10-Q 1 d98259e10vq.txt FORM 10-Q FOR QUARTER ENDED MAY 31, 2002 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 -------------------------------------------------------------------------------- QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------------------------------------------------------------------------- For the quarterly period ended May 31, 2002 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 of 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 July 1, 2002 there were 28,452,908 shares of the Company's common stock issued and outstanding excluding 3,812,258 shares held in the Company's treasury. COMMERCIAL METALS COMPANY AND SUBSIDIARIES INDEX
PART I - FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Consolidated Balance Sheets - May 31, 2002 and August 31, 2001 2 - 3 Consolidated Statements of Earnings - Three and nine months ended May 31, 2002 and 2001 4 Consolidated Statements of Cash Flows - Nine months ended May 31, 2002 and 2001 5 Consolidated Statement of Stockholders' Equity - Nine months ended May 31, 2002 6 Notes to Consolidated Financial Statements 7 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 PART II - OTHER INFORMATION 21 - 22 SIGNATURES 23
ITEM 1 - FINANCIAL STATEMENTS COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (In thousands except share data)
May 31, August 31, 2002 2001 ------------- ------------- CURRENT ASSETS: (unaudited) Cash $ 29,463 $ 33,289 Temporary investments 61,977 23,000 Accounts receivable (less allowance for collection losses of $5,925 and $5,192) 225,770 204,032 Notes receivable from affiliate 122,400 95,515 Inventories 280,367 236,679 Other 49,708 45,412 ------------- ------------- TOTAL CURRENT ASSETS 769,685 637,927 PROPERTY, PLANT AND EQUIPMENT: Land 29,005 29,315 Buildings 118,891 109,549 Equipment 714,132 704,469 Leasehold improvements 34,059 33,213 Construction in process 12,530 20,350 ------------- ------------- 908,617 896,896 Less accumulated depreciation and amortization (532,202) (501,045) ------------- ------------- 376,415 395,851 OTHER ASSETS 42,759 51,022 ------------- ------------- $ 1,188,859 $ 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)
May 31, August 31, 2002 2001 ------------- ------------- (unaudited) CURRENT LIABILITIES: Short-term borrowings $ -- $ 3,793 Accounts payable 244,148 201,292 Accrued expenses and other payables 128,857 133,464 Income taxes payable 11,004 1,105 Current maturities of long-term debt 1,394 10,288 ------------- ------------- TOTAL CURRENT LIABILITIES 385,403 349,942 DEFERRED INCOME TAXES 27,336 30,405 OTHER LONG-TERM LIABILITIES 27,003 17,342 LONG-TERM DEBT 253,093 251,638 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Capital Stock: Preferred stock -- -- Common Stock, par value $5.00 per share: Authorized 40,000,000 shares; issued 32,265,166 and 16,132,583 shares; outstanding 28,437,910 and 13,078,594 shares 161,326 80,663 Additional paid-in capital -- 13,930 Accumulated other comprehensive loss (1,452) (1,961) Retained earnings 387,977 424,688 ------------- ------------- 547,851 517,320 Less treasury stock, 3,827,256 and 3,053,989 shares at cost (51,827) (81,847) ------------- ------------- 496,024 435,473 ------------- ------------- $ 1,188,859 $ 1,084,800 ============= =============
See notes to consolidated financial statements. Page 3 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except share data) (Unaudited)
Three months ended Nine months ended May 31, May 31, ----------------------------- ----------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- ------------- NET SALES $ 642,908 $ 622,090 $ 1,774,207 $ 1,794,960 COSTS AND EXPENSES: Cost of goods sold 550,792 539,197 1,529,124 1,582,970 Selling, general and administrative expenses 58,133 55,396 169,293 153,719 Employees' retirement plans 4,509 3,073 11,441 8,372 Interest expense 4,575 7,338 14,605 23,040 Litigation accrual -- -- -- 10,683 ------------- ------------- ------------- ------------- 618,009 605,004 1,724,463 1,778,784 ------------- ------------- ------------- ------------- EARNINGS BEFORE INCOME TAXES 24,899 17,086 49,744 16,176 INCOME TAXES 8,466 6,365 17,907 6,026 ------------- ------------- ------------- ------------- NET EARNINGS $ 16,433 $ 10,721 $ 31,837 $ 10,150 ============= ============= ============= ============= Basic earnings per share $ 0.59 $ 0.41 $ 1.18 $ 0.39 Diluted earnings per share $ 0.56 $ 0.41 $ 1.14 $ 0.39 Cash dividends per share $ 0.065 $ 0.065 $ 0.195 $ 0.195 Average basic shares outstanding 27,983,434 25,973,114 27,007,668 26,057,890 Average diluted shares outstanding 29,131,438 26,189,368 27,904,366 26,240,112
