings before income taxes, and financing costs.
Unless otherwise indicated, all dollarsdollar amounts below are before income taxes.
The following table shows net sales and adjusted operating profit (loss) by business segment.
Three months ended | ||||||||
November 30, | ||||||||
2003 | 2002 | |||||||
NET SALES: | ||||||||
Manufacturing | $ | 378,626 | $ | 296,330 | ||||
Recycling | 131,892 | 96,356 | ||||||
Marketing and Distribution | 340,381 | 256,363 | ||||||
Corporate and Eliminations | (20,892 | ) | (12,870 | ) | ||||
$ | 830,007 | $ | 636,179 | |||||
ADJUSTED OPERATING PROFIT (LOSS): | ||||||||
Manufacturing | $ | 20,325 | $ | 3,744 | ||||
Recycling | 5,734 | 1,404 | ||||||
Marketing and Distribution | 6,267 | 4,431 | ||||||
Corporate and Eliminations | (7,103 | ) | (1,963 | ) | ||||
$ | 25,223 | $ | 7,616 | |||||
Three Months Ended | Six Months Ended | |||||||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
NET SALES: | ||||||||||||||||
Domestic Mills | $ | 250,963 | $ | 174,360 | $ | 463,490 | $ | 333,656 | ||||||||
CMCZ | 114,491 | — | 114,491 | — | ||||||||||||
Fabrication | 219,970 | 171,616 | 433,598 | 344,020 | ||||||||||||
Recycling | 189,875 | 100,468 | 321,767 | 196,824 | ||||||||||||
Marketing and Distribution | 403,117 | 264,806 | 743,498 | 521,169 | ||||||||||||
Corporate and Eliminations | (110,356 | ) | (50,434 | ) | (178,777 | ) | (98,674 | ) | ||||||||
$ | 1,068,060 | $ | 660,816 | $ | 1,898,067 | $ | 1,296,995 | |||||||||
ADJUSTED OPERATING PROFIT (LOSS): | ||||||||||||||||
Domestic Mills | $ | 15,985 | $ | 4,597 | $ | 30,594 | $ | 8,282 | ||||||||
CMCZ | 6,221 | — | 6,221 | — | ||||||||||||
Fabrication | (1,224 | ) | (3,449 | ) | 4,492 | (3,390 | ) | |||||||||
Recycling | 17,702 | 4,050 | 23,436 | 5,454 | ||||||||||||
Marketing and Distribution | 8,825 | 4,919 | 15,092 | 9,350 | ||||||||||||
Corporate and Eliminations | (6,037 | ) | (2,141 | ) | (13,140 | ) | (4,104 | ) |
MANUFACTURINGDOMESTIC MILLS -
We include our domestic steel groupminimills and our copper tube divisionminimill in our manufacturingdomestic mill segment. Adjusted operating profit is equal to earnings before income taxes for our four
The table below reflects steel minimills, our copper tube mill and the steel group’s fabrication operations. scrap prices per ton:
Three Months Ended | Six Months Ended | |||||||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Average mill selling price (total sales) | $ | 339 | $ | 271 | $ | 324 | $ | 271 | ||||||||
Average mill selling price (finished goods) | 345 | 277 | 330 | 279 | ||||||||||||
Average fabrication selling price | 584 | 535 | 570 | 546 | ||||||||||||
Average ferrous scrap purchase price | 147 | 89 | 132 | 89 |
17
Our manufacturingdomestic mills segment’s adjusted operating profit for the three months ended November 30, 2003February 29, 2004 increased $16.6by $11.4 million (443%(247%) as compared to 20022003 on $82.3$76.6 million (28%(44%) more net sales. Our steel group’s minimillsNet sales and our copper tube mill reported higher adjusted operating profitsprofit were higher due to higherimproved selling prices and increased shipments. Selling prices and shipments although higherincreased due to increased 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. The mills’ production levels (tons melted and rolled) for the 2004 quarter were at or near all time records. These factors were partially offset by significant rapid increases in steel scrap purchase costs and utility costs resulted in continued compressed gross margins. Our steel group’s downstream fabrication operations were more profitable due to higher shipments with stable selling prices. Slower demand for commercial construction was more than offset by demandincreases in other construction markets. Our downstream rebar fabrication, construction related products, steel post plants, steel joist manufacturing and structural steel fabrication businesses, were profitable for the three months ended November 30, 2003.
