-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iy1ZBN6IefeQ7NrFErMhG1k75p6whK0LTNN1dys6pckBsBCoRLfK+IZEPb23QZQJ FdqdHDf43PZ4xRDTH3xmZg== 0000950134-02-000208.txt : 20020413 0000950134-02-000208.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950134-02-000208 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL METALS CO CENTRAL INDEX KEY: 0000022444 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 750725338 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04304 FILM NUMBER: 2507557 BUSINESS ADDRESS: STREET 1: 7800 STEMMONS FRWY STREET 2: P O BOX 1046 CITY: DALLAS STATE: TX ZIP: 75221 BUSINESS PHONE: 2146894300 MAIL ADDRESS: STREET 1: 7800 STEMMONS FRWY STREET 2: PO BOX 1046 CITY: DALLAS STATE: TX ZIP: 75221 10-Q 1 d93408e10-q.txt FORM 10-Q FOR QUARTER ENDED NOVEMBER 30, 2001 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 November 30, 2001 Commission File Number 1-4304 COMMERCIAL METALS COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 75-0725338 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7800 Stemmons Freeway Dallas, Texas 75247 ---------------------------------------- (Address of principal executive offices) (Zip Code) (214) 689-4300 ---------------------------------------------------- (Registrant's telephone number, including area code) --------------------------------------------------- Former name, former address and former fiscal year, if changed since last report 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 November 30, 2001 there were 13,137,474 shares of the Company's common stock issued and outstanding excluding 2,995,109 shares held in the Company's treasury. COMMERCIAL METALS COMPANY AND SUBSIDIARIES INDEX
Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - November 30, 2001 and August 31, 2001 2 - 3 Consolidated Statements of Operations - Three months ended November 30, 2001 and November 30, 2000 4 Consolidated Statements of Cash Flows - Three months ended November 30, 2001 and November 30, 2000 5 Consolidated Statement of Stockholders' Equity- Three months ended November 30, 2001 6 Notes to Consolidated Financial Statements 7 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II OTHER INFORMATION 18 SIGNATURES 19
Page 1 ITEM 1 FINANCIAL STATEMENTS COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (In thousands except share data)
November 30, August 31, 2001 2001 (Unaudited) ----------- ----------- CURRENT ASSETS: Cash $ 31,339 $ 33,289 Temporary investments 8,000 23,000 Accounts receivable (less allowance for collection losses of $5,480 and $5,192) 206,852 204,032 Notes receivable from affiliate 98,068 95,515 Inventories 265,793 236,679 Other 58,411 49,662 ----------- ----------- TOTAL CURRENT ASSETS 668,463 642,177 PROPERTY, PLANT, AND EQUIPMENT: Land 29,315 29,315 Buildings 114,265 109,549 Equipment 706,622 704,469 Leasehold improvements 33,587 33,213 Construction in process 26,480 20,350 ----------- ----------- 910,269 896,896 Less accumulated depreciation and amortization (515,341) (501,045) ----------- ----------- 394,928 395,851 OTHER ASSETS 43,403 46,772 ----------- ----------- $ 1,106,794 $ 1,084,800 =========== ===========
See notes to consolidated financial statements. Page 2 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands except share data)
November 30, August 31, 2001 2001 (Unaudited) ----------- ----------- CURRENT LIABILITIES: Commercial paper $ -- $ -- Notes payable 3,992 3,793 Accounts payable 226,519 201,292 Accrued expenses and other payables 115,851 133,464 Income taxes payable 6,113 1,105 Current maturities of long-term debt 10,291 10,288 ----------- ----------- TOTAL CURRENT LIABILITIES 362,766 349,942 DEFERRED INCOME TAXES 30,405 30,405 OTHER LONG-TERM LIABILITIES 18,020 17,342 LONG-TERM DEBT 251,630 251,638 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Capital stock: Preferred stock -- -- Common stock, par value $5.00 per share; authorized 40,000,000 shares; issued 16,132,583 shares; outstanding 13,137,474 and 13,078,594 shares 80,663 80,663 Additional paid-in capital 13,777 13,930 Accumulated other comprehensive loss (1,992) (1,961) Retained earnings 431,817 424,688 ----------- ----------- 524,265 517,320 Less treasury stock, 2,995,109 and 3,053,989 shares at cost (80,292) (81,847) ----------- ----------- 443,973 435,473 ----------- ----------- $ 1,106,794 $ 1,084,800 =========== ===========
