Commercial Metals Company (CMC) purchases and processes scrap metals for use as raw materials by manufacturers of new metal products. CMC produces finished long steel products, including rebar and merchant bar, as well as semi-finished billets and wire rod.
1 FORM 1O-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 2O549 ------------------------------------ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------------- For quarter ended February 28, 1998 Commission File Number 1-4304 COMMERCIAL METALS COMPANY ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-0725338 - ----------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7800 Stemmons Freeway P. O. Box 1046 Dallas, Texas 75221 ----------------------------------------------------- ( Address of principal executive offices ) ( Zip Code ) (214) 689-4300 ----------------------------------------------------- ( Registrant's telephone number, including area code ) ----------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- As of February 28, 1998 there were 14,902,200 shares of the Company's common stock issued and outstanding excluding 1,230,383 shares held in the Company's treasury.
2 COMMERCIAL METALS COMPANY AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I - Financial Statements: Consolidated Balance Sheets - February 28, 1998 and August 31, 1997 2 - 3 Consolidated Statements of Earnings - Six months and three months ended February 28, 1998 and 1997 4 Consolidated Statements of Cash Flows - Six months ended February 28, 1998 and 1997 5 Consolidated Statement of Stockholders' Equity For the six months ended February 28, 1998 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of the Consolidated Financial Statements 8 - 13 PART II - Other Information and Signatures 14 - 16 </TABLE> Page 1
3 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS ( In thousands except share data ) <TABLE> <CAPTION> Feb 28, August 31, 1998 1997 ------------ ------------ <S> <C> <C> CURRENT ASSETS: Cash $ 25,856 $ 32,998 Accounts receivable (less allowance for collection losses of $6,730 and $6,116) 302,561 289,735 Inventories 240,509 220,644 Other 47,511 41,899 --------- --------- TOTAL CURRENT ASSETS 616,437 585,276 OTHER ASSETS 6,964 6,524 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land 19,679 17,844 Buildings 62,091 55,700 Equipment 460,605 447,553 Leasehold improvements 21,955 19,666 Construction in process 49,588 29,841 --------- --------- 613,918 570,604 Less accumulated depreciation and amortization (343,021) (323,343) --------- --------- 270,897 247,261 --------- --------- $ 894,298 $ 839,061 ========= ========= </TABLE> See notes to consolidated financial statements. Page 2
4 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY ( In thousands except share data ) <TABLE> <CAPTION> Feb 28, August 31, 1998 1997 --------- ------------ CURRENT LIABILITIES: <S> <C> <C> Commercial paper $ 30,000 $ -- Notes payable 40,900 -- Accounts payable 137,980 136,988 Other payables and accrued expenses 106,769 129,036 Income taxes payable 56 618 Current maturities of long-term debt 11,492 11,502 --------- --------- TOTAL CURRENT LIABILITIES 327,197 278,144 DEFERRED INCOME TAXES 20,834 20,834 LONG-TERM DEBT 175,960 185,211 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Capital stock: Preferred stock -- -- Common stock, par value $5.00 a share; authorized 40,000,000 shares; issued 16,132,583 shares, outstanding 14,902,200 and 14,760,930 shares 80,663 80,663 Additional paid-in capital 13,822 13,627 Cumulative translation adjustment (125) Retained earnings 306,149 293,600 --------- --------- 400,509 387,890 Less treasury stock, 1,230,383 and 1,371,653 shares at cost (30,202) (33,018) --------- --------- 370,307 354,872 --------- --------- $ 894,298 $ 839,061 ========= ========= </TABLE> See notes to consolidated financial statements. Page 3
5 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS ( In thousands except share data ) <TABLE> <CAPTION> Three months ended Six months ended February 28, February 28, ------------------------------- ------------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> REVENUES: Net sales $ 563,950 $ 523,463 $ 1,111,049 $ 1,050,322 Other revenues 4,228 2,292 7,630 6,394 ----------- ----------- ----------- ----------- 568,178 525,755 1,118,679 1,056,716 COSTS AND EXPENSES: Cost of goods sold 501,894 467,344 988,594 936,651 Selling, general and administrative expenses 44,215 40,555 86,372 80,555 Interest expense 4,218 3,686 8,397 7,157 Employees' pension and profit sharing plans 4,663 2,724 9,406 6,398 ----------- ----------- ----------- ----------- 554,990 514,309 1,092,769 1,030,761 EARNINGS BEFORE INCOME TAXES 13,188 11,446 25,910 25,955 INCOME TAXES 4,840 4,245 9,509 9,577 ----------- ----------- ----------- ----------- NET EARNINGS $ 8,348 $ 7,201 $ 16,401 $ 16,378 =========== =========== =========== =========== Net earnings per share basic $ 0.57 $ 0.48 $ 1.11 $ 1.09 Net earnings per share diluted $ 0.56 $ 0.47 $ 1.09 $ 1.07 Cash dividends per share $ 0.13 $ 0.13 $ 0.26 $ 0.26 Average shares outstanding basic 14,774,164 15,114,327 14,744,931 15,070,473 Average shares outstanding diluted 15,019,864 15,359,570 15,013,918 15,372,675 </TABLE> See notes to consolidated financial statements. Page 4
6 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Six months ended February 28, -------------------------- 1998 1997 - ----------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 16,401 $ 16,378 Adjustments to earnings not requiring cash: Depreciation and amortization 22,961 21,556 Provision for losses on receivables 1,011 616 Deferred income taxes Other (33) (26) -------- -------- Cash flows from operations before changes in operating assets and liabilities 40,340 38,524 Changes in operating assets and liabilities: Decrease (increase) in receivables (13,837) (14,050) Decrease (increase) in inventories (19,865) (19,028) Decrease (increase) in other assets (6,177) (11,153) Increase (decrease) in accounts payable, accrued expenses and income taxes (21,837) (24,807) -------- -------- Net Cash Used by Operating Activities (21,376) (30,514) - ----------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (46,597) (34,887) Sales of property, plant and equipment 33 26 -------- -------- Net Cash Used by Investing Activities (46,564) (34,861) - ----------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Commercial paper - net change 30,000 30,000 Notes payable - net change 40,900 35,110 Payments on long-term debt (9,261) (9,107) Stock issued under stock option/purchase plans 5,868 4,375 Treasury stock acquired (2,857) Dividends paid (3,852) (3,932) -------- -------- Net Cash Provided by Financing Activities 60,798 56,446 - ----------------------------------------------------------------------------------- Decrease in Cash and Cash Equivalents (7,142) (8,929) Cash and Cash Equivalents at Beginning of Year 32,998 24,260 -------- -------- Cash and Cash Equivalents at End of Period $ 25,856 $ 15,331 ======== ======== </TABLE> See notes to consolidated financial statements. Page 5
7 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ( In thousands except share data ) <TABLE> <CAPTION> Common Stock Treasury Stock ---------------------- Cumulative Add'l ------------------------ Number of Translation Paid-In Retained Number of Shares Amount Adjustment Capital Earnings Shares Amount ---------- -------- ----------- ------- -------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Balance September 1, 1997 16,132,583 $80,663 $13,627 $293,600 (1,371,653) $(33,018) Net earnings for six months ended February 28, 1998 16,401 Cash dividends - $.26 a share (3,852) Treasury stock acquired (95,000) (2,857) Translation adjustment (125) Stock issued under stock option, purchase and bonus plans 195 236,270 5,673 ---------- ------- ----- ------- -------- ---------- -------- Balance, February 28, 1998 16,132,583 $80,663 $(125) $13,822 $306,149 (1,230,383) $(30,202) ========== ======= ===== ======= ======== ========== ======== </TABLE> See notes to consolidated financial statements. Page 6
8 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - LONG-TERM DEBT AND EQUITY (in thousands): <TABLE> <CAPTION> Long-Term Current Amount Debt Maturities Outstanding --------- ---------- ----------- <S> <C> <C> <C> 7.20% notes due 2005 $100,000 $ -- $100,000 6.80% notes due 2007 50,000 -- 50,000 8.49% notes due 2001 21,428 7,143 28,571 8.75% note due 1999 4,284 4,286 8,570 Other 248 63 311 -------- -------- -------- $175,960 $ 11,492 $187,452 ======== ======== ======== </TABLE> NOTE B - TAXES ON INCOME: Provision for taxes on income includes estimated United States taxes on undistributed earnings of subsidiaries outside the United States. NOTE C - QUARTERLY FINANCIAL DATA In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accurals) necessary to present fairly the financial position as of February 28, 1998, the results of operations for the three months and six months then ended and cash flows for the six months. The results of operations for the six month periods are not necessarily indicative of the results to be expected for a full year. NOTE D - EARNINGS PER SHARE Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE, is effective for the Company for the quarter ended February 28, 1998. It requires a reconciliation of both the numerator and denominator of the earnings per share calculations and restatement of previous periods. There are no adjustments to net earnings to arrive at income for either per share calculation. Reconciliation of share amounts is as follows: <TABLE> <CAPTION> Three months ended Six months ended February 28, February 28, 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Shares outstanding for basic earnings per share 14,774,164 15,114,327 14,744,931 15,070,473 Effect of dilutive securities: Stock options/purchase plans 245,700 245,243 268,987 302,202 Shares outstanding for dilutive earnings per share 15,019,864 15,359,570 15,013,918 15,372,675 </TABLE> There were no securities that have anti-dilutive effects. There was no effect of the restated earnings per share amount for the second quarter of last year compared to diluted earnings per share; for the six months ended February 28, 1997 restated earnings per share were one cent higher. Page 7
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED RESULTS OF OPERATIONS (in millions) <TABLE> <CAPTION> 2ND QTR 2nd Qtr FY 1998 FY 1997 ------- ------- <S> <C> <C> Revenues $ 568 $ 526 Net earnings 8.3 7.2 Cash flow 20.5 18.5 LIFO reserve 28.9 30.1 </TABLE> <TABLE> <CAPTION> SIX MONTHS Six Months FY 1998 FY 1997 ------- ------- <S> <C> <C> Revenues $ 1,119 $ 1,057 Net earnings 16.4 16.4 Cash flow 40.3 38.5 </TABLE> SIGNIFICANT EVENTS AFFECTING THE COMPANY THIS QUARTER: - - Net earnings increased 16% over the prior year period. - - Steel Group achieved record second quarter sales and shipments. - - Despite volatile and weakening markets, the Recycling segment reported a modest profit. - - Marketing and Trading overcame Asian market turmoil and posted higher operating income than the prior year period. CONSOLIDATED DATA The LIFO method of inventory valuation increased net earnings for the quarter $270 thousand (2 cents per share diluted) compared to a decrease of $497 thousand (3 cents per share diluted) last year. For the six months net earnings were $792 thousand higher (5 cents per share diluted) compared to a decrease of $149 thousand (1 cent per share diluted) last year. Page 8
10 SEGMENT OPERATING DATA Revenues and operating profit by business segment are shown in the following table: <TABLE> <CAPTION> Three months ended Six months ended ----------------------- ------------------------- Feb 28 Feb 28 Feb 28 Feb 28 1998 1997 1998 1997 ------ ------ ------ ------ <S> <C> <C> <C> <C> REVENUES: Manufacturing $ 279,120 $ 245,090 $ 570,038 $ 503,049 Recycling 104,894 115,207 209,020 211,281 Marketing and Trading 198,113 179,712 370,889 374,269 Corporate and Eliminations (13,949) (14,254) (31,268) (31,883) ---------- ---------- ---------- ---------- $ 568,178 $ 525,755 $ 1,118,679 $1,056,716 OPERATING PROFIT: Manufacturing $ 13,986 $ 10,707 $ 28,656 $ 24,704 Recycling 500 2,117 10 2,307 Marketing and Trading 4,288 3,653 7,676 9,009 Corporate and Eliminations (1,368) (1,345) (2,035) (2,908) ---------- ---------- ---------- ---------- $ 17,406 $ 15,132 $ 34,307 $ 33,112 </TABLE> MANUFACTURING Operating profit for the segment was 31% ahead of last year's comparable quarter. Record second quarter steel mill sales and shipments were complemented by strong results from the steel fabrication businesses. Copper Tube Division operating results were hampered by lower margins and an equipment failure. Steel prices were generally higher as reflected in the table below: <TABLE> <CAPTION> 2nd Qtr 1998 2nd Qtr 1997 ------------ ------------ <S> <C> <C> Average mill selling price $322 $308 Average fab selling price 672 650 Average scrap purchase price 119 110 </TABLE> With higher prices and increased shipments, the Steel Group's operating profit was nearly 50% higher than last year's second quarter. Shipments by the four mills totaled 466,000 tons or 5% higher than last year. Page 9