See notes to consolidated financial statements. Page 4 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine months ended May 31, ------------------------------ 2002 2001 ------------- ------------- CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES: Net earnings $ 31,837 $ 10,150 Adjustments to earnings not requiring cash: Depreciation and amortization 46,507 51,264 Provision for losses on receivables 2,991 1,903 Deferred income taxes (3,069) -- Tax benefits from stock plans 4,316 59 Gain on sale of SMI Owen (5,234) -- Other 54 (192) ------------- ------------- Cash flows from operations before changes in operating assets and liabilities 77,402 63,184 Changes in operating assets and liabilities, net of effect of Coil Steels Group acquisition and sale of SMI Owen: Decrease (increase) in accounts receivable (16,160) 3,149 Funding from accounts receivable sold, net change (30,000) -- Decrease (increase) in inventories (36,713) 11,389 Decrease (increase) in other assets 5,291 (536) Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes 35,679 (30,525) Increase in other long-term liabilities 9,661 1,723 ------------- ------------- Net Cash From Operating Activities 45,160 48,384 CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES: Purchases of property, plant and equipment (28,153) (40,100) Acquisition of Coil Steels Group, net of cash acquired (6,834) -- Sale of assets of SMI Owen 19,705 -- Sales of property, plant and equipment 401 192 Temporary investments - net change (38,977) -- ------------- ------------- Net Cash Used by Investing Activities (53,858) (39,908) CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES: Short-term borrowings - net change (9,981) 8,434 Payments on long-term debt (9,036) (7,955) Stock issued under incentive and purchase plans 29,133 1,961 Treasury stock acquired -- (6,716) Dividends paid (5,244) (5,087) ------------- ------------- Net Cash From (Used by) Financing Activities 4,872 (9,363) ------------- ------------- Decrease in Cash (3,826) (887) Cash at Beginning of Year 33,289 20,067 ------------- ------------- Cash at End of Period $ 29,463 $ 19,180 ============= =============
See notes to consolidated financial statements. Page 5 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands except share data) (Unaudited)
Common Stock ---------------------------- Accumulated Number Add'l Other of Paid-in Comprehensive Retained Shares Amount Capital Loss Earnings ------------ ------------ ------------ ------------ ------------ Balance September 1, 2001: 16,132,583 $ 80,663 $ 13,930 $ (1,961) $ 424,688 Comprehensive income (loss): Net earnings for nine months ended May 31, 2002 31,837 Other comprehensive income (loss): Foreign currency translation adjustment, net of taxes of $274 523 Unrealized loss on derivatives, net of taxes of $(8) (14) Comprehensive income Cash dividends (5,244) Stock issued under incentive and (887) purchase plans Tax benefits from stock plans 4,316 2-for-1 stock split 16,132,583 80,663 (17,359) (63,304) ------------ ------------ ------------ ------------ ------------ Balance May 31, 2002 32,265,166 $ 161,326 $ -- $ (1,452) $ 387,977 ============ ============ ============ ============ ============ Treasury Stock --------------------------- Number of Shares Amount Total ------------ ------------ ------------ Balance September 1, 2001: (3,053,989) $ (81,847) $ 435,473 Comprehensive income (loss): Net earnings for nine months ended May 31, 2002 31,837 Other comprehensive income (loss): Foreign currency translation adjustment, net of taxes of $274 523 Unrealized loss on derivatives, net of taxes of $(8) (14) ------------ Comprehensive income 32,346 Cash dividends (5,244) Stock issued under incentive and 1,140,361 30,020 29,133 purchase plans Tax benefits from stock plans 4,316 2-for-1 stock split (1,913,628) ------------ ------------ ------------ Balance May 31, 2002 (3,827,256) $ (51,827) $ 496,024 ============ ============ ============
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, except for the tax provision reduction referred to in Note D, Income Taxes) necessary to present fairly the financial position as of May 31, 2002 and 2001, the results of operations for the three and nine months then ended, and the cash flows for the nine months then ended. The results of operations for the three and nine month periods are not necessarily indicative of the results to be expected for a full year. NOTE B - SALES OF ACCOUNTS RECEIVABLE As a cost effective short-term financing program, the Company and several of its subsidiaries periodically sell trade accounts receivable substantially to the Company's wholly-owned unconsolidated special purpose affiliate. Depending on the level of financing needs, the affiliate receives funds from third party financial institutions. The key components were as follows as of May 31, 2002 (in thousands): Total accounts receivable sold $ 142,261 Less notes receivable from affiliate 125,102 ---------- Net proceeds from financial institutions $ 17,159 ==========
The notes receivable from affiliate are presented net of allowance of $2.7 million at May 31, 2002. These notes represent amounts withheld for credit and other reserves, as well as excess funding capacity not currently needed by the Company. Discounts (which aggregated $69 thousand and $699 thousand for the three and nine months ended May 31, 2002, respectively) represented primarily the costs of funds and were included in selling, general and administrative expenses. NOTE C - LONG-TERM DEBT Long-term debt (in thousands) was as follows:
May 31, August 31, 2002 2001 ----------- ----------- 8.49% notes due 2001 $ -- $ 7,142 7.20% notes due 2005 101,597 100,000 6.80% notes due 2007 50,000 50,000 6.75% notes due 2009 100,000 100,000 Other 2,890 4,784 ----------- ----------- 254,487 261,926 Less current maturities 1,394 10,288 ----------- ----------- $ 253,093 $ 251,638 =========== ===========