See notes to consolidated financial statements. Page 3 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except share data)
Three months ended November 30, ------------------------------- 2001 2000 ------------ ------------ NET SALES $ 564,880 $ 594,540 COSTS AND EXPENSES: Cost of goods sold 486,785 523,696 Selling, general and administrative expenses 55,082 51,112 Employees' retirement plans 3,807 4,560 Interest expense 4,961 7,664 Litigation accrual -- 10,683 ------------ ------------ 550,635 597,715 ------------ ------------ EARNINGS (LOSS) BEFORE INCOME TAXES 14,245 (3,175) INCOME TAXES (BENEFIT) 5,413 (942) ------------ ------------ NET EARNINGS (LOSS) $ 8,832 $ (2,233) ============ ============ Basic earnings (loss) per share $ 0.67 $ (0.17) Diluted earnings (loss) per share $ 0.66 $ (0.17) Cash dividends per share $ 0.13 $ 0.13 Average basic shares outstanding 13,103,513 13,130,257 Average diluted shares outstanding 13,324,331 13,130,257
See notes to consolidated financial statements. Page 4 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three months ended November 30, ------------------------ 2001 2000 -------- -------- CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES: Net earnings (loss) $ 8,832 $ (2,233) Adjustments to earnings not requiring cash: Depreciation and amortization 15,765 17,052 Provision for losses on receivables 1,094 290 Net gain on sale of property (59) (628) -------- -------- Cash flows from operations before changes in operating assets and liabilities 25,632 14,481 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 10,832 21,358 Funding from accounts receivable sold, net change (15,000) -- Decrease (increase) in inventories (29,114) (15,581) Decrease (increase) in other assets (8,004) (5,338) Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes 12,622 (56,151) Increase (decrease) in other liabilities 678 1,417 -------- -------- Net Cash Flows Used By Operating Activities (2,354) (39,814) CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES: Purchase of property, plant and equipment (14,548) (14,969) Sales of property, plant and equipment 59 628 Temporary investments 15,000 -- -------- -------- Net Cash From (Used By) Investing Activities 511 (14,341) CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES: Commercial paper - net change -- 62,000 Notes payable - net change 199 3,744 Payments on long-term debt (5) (481) Stock issued under incentive and purchase plans 1,402 675 Treasury stock acquired -- (6,512) Dividends paid (1,703) (1,715) -------- -------- Net Cash Provided (Used By) Financing Activities (107) 57,711 -------- -------- Increase (Decrease) in Cash (1,950) 3,556 Cash at Beginning of Year 33,289 20,067 -------- -------- Cash at End of Period $ 31,339 $ 23,623 ======== ========
See notes to consolidated financial statements. Page 5 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) (In thousands except share data)
Common Stock Accumulated ------------------------------ Other Add'l Number of Comprehensive Paid-In Shares Amount Loss Capital ----------- ----------- ------------- ----------- Balance September 1, 2001 16,132,583 $ 80,663 $ (1,961) $ 13,930 Comprehensive income: Net income for three months ended November 30, 2001 Other comprehensive loss: Foreign currency translation adjustment net of taxes of $16 (31) Comprehensive income Cash dividends - $.13 a share Stock issued under stock option, purchase and bonus plans (153) ----------- ----------- ----------- ----------- Balance November 30, 2001 16,132,583 $ 80,663 $ (1,992) $ 13,777 =========== =========== =========== =========== Treasury Stock ------------------------------ Retained Number of Earnings Shares Amount Total ----------- ----------- ----------- ----------- Balance September 1, 2001 $ 424,688 (3,053,989) $ (81,847) $ 435,473 Comprehensive income: Net income for three months ended November 30, 2001 8,832 8,832 Other comprehensive loss: Foreign currency translation adjustment net of taxes of $16 (31) ----------- Comprehensive income 8,801 Cash dividends - $.13 a share (1,703) (1,703) Stock issued under stock option, purchase and bonus plans 58,880 1,555 1,402 ----------- ----------- ----------- ----------- Balance November 30, 2001 $ 431,817 (2,995,109) $ (80,292) $ 443,973 =========== =========== =========== ===========