15
The table below reflects steel and scrap prices per ton:
Three months ended | ||||||||
November 30, | ||||||||
2003 | 2002 | |||||||
Average mill selling price (total sales) | $ | 309 | $ | 272 | ||||
Average mill selling price (finished goods) | 313 | 281 | ||||||
Average fabrication selling price | 555 | 558 | ||||||
Average ferrous scrap purchase price | 118 | 89 |
Adjusted operating profit for our four steel minimills increased 408% for the three months ended November 30, 2003 compared to 2002, due to higher selling prices and shipments.input costs. Adjusted operating profits at all four mills were significantly higher.higher in 2004 as compared to 2003. The largest increases in profitability were at SMI TexasAlabama and SMI South Carolina. Adjusted operating profitsprofit at SMI TexasAlabama increased $2.7$2.6 million (91%(436%) for the three months ended November 30, 2003February 29, 2004 as compared to 2002.2003. SMI South Carolina reported $1.7 million$918 thousand in adjusted operating profit for the three months ended November 30, 2003February 29, 2004 as compared to a $2.3$2.4 million adjusted operating loss in 2002.2003. Adjusted operating profits at SMI Texas and SMI Arkansas increased 33% and 133%, respectively. The mills shipped 566,000609,000 tons in the current2004 quarter as compared to 505,000 last year,537,000 in 2003, an increase of 12%13%. Mill production increased as well, with tons rolled up 13%26% to 541,000.540,000. Tons melted increased 9%19% to 561,000.567,000. The average total mill selling price at $309$339 per ton was $37 (14%$68 (25%) above last year. Our average mill selling price for finished goods also increased $32$68 per ton (11%(25%). AverageHowever, average scrap purchase costs were $29$58 per ton (33%(65%) higher than last year. Utility expensesyear due primarily to increased by $1.8 million as compareddemand resulting from higher production at U.S. minimills, coupled with the high level of scrap exports to last year; both natural gas and electricitythe Far East, especially China. In spite of the increased scrap costs, were higher. Consequently, the increases in our steel product prices were only enough to offset the increase in these input costs, resulting in continuing restricted mill product margins. However, our metal spread (the difference between our average total mill selling price and our average scrap purchase price) was $8$192 per ton, $10 per ton higher during the three months ended November 30, 2003February 29, 2004 as compared to 2002.2003. This increased metal spread more than offset cost increases for utilities and other inputs. Utility expenses increased by $2.9 million in 2004 as compared to 2003. Natural gas increased due to a combination of higher usage and rates, and electricity costs were higher due to usage from increased production. Costs for ferroalloys and graphite electrodes increased as well due largely to more demand from U.S. mills and the impact of the weaker U.S. dollar and higher ocean freight costs on these imported items.
AdjustedOur copper tube mill’s adjusted operating profit increased $1.4 million (386%) to $1.7 million during the three months ended February 29, 2004 as compared to 2003. Copper tube shipments increased 16% to 15.9 million pounds due primarily to better weather in the steel group’s fabrication and other businesses2004 as compared to 2003. Production increased by $6.611% to 16.4 million (472%pounds. The average selling price increased 40 cents per pound (33%) to $1.59 for the three months ended November 30, 2003February 29, 2004 as compared to 2002.$1.19 for the three months ended February 28, 2003. Strong demand in our housing and commercial markets outpaced supply of finished copper tube. The average copper scrap purchase cost increased 28 cents per pound (40%) during the three months ended February 29, 2004 as compared to 2003. The unusually strong copper market resulted in historically high costs for copper scrap. Our metal spreads improved by 12 cents per pound to 59 cents because the average copper scrap purchase cost increased less than the average copper tube sales price.
Adjusted operating profit for our four domestic steel minimills increased 313% for the six months ended February 29, 2004 as compared to 2003. The average total mill selling price at $324 per ton increased $53 (20%) in 2004 as compared to 2003. As a result, metal margins increased $10 per ton for the six months ended February 29, 2004 as compared to 2003. These higher margins more than offset increases in utilities and other input costs. Average scrap purchase costs were $43 per ton (48%) higher than last year. Utility expenses increased by $4.6 million for the six months ended February 29, 2004 as compared to 2003, due to higher natural gas and electricity costs. Electricity usage increased, but prices remained relatively stable. Natural gas costs increased due to both higher usage and prices. The mills shipped 1,175,000 tons year to date in 2004 as compared to 1,042,000 tons in 2003, an increase of 13%.
Our copper tube mill reported an adjusted operating profit of $3.9 million for the six months ended February 29, 2004 as compared to an adjusted operating profit of $631 thousand in 2003. Copper tube shipments increased 3.2 million pounds (11%) to 32.5 million pounds. Average selling prices increased by 33 cents per pound (29%) to $1.47 in 2004 as compared to $1.14 in 2003. The average copper scrap purchase cost increased by 22 cents per pound (32%) during the six months ended February 29, 2004 as compared to 2003.
CMCZ -
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). CMCZ operates a steel minimill similar to our domestic steel minimills with total annual capacity of over 1 million metric tons of rebar and wire rod products as well as merchant bar. With this acquisition, we have become a significant manufacturer of rebar and wire rod in a key Central
18
European market. See Note C — Acquisitions, to the condensed consolidated financial statements. 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 recorded net sales of $114 million and an adjusted operating profit of $6.2 million for the three months ended February 29, 2004. Historically, the period from December through February has been weak in terms of profits and shipments because of winter weather conditions. However, subsequent to our acquisition, the mill, in coordination with our international marketing and distribution operation, found new outlets for its products. CMCZ melted 375,000 tons, rolled 271,000 tons and shipped 390,000 tons, including billets, during the three months ended February 29, 2004. The average total mill selling price was $286 per ton (including 22% billets). The average scrap purchase cost was $147 per ton.