Page 7 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On April 9, 2002, the Company entered into two interest rate swaps to convert a portion of the fixed interest long-term debt commitment of the Company to a floating interest commitment. These arrangements adjust the Company's fixed to floating interest rate mix as well as reduce overall financing costs. The swaps effectively convert interest on the $100 million debt due July 2005 from a fixed rate of 7.20% to a six month LIBOR (determined in arrears) plus a spread of 2.02%. The total fair value of swaps was $1,597,000 at May 31, 2002 and is 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. NOTE D - INCOME TAXES During 2002, the Company favorably resolved all issues for its federal income tax returns through 1999. Due to the lack of any material adjustments, management has reevaluated the tax accruals and consequently has reduced the net tax provision $1,000,000 during the third quarter 2002. NOTE E - EARNINGS PER SHARE On May 20, 2002, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend on its common stock payable June 28, 2002 to its shareholders of record on June 7, 2002. This resulted at the record date in the issuance of 16,132,583 additional shares of common stock and a transfer of $17,354,000 from paid in capital and $63,309,000 from retained earnings. All per share and weighted average share amounts in the accompanying consolidated financial statements have been restated to reflect this stock split. The Company also announced its intent to institute a quarterly cash dividend of eight cents per share on the increased number of shares resulting from the stock dividend. In calculating earnings per share, there were no adjustments to net earnings to arrive at income for the three or nine months ended May 31, 2002 or 2001. The reconciliation of the denominators of earnings per share calculations are as follows:
Three months ended Nine months ended May 31, May 31, --------------------------------- --------------------------------- 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Shares outstanding for basic earnings per share 27,983,434 25,973,114 27,007,668 26,057,890 Effect of dilutive securities-stock options/purchase plans 1,148,004 216,254 896,698 182,222 --------------- --------------- --------------- --------------- Shares outstanding for diluted earnings per share 29,131,438 26,189,368 27,904,366 26,240,112
All stock options at May 31, 2002 were dilutive based on the average share price for the quarter of $21.145. The options expire by 2009. NOTE F - 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 quarters or nine months ended May 31, 2002 and 2001. However, during the third quarter 2002, the Company incurred approximately $600 thousand in foreign exchange losses primary due to lack of performance by certain suppliers. 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 $199 thousand decrease and a $143 thousand decrease in cost of goods sold for the quarters ended May 31, 2002 and 2001, respectively. Also, cost of goods sold decreased by $546 thousand and decreased by $63 thousand for the nine months ended May 31, 2002 and 2001, respectively, due to changes in fair value of these instruments. All of the instruments are highly liquid, and none are entered into for trading purposes or speculation. See Note C, Long-Term Debt, regarding the Company's interest rate risk management strategy. Page 8 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE G - CONTINGENCIES As indicated in Note 10, Commitments and Contingencies, included in the notes to the consolidated financial statements for the year ended August 31, 2001, a subsidiary of the Company entered into a fixed price contract with a design/builder general contractor (D/B) to furnish, erect and install structural steel, hollow core pre-cast concrete planks, fireproofing and certain concrete slabs along with related design and engineering work for the construction of a large hotel and casino complex. In connection with the contract, the D/B secured insurance under a subcontractor/vendor default protection policy which named the Company as an insured in lieu of performance and payment bonds. A large subcontractor to the Company defaulted, and the Company incurred unanticipated costs to complete the work. The Company made a claim against the insurance company for all losses, costs and expenses incurred or arising from the default. A portion of the claim, $6.6 million, was included as a claim receivable in other assets at August 31, 2001. During May 2002, the Company and the insurance company settled litigation filed by the Company following the insurer's refusal to pay the claim. The settlement included the recovery of the $6.6 million claim receivable, receipt of an additional amount ($7.4 million) and, subject to certain contingencies, reimbursement of an additional amount (up to $3 million). The settlement proceeds in excess of the claim receivable were recorded as deferred insurance proceeds (in other long-term liabilities at May 31, 2002) pending final resolution of the Company's disputes with the D/B. During the nine months ended May 31, 2001, the Company increased its litigation accrual 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 anticipated. At May 31, 2002 and August 31, 2001, $9.5 million and $9.4 million respectively, were accrued (including interest). The Company has appealed the judgment. There were no other material developments relating to the Company's construction disputes or other contingencies since August 31, 2001. NOTE H - SALES OF ASSETS On March 28, 2002, the Company sold substantially all of the assets of SMI Owen Steel Company's heavy structural steel fabrication and installation operations located in Columbia, South Carolina, to a subsidiary of ADF Group, Inc. Cash proceeds of $19.7 million were received from the sale. The pre-tax gain from the sale of $5.2 million was included in net sales for the quarter ended May 31, 2002. Page 9 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE I - BUSINESS SEGMENTS The following is a summary of certain financial information by reportable segment (in thousands):