See notes to consolidated financial statements. Page 6 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - QUARTERLY FINANCIAL DATA: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals, and in addition, the prior year litigation accrual discussed in Note G) necessary to present fairly the financial position as of November 30, 2001 and 2000, the results of operations and the cash flows for the three months then ended. The results of operations for the three month periods are not necessarily indicative of the results to be expected for a full year. NOTE B - SALES OF ACCOUNTS RECEIVABLE The Company and several of its subsidiaries (the Originators) have agreements to periodically sell certain trade accounts receivable through a wholly-owned, unconsolidated special purpose subsidiary (CMCR) to a third party financial institution up to a maximum net proceeds of $130 million. The key components of the transaction were as follows (in thousands):
November 30, August 31, 2001 2001 ------------ --------- Total accounts receivable sold $125,580 $138,200 Less notes receivable from affiliate (CMCR) 100,580 98,200 -------- -------- Program participation proceeds from third party $ 25,000 $ 40,000
The notes receivable from affiliate are presented net of allowance of $2,512 and $2,700 at November 30, 2001 and August 31, 2001, respectively. Discounts (which aggregated $347 thousand in the quarter ended November 30, 2001) from the face amounts sold to the third party were included in selling, general, and administrative expenses. NOTE C - LONG-TERM DEBT (in thousands) at November 30, was as follows:
Less Long-Term Current Debt Maturities Total --------- ---------- -------- 6.75% notes due 2009 $100,000 $ -- $100,000 7.20% notes due 2005 100,000 -- 100,000 6.80% notes due 2007 50,000 -- 50,000 8.49% notes due 2001 7,142 7,142 Other 1,630 3,149 4,779 -------- -------- -------- $251,630 $ 10,291 $261,921 ======== ======== ========
Page 7 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D - EARNINGS (LOSS) PER SHARE: In calculating earnings (loss) per share, there were no adjustments to net earnings (loss) to arrive at income (loss) for the three months ended November 30, 2001 or 2000. The reconciliation of the denominators of the earnings (loss) per share calculations are as follows:
Three months ended November 30, --------------------------- 2001 2000 ---------- ---------- Shares outstanding for basic earnings (loss) per share 13,103,513 13,130,257 Effect of dilutive securities-stock options/purchase plans 220,818 -- ---------- ---------- Shares outstanding for diluted earnings (loss) per share 13,324,331 13,130,257
Stock options with total share commitments of 355,819 at November 30, 2001 were anti-dilutive based on the average share price for the quarter of $30.613 per share, and exercise prices of $30.88 - $31.94 per share. The options expire by 2007. NOTE E - DERIVATIVES AND RISK MANAGEMENT The Company's product lines and worldwide operations 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 margins 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 operations for the quarters ended November 30, 2001 and 2000. During both quarters, certain of the foreign currency and all of the commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges. The changes in fair value of these instruments resulted in a $129 thousand increase and a $205 thousand decrease in costs of goods sold for the quarters ended November 30, 2001 and 2000, respectively. None of the instruments used are entered into for trading purposes or speculation. The adoption of Statement of Financial Accounting Standards No. 133, effective September 1, 2000, did not have a material impact on the prior year's first