FABRICATION -
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. See Note C — Acquisitions to the condensed consolidated financial statements. Following our acquisition of Lofland, we changed our internal management reporting structure, which necessitated our reporting fabrication (including Lofland) as a separate segment. See Note J - Business Segments to our condensed consolidated financial statements.
Our fabrication businesses reported an adjusted operating loss of $1.2 million for the three months ended February 29, 2004 as compared to an adjusted operating loss of $3.4 million in 2003. However, net sales were $220 million in 2004, an increase of $48 million (28%) as compared to 2003. Lofland accounted for $18 million of this increase. Although shipments and selling prices increased, we recorded a loss in 2004 primarily because the overall purchase costs from our steel suppliers increased more than our selling prices. Our sales prices did not increase as fast as our steel purchase costs because much of our fabrication work is sold months in advance at a fixed price. We recorded contract loss provisions in excess of $1 million during the three months ended February 29, 2004 on firm sales commitments at various fabrication operations, the largest of which was at Lofland. Construction activity varied by region. Some private nonresidential construction markets were more active, while others remained flat. Public construction continued at a solid level. Fabrication plant shipments totaled 280,000286,000 tons, 29%24% more than last year’s firstsecond quarter shipments of 217,000231,000 tons. Our acquisition of Lofland resulted in 23,000 additional tons. The remainder of the increase was due to the acquisitions of several small rebar fabrication operations during the last half of fiscal 2003 and higher shipments at Fontana Steel. The average fabrication selling price for the three months ended November 30, 2003 was approximately the sameFebruary 29, 2004 increased $49 per ton (9%) to $584 as compared to 2002. All of these lines of business2003. However, rebar fabrication, construction related products, steel post plants, steel joist manufacturing and structural steel fabrication were profitable forall adversely affected by higher input costs during the three months ended November 30, 2003 including rebar and structural fabrication, construction-related products, steel post plants, and steel joist manufacturing. During the three months ended November 30, 2002, our structural steel fabrication and joist plants had reported adjusted operating losses.February 29, 2004 as compared to 2003. We are continuing to evaluate certain 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 asset impairments.
On December 23, 2003, we acquired Lofland Acquisition, Inc. (Lofland) for $48.8 million. Lofland is the sole stockholder of the Lofland Company and subsidiaries which operate steel reinforcing bar fabrication and construction-related products sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. The acquisition of Lofland complements our existing Texas rebar fabrication and construction-related product sales operations and expands our service areas in each of the neighboring states. See Note I, Acquisitions, to the condensed consolidated financial statements.
Our copper tube division’s adjusted operating profit increased $1.9 million (695%) to $2.2 million on 32% higher net sales. Copper tube shipments increased 7% to 16.6 million pounds. Production increased 5% to 16.1 million pounds. The average selling price increased 26 cents per pound (24%) to $1.36 for During the three months ended November 30,February 28, 2003, as compared to $1.10we recorded a $1 million loss provision for the three months ended November 30, 2002. The average copper scrap price increased 15 cents per pound (22%)payments from a customer within 90 days of its bankruptcy filing, which were potentially voidable. This dispute was settled during the three months ended November 30,August 31, 2003 for $118 thousand.
Our fabrication businesses reported an adjusted operating profit of $4.5 million for the six months ended February 29, 2004 as compared to 2002. Demandan adjusted operating loss of $3.4 million in our end use markets remained relatively strong, but2003. Fabrication plant shipments for the six months ended February 29, 2004 were 566,000 tons, an increase of 26% as compared to 2003. The average fabrication selling prices remained constrained by over-supply of water and refrigeration tubing. Our metal spreads improved because the average copper scrap price increased less than$24 per ton (4%) to $570. However, our steel purchase costs increased significantly especially during the average product sales price.
16
Tablesecond quarter of Contents2004. Also, professional services (primarily legal) expenses, decreased by $1.7 million in 2004 as compared to 2003 due to the settlement of contingencies at SMI-Owen during the second half of 2003.
RECYCLING -
Our recycling segment reported an adjusted operating profit of $5.7$17.7 million for the three months ended November 30, 2003February 29, 2004 as compared with an adjusted operating profit of $1.4$4.1 million in 2002.2003. Net sales for the three months ended November 30, 2003February 29, 2004 were 37%89% higher at $132$190 million. Gross margins were 42% higher thanin 2004 doubled as compared to 2003. Ferrous and nonferrous selling prices significantly increased because demand from Far Eastern buyers, especially China, and the same period last year.weaker U.S. dollar, resulted in more scrap exports by our competitors. In addition, domestic demand for scrap increased due to the
19
recovering U.S. economy. The segment processed and shipped 430,000493,000 tons of ferrous scrap during the three months ended November 30, 2003, 10%February 29, 2004, 32% more than 2002.2003. Ferrous sales prices were on average $124increased $77 (82%) to $171 per ton or $35 (39%) higher than 2002.as compared to 2003. Nonferrous shipments were 2.5% lower15% higher at 54,00063,000 tons. The average nonferrous scrap sales price of $1,139$1,371 per ton for the three months ended November 30, 2003February 29, 2004 was 18%34% higher than in 2002.2003. The total volume of scrap processed, including the steel group’sall of our domestic processing plants, was 734,000838,000 tons, an increase of 10%31% from the 669,000642,000 tons processed in 2002.2003. Volumes were up due to increased demand caused by the recovery in the global economy.