Three months ended May 31, 2002 ------------------------------------------------------------------------------------ Marketing Corp. & Manufacturing Recycling & Trading Elim. Consolidated -------------- -------------- -------------- -------------- -------------- Net sales - unaffiliated customers $ 347,206 $ 95,182 $ 200,285 $ 235 $ 642,908 Inter-segments sales 974 7,061 2,382 (10,417) -- -------------- -------------- -------------- -------------- -------------- 348,180 102,243 202,667 (10,182) 642,908 Earnings (loss) before income taxes 25,992 2,136 2,572 (5,801) 24,899
Three months ended May 31, 2001 ------------------------------------------------------------------------------------ Marketing Corp. & Manufacturing Recycling & Trading Elim. Consolidated -------------- -------------- -------------- -------------- -------------- Net sales - unaffiliated customers $ 344,250 $ 93,563 $ 184,270 $ 7 $ 622,090 Inter-segments sales 1,223 5,302 4,578 (11,103) -- -------------- -------------- -------------- -------------- -------------- 345,473 98,865 188,848 (11,096) 622,090 Earnings (loss) before income taxes 21,178 262 1,663 (6,017) 17,086
Nine months ended May 31, 2002 ------------------------------------------------------------------------------------ Marketing Corp. & Manufacturing Recycling & Trading Elim. Consolidated -------------- -------------- -------------- -------------- -------------- Net sales - unaffiliated customers $ 992,436 $ 251,589 $ 529,816 $ 366 $ 1,774,207 Inter-segments sales 2,594 16,203 10,425 (29,222) -- -------------- -------------- -------------- -------------- -------------- 995,030 267,792 540,241 (28,856) 1,774,207 Earnings (loss) before income taxes 62,159 1,000 5,958 (19,373) 49,744 Total assets - May 31, 2002 720,460 100,488 253,885 114,026 1,188,859
Nine months ended May 31, 2001 ------------------------------------------------------------------------------------ Marketing Corp. & Manufacturing Recycling & Trading Elim. Consolidated -------------- -------------- -------------- -------------- -------------- Net sales - unaffiliated customers $ 945,027 $ 281,796 $ 566,973 $ 1,164 $ 1,794,960 Inter-segments sales 4,097 16,205 13,069 (33,371) -- -------------- -------------- -------------- -------------- -------------- 949,124 298,001 580,042 (32,207) 1,794,960 Earnings (loss) before income taxes 30,198 (2,704) 4,905 (16,223) 16,176 Total assets - May 31, 2001 775,728 104,060 218,102 46,501 1,144,391
Page 10 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE J - RECLASSIFICATIONS Certain reclassifications have been made in prior year financial statements to conform to the classifications used in the current year. Page 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS (in millions)
Three Months Ended Nine Months Ended May 31, May 31, ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net sales $ 643 $ 622 $ 1,774 $ 1,795 Net earnings 16.4 10.7 31.8 10.2 Cash flows 26.5 29.2 77.4 63.2 EBITDA 44.8 41.6 110.9 90.5 Ending LIFO reserve 6.3 6.7
The Company's well-executed diversification strategy demonstrated its benefits again through challenging market conditions. Significant events that affected the Company's third quarter included: - Ferrous scrap prices rose, prompting a recovery for the recycling segment, while creating a near-term squeeze in mill product margins. - The manufacturing segment realized a $3.4 million (after-tax) gain from the sale of the assets of SMI-Owen Steel Company. - Steel minimill earnings improved significantly due to higher production and shipments in spite of lower selling prices and higher scrap costs. - Copper tube profits decreased due to softer market conditions and start up of the new production line. - The recycling segment recorded its highest operating profit since the 2000 third quarter due to the improved ferrous scrap market. - Marketing and trading's operating profit was higher than last year's third quarter, but some markets were still weak. - Financing costs decreased due to lower borrowing requirements and reduced interest rates. - A lower effective income tax rate due primarily to the favorable completion of IRS audits added $1.0 million to net earnings in the third quarter of 2002. Page 12 CONSOLIDATED DATA - The LIFO method of inventory valuation increased net earnings by $137 thousand and $377 thousand (no effect and 1 cent per diluted share) for the 2002 and 2001 third quarters, respectively. LIFO increased net earnings by $101 thousand and $974 thousand (no effect and 4 cents per diluted share) for the nine months ended May 31, 2002 and 2001, respectively. The per share numbers have been restated to reflect the stock split referred to in Note E, Earnings per Share, in the consolidated financial statements. SEGMENT OPERATING DATA - (in thousands) All dollars below are pre-tax, unless otherwise indicated. 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 receivable.