quarter. NOTE F - RECLASSIFICATIONS Certain reclassifications have been made in the prior year financial statements to conform to the classifications used in the current year. Page 8 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - CONTINGENCIES: In the prior year first quarter, the Company increased its reserve for litigation by $10.7 million due to unanticipated adverse findings of fact and conclusions of law from a trial. In the prior year fourth quarter, the Court entered judgment in an amount which was $2.5 million less than originally accrued. The Company has appealed the judgment. There were no material developments relating to the Company's construction disputes or other contingencies since August 31, 2001. Refer to Note 10, Commitments and Contingences included in the notes to the consolidated financial statements for the year ended August 31, 2001. NOTE H - BUSINESS SEGMENTS (in thousands): The following is a summary of certain financial information by reportable segment:
Three months ended November 30, 2001 --------------------------------------------------------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED ---------- ---------- ---------- ---------- ---------- Net sales-unaffiliated customers $ 330,504 $ 77,881 $ 156,405 $ 90 $ 564,880 Intersegment sales 804 4,750 2,788 (8,342) -- ---------- ---------- ---------- ---------- ---------- 331,308 82,631 159,193 (8,252) 564,880 Earnings (Loss) before income taxes 20,479 (1,295) 1,653 (6,592) 14,245 Ending total assets 741,178 88,213 225,487 51,916 1,106,794
Three months ended November 30, 2000 ----------------------------------------------------------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED ---------- ---------- ---------- ----------- ----------- Net sales-unaffiliated customers $ 308,900 $ 97,503 $ 187,508 $ 629 $ 594,540 Intersegment sales 1,561 5,744 4,559 (11,864) -- ---------- ---------- ---------- ---------- ---------- 310,461 103,247 192,067 (11,235) 594,540 Earnings (Loss) before income taxes 3,288 (2,035) 1,223 (5,651) (3,175) Ending total assets 775,072 107,518 249,318 41,236 1,173,144
Page 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS (in millions)
First Quarter --------------------- 2002 2001 ------ ------ Net sales $ 565 $ 595 Net earnings (loss) 8.8 (2.2) Cash flows 25.6 14.5 EBITDA 35.0 21.5 LIFO reserve 5.9 7.5
The Company's long-term strategy of vertical integration, product diversification and geographic dispersion was again proven effective though difficult market conditions were exacerbated by the aftermath of September 11, 2001. Significant events that affected the Company's first quarter included: - - First quarter 2002 was significantly better than last year, even excluding the $10.7 million pre-tax litigation accrual recorded in the prior year in the manufacturing segment. - - Prices generally remained at abysmal levels. - - Led by the steel group, the manufacturing segment had its second best first quarter ever. - - Increased steel group shipments, downstream operational improvements and lower utility costs at the steel mills more than offset lower selling prices and decreased profits from copper tube. - - The recycling segment was unprofitable, but better than the first quarter last year. - - Marketing and trading profits significantly improved, but were still historically lower than normal. - - Interest expense was lower due to less debt and reduced rates. Page 10 - - Maintained a strong allowance for collection losses after incurring $1.3 million in doubtful accounts receivable due to two large bankruptcies. CONSOLIDATED DATA - The LIFO method of inventory valuation increased net earnings by $368 thousand and $437 thousand for the three months ended November 30, 2001 and 2000, respectively, an increase in net earnings of 3 cents per diluted share for both quarters. SEGMENT OPERATING DATA - (in thousands) Net sales and operating profit (loss) by business segment are shown in the following table. Operating profit (loss), as presented, is the sum of earnings (loss) before income taxes, outside interest expense and discounts on the sales of accounts receivables.