Our recycling segment reported an adjusted operating profit of $23.4 million for the six months ended February 29, 2004 as compared to an adjusted operating profit of $5.5 million in 2003. Year to date gross margins were 72% higher than in 2003, due to increased selling prices and shipments for both ferrous and nonferrous scrap. For the six months ended February 29, 2004, ferrous and nonferrous scrap selling prices increased by 64% and 28% respectively. The total volume of scrap processed and shipped during the six months ended February 29, 2004, including all of our domestic processing plants, was 1,572,000 tons, an increase of 20% from the 1,311,000 tons processed in 2003. Volumes increased due to increased demand caused by the recovering global economies and the weak U.S. dollar.
MARKETING AND DISTRIBUTION -
Net sales inincreased $138 million (52%) for the three months ended November 30, 2003 for our marketing and distribution segment increased 33% to $340 millionFebruary 29, 2004 as compared to net sales2003, $25 million of $256 million in 2002.which resulted from foreign currency fluctuations. Adjusted operating profit for the three months ended November 30, 2003February 29, 2004 was $6.3$8.8 million, as compared to $4.4$4.9 million in 2002,2003, an increase of 42%79%. The net effect of foreign currency fluctuations on our adjusted operating profit was $553 thousand. Markets were solidfavorable in several geographic regions and product lines. Sales to and within Asia, especially China, were up significantly. Also, the economy in Australia was still strong. Sales were levelAdjusted operating profits increased in Europe and importsEurope. Imports into the United States were mixed. A numbermixed with a significant decline in our steel imports, but sales of industrial raw materials increased. Most product prices (as expressed in U.S. dollars) improved during the three months ended November 30,February 29, 2004 as compared to 2003. Gross margins were better for steel products and industrial raw materials, but were lower for nonferrous metal products. The increased profitability in marketing and distribution was largely due to our strategy in recent years to build up our regional business around the world and to increase our downstream presence.
On December 3,Net sales for the six months ended February 29, 2004 increased by $222 million (43%), $46 million of which was due to foreign currency fluctuations. Adjusted operating profit for the six months ended February 29, 2004 for our marketing and distribution segment increased to $15.1 million as compared to $9.4 million in 2003 we purchased a 71.1% interestdue mostly to better results from our international operations and increased sales and margins for our imports of industrial raw materials in Huta Zawiercie, S.A. in Zawiercie, Poland. Huta Zawiercie is a steel minimill, with annual capacitythe U.S. Foreign currency fluctuations accounted for $1.1 million of about 1 million metric tons of primarily rebarthe increase. Adjusted operating profits increased for Europe and wire rod products. See Note I, Acquisitions,Australia. Sales into Asia, including China were strong during the six months ended February 29, 2004 as compared to the condensed consolidated financial statements.2003. During the threesix months ended November 30, 2003,February 29, 2004, we recognized a $1.5 million gain on our forward purchases of Polish Zlotys related to this acquisition.our acquisition of CMCZ.
OTHERCORPORATE AND ELIMINATIONS -
During the threesix months ended November 30, 2003,February 29, 2004, we incurred a $2.8$3.1 million charge from the purchaserepurchase of $89$90 million of our notes otherwise due in 2005. Discretionary items, such as bonuses and profit sharing increased commensurate with increased profitability for the three and six months ended February 29, 2004 as compared to 2003. Also, professional services expenses increased $1.5 million and $1.9 million, respectively for the three and six months ended February 29, 2004 as compared to 2003 due primarily to costs associated with compliance with Section 404 of Sarbanes Oxley.
CONSOLIDATED DATA -
The LIFO method of inventory valuation decreased net earnings by $6.2 million and $1.9 million (21 cents and 7 cents per diluted share) for the three months ended February 29, 2004 and 2003, respectively. For the six months ended February 29, 2004 and February 28, 2003, after-tax LIFO expense was $7.0 million (24 cents per diluted share) and $1.8 million (6 cents per diluted share), respectively.
Overall selling, general and administrative expenses were $27 million (45%) higher during the three months ended February 29, 2004 as compared to 2003. Our acquisitions of CMCZ and Lofland accounted for $8.2 million of the increase. Also, bad debt expense increased $2.5 million for the six months ended February 29, 2004 as compared to 2003 due to higher sales and increased accounts receivable. During the three and six months ended February 29, 2004, interest expense increased by $3.8 million and $4.9 million,
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respectively, primarily due to additional long-term debt used to finance the Lofland and CMCZ acquisitions.
CONTINGENCIES -
See Note H,I — Contingencies, to the condensed consolidated financial statements.
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings, governmental investigations including environmental matters, and contract disputes. We may incur settlements, fines, penalties or judgments and otherwise become subject to liability because of some of these matters. While we are unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with these matters, we make accruals as amounts become probable and estimable. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process and the uncertainties involved in litigation. Accordingly, we cannot always estimate a meaningful range of possible exposure. We believe that we have adequately provided in our financial statements for the estimable potential impact of these contingencies. We also believe that the outcomes will not significantly affect the long-term results of operations or our financial position. However, they may have a material impact on earnings for a particular period.