11 Mill operating profits increased; particularly notable is the turnaround in profitability of SMI South Carolina which has now been profitable thirteen months in a row. Construction is underway at the new rolling mill at SMI South Carolina and SMI Alabama's new finishing line. Operating profit in the Company's steel fabrication businesses rose almost two hundred percent with improvement in all product areas. Fabricated shipments were a record 185,000 tons for a second quarter versus 151,000 tons in the prior year. The Steel Group computer migration project expense for the quarter was $2.1 million compared to the previous year of $1.4 million. Pension settlement expense was $885,000. The Copper Tube Division operating profit declined compared with last year. Demand for plumbing tube was good, but increased supply resulted indirectly because of soft markets for air conditioning tube. Copper tube shipments increased 6% over the second quarter last year. Production for the quarter was off slightly from the prior year due to an equipment failure at the number two extrusion press but is still 5% ahead of last year-to-date's production rate. RECYCLING -- The Recycling segment reported a modest profit for the quarter but well below that of last year. Total tonnage was up but revenues and gross margins declined because of a sharply reduced average sales price. Nonferrous markets, especially copper and brass, were considerably weaker, and the intake of scrap dropped. The Asian economic troubles are the driving force; global prices were lower than otherwise and reduced demand for American origin scrap products is creating more raw material supply for the domestic markets. Compared with last year the volume of ferrous scrap shipped increased 11% to 318,000 tons; however nonferrous shipments declined 13% to 46,000 tons mainly because copper volume was significantly lower. Total volume of scrap processed including the Steel Group processing plants reached 480,000 tons. MARKETING AND TRADING -- Operating income for the Marketing and Trading segment was 17% higher than last year's second quarter while revenues increased 10%. Sales into North America remained at a healthy level and business in Europe was stronger, but the turmoil in Asia was a negative for the entire Pacific Rim. Page 10
12 Trade flow in the Far East reversed dramatically and our sales and shipments to Asian countries were sharply curbed, which was only partly offset by increased purchases from the area. Operating profits from steel trading were down significantly, affected by nonperformance by several customers. However, profitability in steel marketing and distribution was maintained. Results for nonferrous metal products remained buoyant on account of a substantial increase in aluminum semis volume and growing business in copper and copper alloy products. Activity for ores, minerals and industrial materials continued to be solid. The Company continues to diversify sourcing in all product lines. OTHER Statement of Financial Accounting Standards No. 128, Earnings per Share, was effective for the quarter ended February 28,1998. There was no effect on the restated earnings per share amount for the second quarter of last year compared to diluted earnings per share; for the six months ended February 28,1997 restated earnings per share were one cent higher. ENVIRONMENTAL ACTIVITIES The Company is subject to federal, state and local pollution control laws and regulations in all locations where it has operating facilities. It anticipates that compliance with these laws and regulations will involve continuing capital expenditures and operating costs. In the ordinary course of conducting its business, the Company becomes involved in environmental litigation, administrative proceedings, and governmental investigations. Certain of these environmental matters or other proceedings may result in fines, penalties or judgments against the Company which may have a material impact on earnings for a particular quarter. While the Company is unable to estimate precisely the ultimate dollar amount of exposure to losses in connection with such matters, it makes timely accruals as warranted. It is the opinion of the Company's management that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on the business or consolidated financial position of the Company. Page 11
13 OUTLOOK Domestic markets are firm and manufacturing margins should continue to widen during the balance of the year despite the Asian situation and its widespread effect. Construction in the United States, including nonresidential, public and residential, is strong. Manufacturing sector and distributor markets also remain firm. Relatively low priced steel imports into North America will occur, but quantities should be restrained on account of production limitations in the Far East and possible anti-dumping actions; consequently, the main effect will be to temper price increases. Some improvement in recycling profits is anticipated, although scrap markets are sloppy. Global demand and prices for steel and nonferrous metals are very likely to remain under pressure, especially if the prolonged economic slump in Japan is not turned around. However, it is likely that further new marketing opportunities will arise in response to the dislocations in the Far East. The Company remains optimistic about the balance of this fiscal year and very positive for the future on account of its fundamental strengths and sound strategic plan. This report contains forward-looking statements regarding the outlook for the Company's short-term financial results including shipments, pricing, demand and general market conditions. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from management's current opinion. Developments that could impact the Company's expectations include interest rate changes, construction activity, metals pricing over which the Company exerts little influence, new capacity and product availability from competing steel minimills and other steel suppliers, currency fluctuations and decisions by governments impacting the pace of overall economic growth. LIQUIDITY Cash flow from operations before changes in operating assets and liabilities for the six months was $40 million compared to $39 million last year, the increase coming by way of higher depreciation expense. Accounts receivable increased $14 million due to strong quarterly results of the steel fabrication businesses and international trading activity. Steel inventories increased at the Company's joist plants and its rail salvage business. other assets increased due to advance payments on contracts. Accounts payable and accrued expenses decreased $22 million, about the same as the comparable period last year. The Company financed these working capital needs as Page 12
14 well as $9 million of payments on long-term debt through internal cash flow and an increase in short term borrowings of $71 million. The Company invested $47 million in capital expenditures as part of its anticipated $125 million annual capital program. During the quarter, the Company repurchased 95,000 shares of Company stock at an average cost of $30.07 per share. At February 28,1998, there were 14,902,200 common shares issued and outstanding with 1,230,383 shares held in the Company's treasury. Stockholders' equity was $370 million or $24.85 per share. Net working capital was $289 million at February 28,1998 compared to $307 million at August 31,1997. The current ratio was 1.9 compared to 2.1 at August 31,1997. The Company's effective tax rate for the six months was 36.7%; the rate for the comparable period last year was 36.9%. Long-term debt as a percent of total capitalization was 31% at February 28, 1998 compared to 33% at August 31,1997. The ratio of total debt to total capitalization plus short-term debt stood at 39.8% compared with 34.4% at year end due to seasonal borrowing requirements. Page 13
15 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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, 1997 filed November 25, 1997, with the Securities and Exchange Commission. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the registrant's annual meeting of stockholders held January 22, 1998, a total of 13,378,824 shares of common stock or approximately 90% percent of those outstanding and entitled to vote were present in person or by proxy. There was no solicitation in opposition to management's nominees and all such nominees were elected as set forth in the following tabulation: <TABLE> <CAPTION> Nominee Votes For Votes Withheld ------- --------- -------------- <S> <C> <C> Moses Feldman 13,266,997 111,827 Ralph E. Loewenberg 13,259,782 119,042 Stanley A. Rabin 13,265,375 113,449 Marvin Selig 13,240,735 138,090 </TABLE> Page 14
16 Stockholders approved the proposed amendment to the Company's General Employees Stock Purchase Plan by the following vote: <TABLE> <CAPTION> For Against Abstain --- ------- ------- <S> <C> <C> 12,984,104 369,101 25,619 </TABLE> Stockholders also approved the ratification of the appointment of Deloitte & Touche LLP as auditors of the registrant for the fiscal year ending August 31, 1998, by the following vote: <TABLE> <CAPTION> For Against Abstain ---- ------- ------- <S> <C> <C> 13,306,747 53,142 18,935 </TABLE> 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. 27. Financial Data Schedule Page 15
17 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 April 10, 1998 Lawrence A. Engels Vice President, Treasurer & Chief Financial Officer April 10, 1998 William B. Larson Controller Page 16
18 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 27 Financial Data Schedule </TABLE>