Three months ended November 30, ------------------------------ 2001 2000 --------- --------- NET SALES: Manufacturing $ 331,308 $ 310,461 Recycling 82,631 103,247 Marketing and Trading 159,193 192,067 Corporate and Eliminations (8,252) (11,235) --------- --------- $ 564,880 $ 594,540 ========= ========= OPERATING PROFIT (LOSS): Manufacturing $ 20,745 $ 3,385 Recycling (1,222) (2,027) Marketing and Trading 2,280 1,618 Corporate and Eliminations (2,251) 1,513 --------- --------- $ 19,552 $ 4,489 ========= =========
MANUFACTURING - The Company's manufacturing segment consists of the steel group and the copper tube division. Operating profit for the segment increased $17.4 million to $20.7 million from $3.4 million during last year's first quarter on $20.8 million (7%) more net sales. $10.7 million of the increase in operating profit was due to the prior year litigation accrual. Excluding this item, the manufacturing segment's operating profit was 47% Page 11 above last year's first quarter because of significantly improved steel group profitability. This strong performance in steel resulted from increased shipments which more than offset lower average selling prices, and continued significant contributions from downstream operations. Continuing low-priced steel imports into the United States and negative economic conditions resulted in yet lower selling prices, although the underlying demand for steel products resulted in increased tonnage shipped. Also, margins were benefited by lower utility and raw material costs. Operating profit for the copper tube division was 43% less than last year's historically strong first quarter. Steel and scrap prices per ton are as reflected in the table below:
Three months ended November 30, ------------------ 2001 2000 ---- ---- Average mill selling price (total sales) $277 $293 Average mill selling price (finished goods) 282 299 Average fab selling price 634 655 Average ferrous scrap purchase price 73 77
Operating profit for the Company's four steel minimills was 150% more than the prior year period in spite of lower selling prices, which resulted from low-priced steel imports and aggressive domestic competition. SMI South Carolina contributed with a $1.2 million pre-tax profit versus a $1.4 million loss in the prior year. Profits at SMI Texas and SMI Alabama were also significantly better while Arkansas was down. The primary reason for the improved profitability was a 13% increase in mill shipments, which were up to 476,000 tons from 422,000. Tons rolled were up 12% from last year to 485,000, and tons melted increased 8% to 525,000. The average total mill selling price at $277 per ton was $16 (5%) below last year, and the average selling price for finished goods dropped $17 (6%) per ton to $282. Average scrap purchase costs were lower by $4 per ton providing a partial offset in maintaining mill product margins. Utility expenses declined by $1.3 million (pre-tax) from the prior year quarter due to lower natural gas costs. Operating profit in the Company's steel fabrication and related businesses increased by 60%, excluding the prior year litigation accrual of $10.7 million. Net sales increased by 3%. Fabricated steel shipments totaled 256,000 tons, an 8% increase from the prior year period. The average fab selling price decreased $21 per ton (3%). The continued improvement in performance at SMI Owen resulted in $2.4 million (pre-tax) profit versus a $1.7 million loss in the prior year's first quarter. The Company's rebar fabrication, concrete related products and steel post plants continued to perform well. Also a turnaround in steel joist and cellular beam manufacturing was achieved through cost reduction efforts in spite of lower prices and shipments. Page 12 The copper tube division's operating profit decreased 43% from the same period last year, while net sales decreased 11%. Copper tube production was 6.5% higher at 13.5 million pounds, and shipments increased 7% from the first quarter last year to 15 million pounds. However, average sales prices decreased 17%, resulting in lower metal spreads. Commissioning of the new line and product expansion has begun. RECYCLING - The recycling segment reported an operating loss of $1.2 million, about 60% of the $2 million loss for the first quarter last year. Net sales decreased 20% to $82.6 million. The segment's markets were abysmal with low prices, and some customers deferred shipments while a number of others experienced financial difficulties. Nonferrous sales prices plummeted and, as a result, material margins for the segment decreased 4% compared with the previous year's first quarter. Ferrous scrap tonnage processed and shipped rose 3% to 347,000 tons, but ferrous sales prices were on average $71 per ton or 10% lower than a year ago. Nonferrous shipments declined 6%, and the average nonferrous scrap price was 20% lower than the prior year period. Total volume of scrap processed, including the steel group processing plants, was 584,000 tons, an increase of 2% from the 574,000 tons processed during the prior year period. MARKETING AND TRADING - Operating profit of $2.3 million for the marketing and trading segment was 41% higher than the prior year's first quarter, while net sales decreased 17% to $159 million. Sales declined significantly in the United States, with markets characterized by continued oversupply and intense competition from