We are subject to federal, state and local pollution control laws and regulations in all locations where we have operating facilities. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs.
17
NEAR-TERM OUTLOOK -
We expect our fiscal year ending August 31, 2004 to be significantly more profitable than 2003, primarily due to market improvements, the weakened U.S. dollar, acquisitions, internal cost reductionsour recent acquisition of CMCZ and productivity improvements. Earnings each month will be significantly influenced by the realized selling prices in our recycling, domestic mill and fabrication segments. We anticipate that the price of steel scrap will stop increasing and could decrease during our third quarter. Therefore, we expect that mill margins and fabrication margins will increase as the year progresses. Assuming that steel scrap prices gradually decrease, and our second quarter, which is typically our weakest, will be relatively strong. Weother selling prices remain substantially flat, we estimate that our net earnings (excluding anyper diluted share (including the impact of adjusting our inventory valuation to the LIFO method which we are unable to estimate)method) will be between $7 million$0.55 and $10 million$0.75 for the three months ending February 28,May 31, 2004. Interest rates remain historically low, and economic and industry sector trends are generally strong. We have noted signsexpect some slowing of increasingactivity in China, because we believe that the government is trying to moderate the growth rate. Supply and demand in the U.S. manufacturing sector,factors for ferrous and some improvement in construction. However, office, lodging and industrial construction will be slower to recover. Also, orders for capital goodsnonferrous scrap are higher. Asian markets are relatively strong and European markets are partially recovering.all positive. 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 manufacturingdomestic mill segment as compared to 2003 because of higher metal spreads and increased production, shipments and selling prices. We have implemented several price increases on most of our steel minimill products. Manufacturing margins are likely to be squeezedshould improve in the short run becauseas scrap purchase costs moderate, although the benefits of higher volumes and improved pricing will continue to be partially offset by continued increased raw material costs as well as higher energy and freightother input costs. We are expecting theseour selling price increases to become fully effective during the second half of fiscal 2004. As a result, gross margins at our steel minimills should increase.
As weather improves, we anticipate that our adjusted operating profit at CMCZ will increase during the second half of 2004 as compared to its results since our acquisition.
We expect the gross margins in our fabrication and other related businesses to continue at current levelsimprove during the second quarterhalf of fiscal 2004, as our new backlog was obtained at higher selling prices. However, job losses could increase if steel purchase prices continue to rise. This may particularly affect Lofland resulting in short-term losses for this operation. We believe that these losses will turn around as the backlog which we acquired (which included sales contracts at fixed prices) is depleted. However, Lofland may breakeven or report a slight adjusted operating loss for fiscal 2004. However, these margins should improve later this year. The weak U.S. dollar, high freight costs, and strong Asian demand will minimizeAlso, we anticipate that fabrication bad debts may rise due to the negative impact of the Section 201 tariff repeal.generally higher prices on some of our weaker customers.
We anticipate that our recycling segment will continue to report significant profits during the second half of 2004, due to strong demand for steel scrap and nonferrous metal scrap and the effect of reduced competition due to continuing exports resulting from the relatively weak U.S. dollar.dollar and continued global demand. Ferrous scrap prices should peak and may decrease. Demand for nonferrous scrap should remain strong.
21
Our marketing and distribution segment should remain consistently profitable during our fiscal 2004. We expect that our U.S. operations willshould be more profitable but that our international operations will have lower profits in 2004 as compared to 2003. Our international operations should continue to be profitable in 2004. Overall prices and volumes should remain constant.constant or increase. Increases in freight costs and bad debt expense could partially offset these positive factors.
We anticipate that our capital spending for 2004 will be $61 million, excluding acquisition costs for Huta ZawiercieCMCZ and Lofland. Most of these expenditures will be inat our manufacturing segmentsteel minimills including a major improvement project at our SMI-Texas melt shop. We believe that our purchaseshop and capital expenditures of Huta Zawiercie, S.A. and Lofland will be accretive to our 2004 earnings.$6.2 million for CMCZ in Poland.
LONG-TERM OUTLOOK -
We believe that we are well-positioned to exploit long-term opportunities. 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.
We believe that there will be further consolidation in theour 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.
This outlook section contains forward-looking statements regarding the outlook for our financial results including net earnings, product pricing and demand, production rates, energy expense, freight expense, interest rates, inventory levels, acquisitions and general market conditions. These forward-looking statements generally can be identified by phrases such as we “will”, “expect”, “anticipate”, “believe”, “presume”, “think”, “plan to”, “should”, “likely”, “appear”, “project”, or other similar words or phrases of similar impact. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from our current opinion. Developments that could impact our expectations include the following:
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LIQUIDITY AND CAPITAL RESOURCES -
We 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 for liquidity. Our short-term financing sources include the issuance of commercial paper, sales of accounts 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 debt and private debt placements.debt. Our investment grade credit ratings and general business conditions affect our access to external financing on a cost-effective basis. Depending on the price of our common stock, we may realize significant cash flows from the exercise of stock options.