Three months ended Nine months ended May 31, May 31, ------------------------------ ------------------------------ 2002 2001 2002 2001 ------------- ------------- ------------- ------------- NET SALES: Manufacturing $ 348,180 $ 345,473 $ 995,030 $ 949,124 Recycling 102,243 98,865 267,792 298,001 Marketing and Trading 202,667 188,848 540,241 580,042 Corporate and Eliminations (10,182) (11,096) (28,856) (32,207) ------------- ------------- ------------- ------------- $ 642,908 $ 622,090 $ 1,774,207 $ 1,794,960 ============= ============= ============= ============= OPERATING PROFIT (LOSS): Manufacturing $ 26,139 $ 21,262 $ 62,734 $ 30,475 Recycling 2,169 264 1,145 (2,693) Marketing and Trading 3,254 2,135 7,740 6,198 Corporate and Eliminations (2,019) 763 (6,571) 5,236 ------------- ------------- ------------- ------------- $ 29,543 $ 24,424 $ 65,048 $ 39,216 ============= ============= ============= =============
MANUFACTURING - The Company's manufacturing segment consists of the steel group and the copper tube division. Operating profit for the segment increased $4.9 million (23%) from the third quarter last year on $2.7 million (1%) more net sales. $5.2 million of the increase in operating profit was due to a gain from the sale of SMI-Owen (the steel group's heavy structural fabrication operation). Excluding this item, the manufacturing segment's operating profit was 2% below last year's third quarter. Increased production and shipments at the steel group's minimills significantly offset lower unit margins, lower selling prices, and lower copper tube earnings. The steel group's downstream operations continued to contribute as well, in spite of lower volumes and selling prices. Operating profit from the copper tube business, although still solid, was less than last year's third quarter. Page 13 Steel and scrap prices per ton are as reflected in the table below:
Three months ended May 31, ------------------------- 2002 2001 ----------- ----------- Average mill selling price (total sales) $ 267 $ 281 Average mill selling price (finished goods) 273 288 Average fabrication selling price 598 627 Average ferrous scrap purchase price 84 73
During this year's third quarter, operating profit for the Company's four steel minimills rose 28% compared with a year earlier despite lower selling prices. Operating profit for the mills was also up 38% from this year's second quarter. Profits at SMI Texas, SMI Alabama and SMI Arkansas were significantly better than last year, while SMI South Carolina was lower. The primary reason for the overall improved minimill profitability was a 17% increase in shipments, which were 612,000 tons in the current quarter compared to 523,000 last year. 501,000 tons were shipped in the current year second quarter. Mill production increased as well over last year with tons rolled up 22% to 556,000, and tons melted up 21% to 565,000. Even though demand was strong, the average total mill selling price at $267 per ton was $14 (5%) below last year and substantially unchanged from this year's second quarter. Average scrap purchase costs were $11 per ton higher than last year, resulting in compressed mill product margins. Utility expenses declined by $568 thousand compared with the third quarter last year with decreases in natural gas more than offsetting higher electricity costs. Also, depreciation and amortization decreased by $1.6 million, primarily because mill rolls and guides and certain casting equipment at SMI South Carolina were fully depreciated in the third quarter of 2002. Operating profit in the steel group's fabrication and related businesses increased by $3.5 million (33%) from the prior year period. Excluding the gain on the sale of SMI-Owen, operating profits decreased by $1.7 million (16%). Fabricated steel shipments totaled 248,000 tons, a 3% decrease from the prior year period. The average fabrication selling price decreased $29 per ton (5%). The rebar fabrication, concrete related products and steel post plants continued to perform well, although combined profits were less than last year. Despite reduced operating costs and shop efficiencies, steel joist and cellular beam manufacturing operations reported lower profits due to considerably lower selling prices and shipments. Also, during the third quarter 2002, cellular beam inventory was written down by $627,000 primarily due to the default of a customer. During the 2001 third quarter, steel joist and cellular beam manufacturing incurred $2.1 million of nonrecurring start-up costs. Structural steel fabrication (excluding the gain on the sale of SMI-Owen) was substantially break even in 2002 compared with a small profit in the prior year. The Copper tube division's operating profit decreased 28% from the same period last year, on 11% more net sales. Copper tube shipments increased 18% from the third quarter last year to 17.0 million pounds, while production increased 8% to 14.7 million pounds. Average sales prices dropped 6%. Housing starts declined, and hotel/motel construction continued at a much reduced level. Consequently, demand for plumbing and refrigeration tube was not as strong. Metal spreads declined but were mitigated due to lower raw material purchase costs. Operating costs, however, increased due to the startup of the new production line. RECYCLING - The recycling segment reported an operating profit of $2.2 million in the 2002 third quarter compared with an operating profit of $264 thousand for the third quarter last year, on 3% higher net sales. Gross margins were significantly above last year. Both domestic and international demand for scrap improved. Ferrous scrap tonnage processed and shipped rose 12% to 385,000 tons, and ferrous sales prices were on average $86 per ton or 18% higher than a year ago. Nonferrous tons shipped were substantially unchanged, and the average nonferrous scrap price was 4% lower than the prior year period. However, both ferrous and non-ferrous selling Page 14 prices were higher than the second quarter of this year. Total volume of scrap processed, including the steel group processing plants, was 667,000 tons, an increase of 15% from the 580,000 tons processed during the prior year period. MARKETING AND TRADING - Net sales for the marketing and trading segment increased 7% from the prior year's third quarter to $203 million, and operating profit increased 52% to $3.3 million. Markets in the current period were still weak, though better than last year's third quarter. Volumes were up in Australia and China, level in Europe, but down for imports into the United States. Prices for a number