domestic suppliers. The influence of the strong U.S. dollar valuation continued to hamper the Company's results in most parts of the world. Margins were lower for most steel products, nonferrous metal products and industrial raw materials and products. In September 2001, the Company completed its acquisition of Coil Steels Group, an Australian service center in which the Company already owned a 22% share. This acquisition, as well as a turnaround in existing Australian operations, were major factors in the segment's improved profitability. OTHER - The Company's pre-tax interest expense decreased by $2.7 million (35%) from the prior year's first quarter due to lower interest rates and much lower short-term debt levels. During the prior year quarter, the Company sold land which was no longer being utilized, recognizing a gain of $600 thousand in the Corporate segment. Net book value was minimal. Page 13 CONTINGENCIES - See footnote G, Contingencies, in the Company's consolidated financial statements. In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings, governmental investigations, including environmental matters, and contract disputes. Some of these matters may result in settlements, fines, penalties or judgments being assessed against the Company. While the Company is unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with the above-referenced matters, it makes accruals as warranted. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors, amounts accrued could vary significantly from amounts paid. Accordingly, it is not possible to estimate a meaningful range of possible exposure. Management believes that adequate provision has been made in the financial statements for the estimable potential impact of these contingencies, and that the outcomes will not significantly impact the long-term results of operations or the financial position of the Company, although they may have a material impact on earnings for a particular period. The Company is subject to federal, state and local pollution control laws and regulations in all locations where it has operating facilities. It anticipates that compliance with these laws and regulations will involve continuing capital expenditures and operating costs. OUTLOOK - During the current year first quarter, the worldwide economic downturn widened and deepened, exacerbated by the aftermath of September 11, 2001, which in turn worsened already difficult market conditions. The recession in the Company's markets was especially severe for global industrial production, although residential activity was relatively stable and public construction remained strong. Service centers/distributors, an important customer group, remained focused on reducing inventories. Worldwide demand for steel and nonferrous metals continued to erode. Also, the high level of bankruptcies among the Company's customers and competitors remained a challenge. However, late in the quarter, production cutbacks by steel and metals suppliers accelerated on a global basis, a favorable development. There is an abnormal degree of uncertainty in the near term, especially regarding consumer and business confidence. Nevertheless, management continues to believe that the Company's performance will improve further during the current year due to internal and external factors, including modest improvements in the economy during the latter part of the fiscal year. While the U.S. economy continues to contract, there are signs that the rate of decline has slowed, that inventories have been worked down Page 14 significantly and that stimulative factors are helping. Commercial construction is likely to be softer, but public construction should remain firm. Both houses of Congress recently passed the 2002 Department of Transportation spending bill, which appropriates $59.6 billion in funding, an overall increase of 2.5%. However, the Company's second quarter typically is its weakest, and it began with an even poorer near term pricing environment. Accordingly, management expects second quarter results to be below this year's first quarter, although substantially higher than last year's second quarter. The Company anticipates improved performance in the second half of its fiscal year due to increases in volume and prices in most of its businesses combined with generally low input costs. Lower import levels are also expected. Also, reduced costs in various areas have already begun to benefit the Company's earnings. Longer term, the Company expects stronger demand for construction related products and services. Management anticipates relatively high consumption of steel bar and structural steel in the public sector during the next few years. The outlook for institutional building and power plant construction continues to look promising. Also, various end use markets around the world, especially in manufacturing activity, should improve when the economic downturn reverses. Renewed growth in steel and nonferrous metal consumption should lead to a more favorable supply/demand balance. The U.S. International Trade Commission announced in October 2001 (under the Section 201 trade investigation instituted at the request of President George W. Bush) that steel imports have caused serious injury to the U.S. steel industry including a number of the Company's product lines. The remedies recommended by the commissioners entail a range of tariffs or