Moody’s Investors Service (P-2) and Standard & Poor’s Corporation (A-2) rate our $275 million commercial paper program in the second highest category. To support our commercial paper program, we have an unsecured contractually committed revolving credit agreement with a group of sixteen banks. Our $275 million facility expires in August 2006. 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. Also, we have numerous informal, uncommitted, nonbinding, 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 certain instances, short-term working capital loans.
For added flexibility, we may secure financing through sales of certain accounts 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. Our long-term public debt was $362$360 million at November 30, 2003February 29, 2004 and is investment grade rated by Standard & Poors’ Corporation (BBB) and by Moody’s Investors Services (Baa2). We believe we will have access to the public markets for potential refinancing or the issuance of additional long-term debt. In November 2003,During the six months ended February 29, 2004, we purchased $89$90 million of our 7.20% notes otherwise due in 2005, and issued $200 million of 5.625% rate notes due November 2013. See Note E, Long-termF — Long-Term Debt to the condensed consolidated financial statements. Also,
On March 26, 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 a revolving credit facility with maximum borrowings of 60 million PLN ($15.4 million). The term note and the revolving credit facility contain certain financial covenants for CMCZ. We have numerous informal, uncommitted, nonbinding, short-term credit facilities available from domestic and international banks. These credit facilities are priced at bankers’ acceptance rates on a cost of funds basis.
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Table of Contentsnot issued any guarantees for this debt. See Note F — Long-Term Debt, to the condensed consolidated financial statements.
In order to facilitate certain trade transactions, especially international, we utilize bank letters of credit to provide assurance of payment to our 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
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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.
Credit ratings affect our ability to obtain short and long-term financing and the cost of such financing. If the rating agencies were to reduce our credit ratings, we would pay higher financing costs and probably would have less availability of the informal, uncommitted facilities. In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, off balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy, industry condition and contingencies. Maintaining our investment grade ratings is a high priority for us.
Certain of our financing agreementagreements include various covenants. The most restrictive of theseOur revolving credit agreement contains financial covenants requires 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 than three times0.55 to 1.00 at any time and a(b) not permit our ratio of consolidated EBITDA to consolidated interest expense for the past four consecutive fiscal quarters to be less than 3.00 to 1.00. At February 29, 2004, our ratio of consolidated debt to total capitalization was 0.41 to 1.00. Our ratio of 55%, as defined inconsolidated EBITDA to interest expense for the financing agreement. A fewsix months ended February 29, 2004 was 8.25 to 1.00, which was approximately equal to the EBITDA ratio for the past four consecutive quarters. 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 the agreements provide that if we default on the termssome of another financing agreement, it is considered a default under these agreements.our subsidiaries to incur certain types of debt or to guarantee debt. We have complied with the requirements, including the covenants of our financing agreements as of and for the three months ended November 30, 2003.February 29, 2004.
Our revolving credit andOff-Balance Sheet Arrangement — For added flexibility, we may secure financing through sales of certain accounts receivable securitization agreements include ratings triggers. The trigger in the revolving credit agreement is solely a meansan amount not to reset pricing for facility feesexceed $130 million (the Securitization Program) and if a borrowing occurs, on loans. Within thedirect sales of accounts receivable. We may continually sell accounts receivable securitization agreement,on an ongoing basis to replace those receivables that have been collected from our customers. See Note D - Sales of Accounts Receivable, to the ratings trigger is contained in a “termination event”, butcondensed consolidated financial statements. In the trigger requires a combination of ratings actions on behalf ofunlikely event that two independent rating agencies and is set at levelslower our credit rating by six ratings categories below our current rating.rating, the Securitization Program could be terminated by the Buyer. Also, the Securitization Program contains certain cross-default provisions whereby a termination event could occur should we default under another credit arrangement. 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 facility. As such, we do not believe that any reductions in the capacity or termination of the Securitization Program would materially impact our financial position, cash flows or liquidity because we have access to other sources of external funding.
Our manufacturing and recycling businesses are capital intensive. Our capital requirements include construction, purchases of equipment and maintenance capital at existing facilities. We plan to invest in new operations, 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 potential future major acquisitions could require additional financing from external sources such as the issuance of common or preferred stock.
Cash Flows
— Our cash flows from operating activities primarily result from sales of steel and related products, and to a lesser extent, sales of nonferrous metal products. We 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 G,H - Derivatives and Risk
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Management, to the condensed consolidated financial statements.
The volume and pricing of orders from our U.S. customers in the construction sector affects our cash flows from operating activities. The pace of economic expansion and retraction of major industrialized markets outside of the United States also significantly affects our cash flows from operating activities. The weather can influence the volume of products we ship in any given period. Also, the general economy, the strength of the U.S. dollar, governmental action, and various other factors beyond our control influence our volume and prices. Periodic fluctuations in our prices and volumes can result in variations in cash flows from operations. Despite these fluctuations, we have historically relied on operating activities as a steady source of cash.