of products improved during the 2002 third quarter. The U. S. dollar weakened by up to 10% against major currencies. Margins were better for most steel products, but did not improve for nonferrous metal products and industrial raw materials and products. During the third quarter 2002, the Australian operations incurred approximately $600 thousand in foreign exchange losses primarily due to lack of performance by Japanese suppliers, in spite of which overall performance was still profitable. The Company's recent strategy of growing its downstream marketing and distribution business mitigated the continuing very difficult trading conditions. OTHER - The Company's selling, general and administrative as well as employee's retirement plan expenses were higher in the current year third quarter due to discretionary items consistent with the improvement in operating profitability. The Company's pre-tax interest expense decreased by $2.8 million (38%) from the prior year's third quarter primarily due to lower interest rates and much lower average short-term debt levels. Also, during the third quarter 2002, the Company entered into two interest rate swaps, (see Note F, Derivatives and Risk Management, to the consolidated financial statements) which resulted in interest expense savings. During 2002, the Company favorably resolved all issues for its federal income tax returns through 1999. Due to the lack of any material adjustments, management has reevaluated the tax accruals and consequently reduced the net tax provision by $1.0 million during the third quarter 2002. 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. Page 15 OUTLOOK - Management believes that the fourth quarter of fiscal year 2002 will be relatively strong, although slightly less than the prior year's fourth quarter. The world economy grew robustly during the first calendar quarter of 2002, primarily due to the turn of the inventory cycle; however, growth slowed in the second calendar quarter. The U.S. economy continued its modest recovery, although the upturn to-date has been uneven and tentative. The Company's biggest near-term challenge is the drop in private nonresidential construction. The European and Asian (especially Chinese) economies have rebounded some. The Company's customers' inventory levels have mostly been reduced. Management believes that the weaker U.S. dollar will be beneficial. Also, the positive impact from the Section 201 trade remedy on steel imports into the U.S. should begin during the fourth quarter. Management expects steel mill operating levels to continue to rise, prices to strengthen moderately, and scrap costs to flatten. Fabrication operations, however, will continue to be hurt by the falloff in commercial construction, although public and institutional building should remain solid. Copper tube profits are likely to be around recent levels, because new home sales continue to be strong. Recycling results should improve further during the fourth quarter due to the more favorable ferrous scrap market, although the segment's markets are neither robust nor uniformly upbeat. In the marketing and trading segment, order intake generally has shown an improvement, and global markets are more active, albeit still intensely competitive. The Company anticipates further improvements in fiscal 2003 due to both internal and external factors, including a stronger demand for its products. Moderate increases in volume and prices in most of its businesses combined with controlled operating costs should benefit the Company's earnings. New product lines should be a benefit as well. Longer term, management expects vibrant demand for construction related products and services including strong spending under the Federal Transportation Program. The Company anticipates relatively high consumption of steel bar and structural steel in the public sector during the next few years. The outlook for institutional building continues to look promising. Also, management is optimistic that manufacturing sector, service center, and commercial construction demand will improve. Strategically, management's focus remains on creating economic value through internal growth, by participating in industry consolidation, forming strategic alliances, growing added value businesses, redeploying assets, thereby increasing the Company's earnings, cash flows and return on capital. 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 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. Page 16 LIQUIDITY AND CAPITAL RESOURCES - The following discussion of liquidity and capital resources is on a consolidated basis, noting the sources and uses of the three operating segments and centralized corporate functions. The Company provides a centralized treasury function and uses inter-company loans to efficiently manage the short-term cash needs of its operating divisions. Any excess funds are invested centrally. The Company and its subsidiaries rely upon cash flows from operating activities, and to the extent necessary, external short-term financing sources including the issuance of commercial paper, sales of certain accounts receivable and bank credit facilities. Also, from time to time, the Company has issued long-term public debt. The Company's continuing cost-effective access to external financing is dependent on maintaining the Company's investment grade credit ratings, and general business conditions. Depending on the market valuation of its common stock, the Company may realize significant cash flows from the exercise of stock options. The Company's $135 million commercial paper program is rated in the second highest category by Moody's Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch (F-2). To back up its commercial paper program, the Company has unsecured revolving credit agreements with a group of five banks consisting of a $90 million facility expiring in August 2002 and a $45 million facility expiring in August 2004. The Company anticipates maintaining its commercial paper program supported by the revolving credit agreements in comparable amounts. For added flexibility, the Company has a program to provide financing through sales of customer accounts receivable allowing for funding of up to $130 million. Under these facilities, the Company continually sells accounts receivable on an ongoing basis to replace those receivables that have been collected. Because the Company's long-term public debt ($252 million at May 31, 2002) is investment grade rated by Standard & Poors' Corporation (BBB), Fitch (BBB) and by Moody's Investors Services (Baa1), it has