quotas on various steel products. A decision from the President as to what remedies to impose is anticipated toward the end of the Company's second quarter. Management believes that the ultimate resolution will be beneficial to the Company's steel manufacturing operations. Strategically, management's focus remains on participating in industry consolidation, forming strategic alliances, growing added value businesses, redeploying assets and increasing the Company's earnings and cash flows. This outlook section contains forward-looking statements regarding the outlook for the Company's financial results including net earnings, product pricing and demand, production rates, manufacturing costs, interest rates, inventory levels, results of litigation and general market conditions. These forward-looking statements can generally be identified by phrases such as the Company or management "expects", "anticipates", "believes", "plans to", "should", "likely", "appears", "projects", or other 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 management's current opinion. Developments that could impact the Page 15 Company's expectations include interest rate changes, construction activity, difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes, metals pricing over which the Company exerts little influence, increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing, global factors including credit availability, currency fluctuations, energy prices, and decisions by governments impacting the level and pace of overall economic activity. LIQUIDITY - Cash flows from operations before changes in operating assets and liabilities for the three months ended November 30, 2001 increased to $25.6 million from $14.5 million in the prior year due to higher earnings. Depreciation and amortization decreased during the first quarter of fiscal 2002 primarily because mill rolls and guides for SMI South Carolina were fully depreciated. Due to the high level of bankrupt and financially troubled customers, the Company's provision for losses on receivables increased $804 thousand from the prior year period. Net cash flows used by operating activities decreased to $2.4 million from $39.8 million in the prior year first quarter due primarily to better earnings and working capital management. Accounts receivable decreased from August 31, 2001 in all segments primarily due to the decline in net sales. Also, the Company utilized $15 million less funding from sales of its accounts receivable. Inventories and accounts payable increased by $29.1 million and $25.2 million, respectively, from the prior year-end due mostly to the acquisition of Coil Steels Group and goods in transit in marketing and trading. Accrued expenses and other payables decreased $17.6 million due to the payment of incentive compensation and the funding of employee benefit plans accrued at August 31, 2001. Income taxes payable increased $5.0 million due to improved profitability during the current fiscal year. The Company invested $14.5 million in property, plant and equipment during the quarter ended November 30, 2001, the majority of which was for Coil Steels Group and to replace an expiring leasehold in recycling. Short-term financing needs were dramatically lower during the current year's first quarter. At November 30, 2001, there were 13,137,474 common shares issued and outstanding with 2,995,109 held in the Company's treasury. Stockholders' equity was $444 million or $33.79 per share. Net working capital was $306 million at November 30, 2001 compared to $292 million at August 31, 2001. The increase was primarily due to the higher inventory levels. The current ratio was 1.8, unchanged from August 31, 2001. The Company's effective tax Page 16 rate for the current period was 38.0% versus a 29.7% benefit for the first quarter last year. The rate varied due to a different tax rate applied to the prior period litigation accrual. Long-term debt as a percent of total capitalization was 34.7% at November 30, 2001, slightly down from 35.1% at August 31, 2001. The ratio of total debt to total capitalization plus short-term debt stood at 35.9%, lower than the 2001 year end ratio of 36.3%. These ratios decreased due to more equity resulting from current first quarter net earnings. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required hereunder for the Company is not significantly different from the information set forth in Item 7a. Quantitative and Qualitative Disclosures About Market Risk included in the Company's Annual Report of Form 10-K for the year ended August 31, 2001, filed November 19, 2001 with the Securities Exchange Commission, and is therefore not presented herein. Page 17 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, 2001, filed November 21, 2001, 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 Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits required by Item 601 of Regulation S-K. None B. The Registrant did not file a report on Form 8-K during the three-month period ended November 30, 2001. Page 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCIAL METALS COMPANY /s/ WILLIAM B. LARSON ------------------------------------ January 11, 2002 William B. Larson Vice President & Chief Financial Officer /s/ MALINDA G. PASSMORE ------------------------------------ January 11, 2002 Malinda G. Passmore Controller Page 19 -----END PRIVACY-ENHANCED MESSAGE-----