We used $59.3$80.7 million of net cash flows in our operating activities for the threesix months ended November 30, 2003February 29, 2004 as compared to the $53.1$52.7 million of net cash flows used by our operating activities for the threesix months ended November 30, 2002.February 28, 2003. Net earnings were $10.4$28.6 million higher for the threesix months ended November 30, 2003February 29, 2004 as compared to 2002. Net2003. However, net working capital increased by $70 million to $540$483 million at
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November 30, 2003 February 29, 2004 from $399 million at August 31, 2003, primarily becauseexcluding the effect of our acquisitions of CMCZ and Lofland. Accounts receivable (excluding CMCZ and Lofland) increased $143 million. Although accounts receivable (primarilyincreased in marketingall segments primarily due to higher selling prices and distribution) and inventories (primarilyshipments, the majority of the increases were in manufacturingrecycling and marketing and distribution).distribution. Inventories increased $142 million due to higher purchase costs, higher quantities in anticipation of increased sales, goods in transit and foreign currency fluctuations primarily in Australia. The majority of the increase was in our marketing and distribution, domestic mills and fabrication segments.
WeExcluding the acquisitions of Lofland and CMCZ, we invested $7.1$14.6 million in property, plant and equipment during the threesix months ended November 30, 2003,February 29, 2004, which was less than during 2002.2003. We expect our capital spending for fiscal 2004 to be $61 million, excluding our acquisitions of Huta ZawiercieCMCZ and Lofland. 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 in November 2003 to purchase $89$90 million of our notes otherwise due in 2005, and finance our purchases of Huta ZawiercieCMCZ and Lofland in December 2003.Lofland.
At November 30, 2003, 28,325,301February 29, 2004 28,825,642 common shares were issued and outstanding, with 3,939,8653,439,524 held in our treasury. During the six months ended February 29, 2004, we received $12.9 million from stock issued under our employee incentive and stock purchase plans as compared to $4.5 million in 2003. We paid dividends of $2.2$4.5 million during the threesix months ended November 30, 2003,February 29, 2004, approximately the same amount as we paid during 2002. During the three months ended November 30, 2002, we2003. We purchased 100,000no shares of our common stock at an average price of $16.13 per share. These shares were held in our treasury. We purchased no shares during the threesix months ended November 30, 2003.February 29, 2004.
For the twelve months following February 29, 2004, our long-term debt service requirements will be minimal, as the earliest maturity of principal is for $10 million to be paid in July 2005. Our $9 million short-term trade financing arrangement will be self-liquidating with cash flows from our operating activities. We believe that we have sufficient liquidity from cash flows from operating activities and our short-term financing arrangements to enable us to meet our contractual obligations for fiscal 2004.the next twelve months.
CONTRACTUAL OBLIGATIONS -
The following table represents our contractual obligations as of November 30, 2003 belowFebruary 29, 2004 (dollars in thousands):
Payments Due Within * | |||||||||||||||||||||
2-3 | 4-5 | After | |||||||||||||||||||
Total | 1 Year | Years | Years | 5 Years | |||||||||||||||||
Contractual Obligations: | |||||||||||||||||||||
Long-term Debt (1) | $ | 362,983 | $ | 618 | $ | 12,256 | $ | 50,037 | $ | 300,072 | |||||||||||
Operating Leases (2) | 32,852 | 8,151 | 10,771 | 5,811 | 8,119 | ||||||||||||||||
Unconditional Purchase Obligations (3) | 176,858 | 98,040 | 51,913 | 12,834 | 14,071 | ||||||||||||||||
Total Contractual Cash Obligations | $ | 572,693 | $ | 106,809 | $ | 74,940 | $ | 68,682 | $ | 322,262 | |||||||||||
Payments Due Within * | ||||||||||||||||||||
2-3 | 4-5 | After | ||||||||||||||||||
Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
Contractual Obligations: | ||||||||||||||||||||
Long-term Debt (1) | $ | 363,706 | $ | 804 | $ | 11,191 | $ | 51,639 | $ | 300,072 | ||||||||||
Interest | 159,451 | 22,263 | 43,193 | 37,717 | 56,278 | |||||||||||||||
Operating Leases (2) | 51,969 | 10,996 | 13,457 | 7,434 | 20,082 | |||||||||||||||
Unconditional Purchase Obligations (3) | 210,447 | 45,076 | 90,109 | 61,191 | 14,071 | |||||||||||||||
Total Contractual Cash Obligations | $ | 785,573 | $ | 79,139 | $ | 157,950 | $ | 157,981 | $ | 390,503 | ||||||||||
* | Cash obligations herein are not discounted. |
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(1) | Total amounts are included in the | |||
(2) | Includes minimum lease payment obligations for noncancelable equipment and real-estate leases in effect as of | |||
(3) | About |
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain transactions that our customersinsurance providers and suppliers request. At November 30, 2003,February 29, 2004, we had committed $20.7$24.4 million under these arrangements. All of the commitments expire within one year.
At the request of a customer and its surety bond issuer, we have agreed to indemnify the surety against all costs the surety may incur should our customer fail to perform its obligations under construction contracts covered by payment and performance bonds issued by the surety. We are the customer’s primary supplier of steel, and steel is a substantial portion of our customer’s cost to perform the contracts. We believe we have
21
adequate controls to monitor the customer’s performance under the contracts including payment for the steel we supply. As of November 30, 2003,February 29, 2004, the surety had issued bonds in the total amount (without reduction for the work performed to date) of $11.9$10.0 million which are subject to our guaranty obligation under the indemnity agreement.