access to the public markets for potential refinancing and/or issuance of additional long-term debt. Credit ratings impact the Company's ability to obtain short- and long-term financing and the cost of such financing. In determining the Company's credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These 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. Also considered are predictability of cash flows, business strategy, industry condition and contingencies. Management is committed to maintaining the Company's investment grade ratings. Certain of the Company's financing agreements include various covenants. The most restrictive of these requires maintenance of an interest coverage ratio of greater than three times and a debt to capitalization ratio of 55% (as defined). Some of the agreements contain cross-default provisions as well. As of, and for the nine months ended May 31, 2002, the Company was in compliance with these requirements. There is a ratings trigger within the Company's revolving credit agreements and one within its accounts receivable securitization agreement. The trigger in the revolving credit agreements is solely a means to reset pricing for facility fees and loans if a borrowing occurs. Within the accounts receivable securitization agreement, the ratings trigger is contained in a termination event, but one that has been targeted at catastrophic levels. It requires a combination of ratings actions on behalf of two independent rating agencies and is set at levels seven ratings categories below the Company's current rating. Page 17 The Company's businesses in the manufacturing and recycling segments are capital intensive. A significant amount of capital resources are used to fund these capital requirements, including construction, purchases of equipment and maintenance capital at existing facilities. The Company's business plan also calls for investments in new operations. Additionally, the Company must fund additional working capital requirements to support the growth of its businesses in all segments and maintain its ability to repay maturing long-term debt (earliest maturity in 2005) and pay dividends to its stockholders. The Company continues to assess other alternative means of raising capital, including potential dispositions of under-performing or non-strategic assets. Any potential future major acquisitions could require additional external financing, including the issuance of common stock. Cash Flows The Company's cash flows from operating activities primarily result from sales of steel and related products, although all segments include sales of nonferrous metal products as well. The Company's customer base is diverse and generally stable. The Company uses futures or forward contracts as needed to mitigate the risks from fluctuations in foreign currency exchange rates and metals commodity prices (see footnote F, Derivatives and Risk Management in the consolidated financial statements). The Company's cash flows from operating activities are impacted by the volume and pricing of orders from its customers, who are primarily in the manufacturing and construction sectors of the United States, although international operations are significant. Product shipment volumes can be impacted by weather, and volumes and prices by the general economy, the strength of the U.S. dollar, governmental action, and various other factors. Periodic fluctuations in prices and volumes can result in variations in cash flows from operations, however these have historically been a reliable and steady source of cash. Cash flows from operations before changes in operating assets and liabilities for the nine months ended May 31, 2002 increased to $77.4 million from $63.2 million in the prior year due mostly to higher earnings. Depreciation and amortization decreased during fiscal 2002 primarily because mill rolls and guides as well as certain melt shop equipment at SMI South Carolina were fully depreciated. Due to the level of bankrupt and financially troubled customers, the Company's provision for losses on receivables increased $1.1 million during the nine months ended May 31, 2002 from the prior year period. The Company also realized a $4.3 million increase in the tax benefits from stock issued under option and purchase plans during fiscal 2002. Net cash flows of $45.2 million were provided by operating activities for the nine months ended May 31, 2002 compared with $48.4 million in the prior year period; the decrease was due primarily to increases in accounts receivable as well as decreased funding from sales of accounts receivable. Net working capital increased to $384 million at May 31, 2002 from $288 million at August 31, 2001. The increase was primarily due to more temporary investments and higher receivables, as the increases in inventories and payables offset each other. The current ratio was 2.0 at May 31, 2002, up from 1.8 at August 31, 2001. Accounts and notes receivable at May 31, 2002 were $46.2 million more than at August 31, 2001 due to higher sales and less accounts receivable sold to financial institutions. Inventories and accounts payable, accrued expenses, other payables and income taxes at May 31, 2002 increased by $36.7 million and $35.7 million, respectively, from the prior year-end. Inventories in the steel group (excluding Page 18 SMI-Owen) were up $31.3 million, the majority of which was at the minimills because of increased scrap purchase costs and higher quantities. Steel fabrication inventories increased as well. Inventories in marketing and trading (excluding Coil Steels Group) were up mostly due to shipments in transit. Accounts payable increased in marketing and trading (excluding Coil Steels Group) due to higher inventory purchases and extended terms with vendors. Accounts payable in the steel group decreased, with increases at the minimills more than offset by decreases in fabrication (excluding the effect of the sale of SMI-Owen). Accrued expenses and other payables decreased due to the payment in the current year of incentive compensation and the funding of employee benefit plans that were accrued at August 31, 2001. Also, during the third quarter fiscal 2002, the Company received $14.0 million from a litigation settlement (see Note G, Contingencies, to the consolidated financial statements). Income taxes payable increased mostly due to increased profits and the reduction in deferred taxes. During the 2002 third quarter, the Company received $5.2 million for the contract balance and settlement of disputed change orders on an old large structural steel fabrication