FORWARD-LOOKING STATEMENTS -
This Form 10-Q contains forward-looking statements regarding the outlook for our financial results including net earnings, product pricing and demand, production rates, energy expense, freight expense, interest rates, inventory levels, acquisitions and general market conditions. These forward-looking statements generally can be identified by phrases such as we “will”, “expect”, “anticipate”, “believe”, “presume”, “think”, “plan to”, “should”, “likely”, “appear”, “project”, or other similar words or phrases of similar impact. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from our current opinion. Developments that could impact our expectations include the following:
• | interest rate changes | |||
• | construction activity | |||
• | difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes | |||
• | metals pricing over which we exert little influence | |||
• | increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing | |||
• | industry consolidation or changes in production capacity or utilization | |||
• | global factors including credit availability and military uncertainties | |||
• | credit availability | |||
• | currency fluctuations | |||
• | scrap, energy and freight prices | |||
• | decisions by governments impacting the level of steel imports | |||
• | pace of overall economic activity, particularly China. |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Company is not materially different from the information set forth in Item 7a. Quantitative and Qualitative Disclosures About Market Risk included in the Company’s Annual Report of Form 10-K for the year ended August 31, 2003, filed with the Securities Exchange Commission, and is therefore not presented herein.
Also, see Note G,H — Derivatives and Risk Management, to the condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
The term “disclosure controls and 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 quarterly 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 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Reference is made to the information incorporated by reference from Item 3. Legal Proceedings in the Company’s Annual Report on Form 10-K for the year ending August 31, 2003, filed November 24, 2003, with the Securities and Exchange Commission.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not ApplicableAt the registrant’s annual meeting of stockholders held January 22, 2004, the five nominees named in the Company’s Proxy Statement dated December 8, 2003, were elected to serve as directors, one nominee to a one year term and four to three year terms. There was no solicitation in opposition to the nominees for directors. The proposal to amend the Company’s restated certificate of incorporation to increase the number of authorized shares of common stock from 40,000,000 to 100,000,000 was approved and the appointment of Deloitte & Touche, LLP, as independent auditors of the registrant for the fiscal year ending August 31, 2004 was ratified.
Additional information as to the vote on each nominee standing for election, all matters voted on at the meeting and directors continuing in office is provided below:
Proposal 1 — Election of Directors
For | Withheld | |||||||
Harold L. Adams | 22,963,697 | 2,319,602 | ||||||
Moses Feldman | 22,844,603 | 2,438,696 | ||||||
Ralph E. Loewenberg | 22,963,678 | 2,319,621 | ||||||
Stanley A. Rabin | 22,961,514 | 2,312,785 | ||||||
J. David Smith (1) | 22,962,759 | 2,320,540 |
(1) elected to a one year term — all other nominees were elected to three year terms.
Directors continuing in office are:
A. Leo Howell
Anthony A. Massaro
Robert D. Neary
Dorothy G. Owen
Clyde P. Selig
Robert R. Womack
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Proposal 2 — Amendment to increase authorized shares of common stock from 40,000,000 to 100,000,000.
For 19,942,611 | Against 5,315,857 | Abstain 24,831 |
Proposal 3 — Ratification of appointment of Deloitte & Touche LLP as independent auditors for the year ending August 31, 2004.
For 24,876,805 | Against 391,116 | Abstain 15,378 |
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. | Exhibits required by Item 601 of Regulation S-K.* | |||
3(i)(d) | Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State February 5, 2004 (filed herewith). | |||
31.1 | Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |||
31.2 | Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |||
32.1 | Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |||
32.2 | Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |||
* | Does not include a long-term debt instrument representing less than ten percent of the assets of the Company and its subsidiaries on a consolidated basis. A copy of such instrument will be furnished to the Securities and Exchange Commission upon request. | |||
B. | Commercial Metals Company filed and/or furnished the following Form 8-K’s during the quarter ended | |||
Form 8-K on | ||||
Form 8-K on December 17, 2003 under Items 9 and 12 for the purpose of furnishing the |
28
press release announcing Commercial Metals Company’s financial results for the |
23
Form 8-K | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMMERCIAL METALS COMPANY | |||||
/s/ William B. Larson | |||||
April 13, 2004 | William B. Larson | ||||
Vice President and Chief Financial Officer | |||||
/s/ Malinda G. Passmore | |||||
April 13, 2004 | |||||
Malinda G. Passmore | |||||
Controller |
25
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INDEX TO EXHIBITS*
Exhibit No | ||||||
3(i)(d) | Certification of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State February 5,2004 (filed herewith). | |||||
31.1 | Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |||||
31.2 | Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |||||
32.1 | Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |||||
32.2 | Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |||||
*Does not include a long-term debt instrument representing less than ten percent of the assets of the Company and its subsidiaries on a consolidated basis. A copy of such instrument will be furnished to the Securities and Exchange Commission upon request. |
2631