contract at SMI-Owen. The Company invested $28.2 million in property, plant and equipment during the nine months ended May 31, 2002, which was $11.9 million less than the prior year. In addition, in 2002 the Company acquired the remaining shares of the Coil Steels Group (CSG) for $6.8 million (net of cash). During 2002, $19.7 million was provided from the sale of the assets of SMI-Owen. Capital spending for fiscal 2002 is expected to be $70 million, including CSG and both greenfield and acquisitions to expand the downstream businesses in steel fabrication. Year-to-date May 31, 2002, the Company invested $39.0 million in temporary cash instruments, compared to none in the prior year period. Short-term financing needs were dramatically lower during the current year than the prior year period mostly due to better management of working capital, higher earnings, the litigation settlement and the sale of SMI-Owen which enabled the Company to repay all of its short-term borrowings. The Company made its final payment on the 8.49% long-term notes in fiscal 2002. On May 20, 2002, the Company's Board of Directors declared a two-for-one stock split in the form of a stock dividend on its common stock payable June 28, 2002 to its shareholders of record on June 7, 2002. See Note E, Earnings per Share, to the consolidated financial statements. At May 31, 2002, there were 28,437,910 common shares issued and outstanding with 3,827,256 held in the Company's treasury. Excluding the effect of the stock split, outstanding shares increased by 1,140,361 since August 31, 2001. An increased number of employee stock option exercises resulting from the significant increase in the Company's average market price per share and issuance of shares pursuant to the Company's employee stock purchase plan account for the additional outstanding shares. All shares issued were from treasury shares previously purchased by the Company. This activity resulted in $29.1 million of cash flows year to date 2002 versus $2.0 million from such activity in the prior year period. Dividends of $5.2 million were paid during the first nine months of 2002, slightly more than the $5.1 million paid during 2001. On May 20, 2002, the Company's directors declared a quarterly cash dividend of eight cents per share on common stock to be paid July 19 to stockholders of record July 5, 2002. This new cash dividend rate on the after-split shares represents a 23% increase in the cash dividend. This will be the 151st consecutive quarterly cash dividend paid by the Company. Page 19 Contractual Obligations The Company's contractual obligations as of May 31, 2002 are summarized in the table below (dollars in thousands):
Payments Due Within * --------------------------------------------------------- 1-3 4-5 After Total 1 Year Years Years 5 Years ------------ ------------ ------------ ------------ ------------ Contractual Obligations: Long-term Debt (1) $ 254,487 $ 1,394 $ 102,632 $ 50,382 $ 100,079 Operating Leases (2) 22,762 9,039 7,813 3,480 2,430 Unconditional Purchase Obligations (3) 34,828 18,041 15,644 574 569 ------------ ------------ ------------ ------------ ------------ Total Contractual Cash Obligations $ 312,077 $ 28,474 $ 126,089 $ 54,436 $ 103,078 ============ ============ ============ ============ ============
* Cash obligations herein are not discounted. (1) Total amounts are included in the May 31, 2002 consolidated balance sheet. (2) Includes minimum lease payment obligations for noncancelable equipment and real-estate leases in effect as of May 31, 2002. (3) About 55% of these purchase obligations are for inventory items to be sold in the ordinary course of business; most of the remainder are for freight and supplies associated with normal revenue-producing activities. At May 31, 2002, the Company had received $17,159,000 of net proceeds from the sales of accounts receivable, See Note B, Sales of Accounts Receivable, to the consolidated financial statements. If the program was terminated, the first $17,159,000 of collections from these accounts would be paid to the third party financial institutions. At May 31, 2002, the Company had overall 41 days sales in accounts receivable (excluding its international division and retention on long-term contracts). The Company was in compliance with the terms of this program as of, and for the nine months ended May 31, 2002. Other Commercial Commitments The Company maintains stand-by letters of credit to provide support for certain transactions as requested by third parties. At May 31, 2002, $19.8 million was committed under these arrangements, $6 million of which was collateralized by a cash deposit included in current other assets on the consolidated balance sheet. All of commitments expire within one year. To satisfy customer requirements, the Company guarantees the performance of a subcontractor at one of its fabrication locations. Total amounts guaranteed as of May 31, 2002 were $453,000. 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. Also, see footnote F, Derivatives and Risk Management, to the Company's consolidated financial statements. Page 20 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 ended August 31, 2001, filed November 21, 2001. In May, 2002, the Company's subsidiary, SMI-Owen Steel Company, Inc., settled litigation against St. Paul Fire & Marine Insurance Company related to the Aladdin hotel and casino complex arising under a subcontractor/vendor default protection insurance policy. The Company received $14 million and, subject to certain contingencies, may receive reimbursement of an additional amount of up to $3 million. The litigation against J & H Marsh McClennan, Inc., continues as do arbitration proceedings involving other disputes concerning the Aladdin project. See also Note G of the Notes To Consolidated Financial Statements in Part I, Item I. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable Page 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits required by Item 601 of Regulation S-K. Exhibit 10.(iii)e - Employment and Consulting Agreement of Marvin Selig dated June 7, 2002 B. No reports on Form 8-K were filed during the quarter ended May 31, 2002. Page 22 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 --------------------------------- July 11, 2002 William B. Larson Vice President & Chief Financial Officer /s/ Malinda G. Passmore ---------------------------------- July 11, 2002 Malinda G. Passmore Controller Page 23 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- Exhibit 10.(iii)e Employment and Consulting Agreement of Marvin Selig dated June 7, 2002